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DOI: 10.1177/0894486510374302

2010 23: 246 originally published online 11 June 2010Family Business ReviewStefano Cascino, Amedeo Pugliese, Donata Mussolino and Chiara Sansone

The Influence of Family Ownership on the Quality of Accounting Information

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Family Business Review23(3) 246265 The Author(s) 2010Reprints and permission: http://www.sagepub.com/journalsPermissions.navDOI: 10.1177/0894486510374302http://fbr.sagepub.com

The Influence of Family Ownershipon the Quality of AccountingInformation

Stefano Cascino1, Amedeo Pugliese2,

Donata Mussolino3, and Chiara Sansone4

Abstract

This article explores the quality of accounting information in listed family firms. The authors exploit the featuresof the Italian equity market characterized by high ownership concentration across all types of firms to disentanglethe effects of family ownership from other major block holders on the quality of accounting information. Thefindings document that family firms convey financial information of higher quality compared to their nonfamily

peers. Furthermore, the authors provide evidence that the determinants of accounting quality differ across familyand nonfamily firms.

Keywords

family firms, financial reporting, earnings attributes, accounting quality

Accounting information is essential for all companies

competing to acquire resources on financial markets.

High-quality financial reporting is well appreciated by

market participants as it reduces information asymme-

tries, increases overall transparency, and provides a bet-

ter device for contracting purposes (Watts & Zimmerman,

1986). In turn, financial reporting of higher quality is

associated with positive capital market consequences

such as lower cost of equity and debt capital (Francis,

LaFond, Olsson, & Schipper, 2004), higher market

liquidity (Diamond & Verrecchia, 1991), better firm per-

formance, and higher competiveness.

During the past decade numerous scandals have put

under increased scrutiny the quality of financial report-

ing. Widely held corporations (e.g., Enron, Ahold, and

Tyco) as well as publicly listed family firms (e.g.,

Adelphia, Cirio, and Parmalat) have been indicted fortheir bad accounting. This study empirically investigates

whether family ownership affects the quality of finan-

cial reporting in listed firms.

Exploring the quality of accounting information in

family firms is a timely issue because of their prevalence

among listed firms around the world (Burkart, Panunzi,

& Shleifer, 2003). Nevertheless, in spite of the great

attention on family firms (Chrisman, Chua, & Sharma,

2005; Corbetta & Salvato, 2004; Poutziouris, OSullivan,

& Nicolescu, 1997), we still know very little about the

quality and the overall informativeness of their financial

reporting practices (Hutton, 2007). To our knowledge, a

few studies have explored differences between family

and nonfamily firms in terms of earnings quality

(Jiraporn & Dadalt, 2009; Wang, 2006; Zhao & Millet-

Reyes, 2007) and voluntary disclosure (Lakhal, 2005).

However, the extant literature fails to disentangle the

influence of family ownership from other major block

holders on the quality of accounting information because

of an almost exclusive focus on concentrated (rather

1London School of Economics, London, UK

2University of Naples Federico II, Naples, Italy3Second University of Naples, Naples, Italy4Bank of New York Mellon, Bruxelles, Belgium

Corresponding Author:

Stefano Cascino, London School of Economics,Houghton Street, WC2A 2AE London, UK

Email: [email protected]

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Cascino et al. 24

than family) ownership. In addition, we are not aware of

studies that investigate the determinants of accounting

quality across family and nonfamily firms.

This study builds on previous research in governance

and accounting that sought to assess the relationship

between ownership structures and the characteristics of

accounting information (Bushman & Smith, 2001). Our

aim is to investigate if family firms provide accounting

information of higher (lower) quality compared to their

nonfamily peers and what type of determinants possibly

drive any differences.

Previous studies mainly investigate the U.S. equity

market where listed firms are generally widely held.

The common proxy utilized to identify family firms is

high ownership concentration. In these studies nonfam-

ily firms are typically those with widespread ownership

structures and whose managers have incentives to oppor-

tunistically maximize their personal wealth (the so-called

agency problem I; hereafter AP I). Family firms are

instead regarded as those with highly concentrated own-

ership whose main problem is related to the risk of expro-

priation of unprotected minorities (the so-called agency

problem II; hereafter AP II). These agency conflicts

potentially induce managers to hide private information

from outside parties with negative consequences on the

quality of financial reports (McConnell & Servaes, 1990).

