Chapter 3: The effects of family involvement and corporate governance practices on earnings quality of listed companies
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A growing stream of literature is studying the relation between performance and family control, but a few studies exist on comparing the quality of the financial reporting of family and non-family firms. These studies, however, do not reach unanimous findings. It is a diffused common thinking that listed family firms are less transparent than publicly held companies, because of the excessive power of controlling shareholders and ineffective monitoring systems counterbalancing it. This is consistent with the view of family firms being a less efficient ownership structure because family behaviors can be more easily aimed at extracting private benefits at the expense of minority shareholders (Fama and Jensen, 1983a; Morck et al., 1988; Shleifer and Vishny, 1997; Bebchuk et al., 1999). Empirical evidence has been provided about that (Francis et al., 2005; Fan and Wong, 2002). This is mainly due to the ‘entrenchment effect’ in concentrated ownership structures. On the other hand, companies, when owned and managed by a family, benefit from the natural alignment between management and shareholders’ interests, which have the common purpose of creating value in the long run. And even if a non-family member is acting as CEO, management monitoring by family controlling shareholders is much more effective than in a large public companies (Demsetz and Lehn, 1985; Shleifer and Vishny, 1986). Families thus have higher incentives to report good earnings quality (EQ) because they need to preserve the family’s name and reputation, to pass on their business to future generations, and they look for long-term profitability.

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