Founding Family Ownership and Earnings Quality

Author: WANG, DECHUN

Source: Journal of Accounting Research, Volume 44, Number 3, June 2006 , pp. 619-656(38)

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Abstract:

This study investigates the relation between founding family ownership and earnings quality using data from the Standard & Poor's 500 companies. Existing literature has documented that financial reporting is of higher quality when firms have stronger corporate governance mechanisms and when there is greater demand for quality financial reporting. I provide two competing theories of the effect of founding family ownership on the demand and supply of earnings quality: the entrenchment effect and the alignment effect. The empirical results show that, on average, founding family ownership is associated with higher earnings quality. In particular, I find consistent evidence that founding family ownership is associated with lower abnormal accruals, greater earnings informativeness, and less persistence of transitory loss components in earnings. In addition, the results suggest a nonlinear relation between family ownership and earnings quality.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1475-679X.2006.00213.x

Affiliations: 1: University of Nebraska–Lincoln.

Publication date: 2006-06-01