We exploit the features of the Italian equity market

characterized by high ownership concentration across all

types of companies (La Porta, Lopez-de-Silanes, &

Shleifer, 1999) to disentangle the effects of family owner-

ship from other major block holders on the quality of

accounting information. We analyze a panel of 778 firm-

year observations (507 family firm-year observations and

271 nonfamily firm-year observations) on firms listed on

the Italian Stock Exchange from 1998 to 2004. Our results

show that family firms exhibit on average higher account-

ing quality compared to nonfamily firms. Moreover, we

show that the determinants of accounting quality across

family and nonfamily firms systematically differ along

several dimensions.

This study contributes to the family business litera-

ture in three ways: (a) it sheds some light on the rela-tively unexplored topic of accounting quality in family

firms, (b) it differentiates the effects of family ownership

vis--vis other major block holders on accounting qual-

ity, and (c) it provides evidence of the positive influence

of family ownership on financial reporting quality.

The reminder of the article unfolds as follows: First

we discuss the institutional setting. Second, we presen

the theoretical foundations and our hypothesis. Third, w

describe the research design and data. Fourth, we illus

trate the findings and discuss their implications. Last, w

conclude by highlighting the overall contribution an

implications of our study as well as its limitations.

The Institutional Setting:

Corporate Governance in

Italian Listed Companies

The Italian equity market represents an ideal setting

to investigate the influence of family ownership on

accounting quality because of its unique features

(a) a large number of listed family firms and (b)

high ownership concentration across all listed firm

(Bianco & Casavola, 1999).

For historical reasons, family firms represent a highe

portion of companies traded on the Italian Stock Exchange

Similar to other countries with poor financial infrastruc

tures, the control of a large fraction of the economy is del

egated to wealthy and well-established families (Pagano

Panetta, & Zingales, 1998). The Italian equity market i

also characterized by a high level of ownership concentra

tion across all listed firms.1 Three different classes o

major block holders are commonly identified: familie

with active family members, the state or other public bod

ies, and coalitions of shareholders with venturesome activ

ity or entrepreneurial backgrounds. Moreover, controllin

families are usually very much involved in the activities o

the firm as revealed by the regular appointment of famil

members to the board of directors or even in CEO posi

tions (Prencipe, Markarian, & Pozza, 2008). The presenc

of a dominant shareholder in Italian listed firms makes th

separation between owners and managers less severe, thu

reducing AP I. On the other hand, it raises a different con

flict between controlling shareholders and minorities

known as AP II (Stulz, 1988).

These distinctive features of the Italian setting repre

sent a unique opportunity to investigate the quality ofinancial reporting information in family firms. Concur

rent U.S.-based research in fact commonly identifie

family firms by relying on high levels of ownership

concentration as the main proxy (Anderson, Duru, &

Reeb, 2009) and provides results that often capture th

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248 Family Business Review 23(3)

influence of high ownership concentrationrather than

family ownershipon accounting quality (Givoly,

Hayn, & Katz, in press). The Italian setting allows

us to disentangle better the influence of familism on

accounting quality through a more fine-grained distinc-

tion between family-owned companies and firms with

other major block holders.

Theoretical Framework

Accounting information is crucial for all firms that com-

pete to acquire resources both on equity or debt markets.

High-quality accounting information is well appreciated

by market participants as it reduces asymmetric infor-

mation, increases transparency, and provides better

contracting devices (Watts & Zimmerman, 1986). The

accounting literature emphasizes the desirability of high-

quality accounting information for all companies operat-

ing on financial markets and documents positive capital

market consequences such as reduced cost of capital

(both equity and debt) and increased market liquidity,

which makes stocks more attractive to outside investors

(Francis et al., 2004). High-quality financial statements

provide users with more reliable and decision useful

information and better reflect the underlying economic

fundamentals of companies. The quality of accounting

information refers to (a) the informativeness of reported

numbers, (b) the level of disclosure, and (c) the degree

of compliance with generally accepted accounting stan-

dards. However, among the three listed above, the infor-

mativeness of accounting numbers (in particular

earnings) plays a prominent role (Schipper & Vincent,

2003). Earnings have two different components: cash

flow and accruals. The first component is more objec-

tive and hardly manageable through accounting pol-

icies, whereas the latter is more discretionary. The

discretion managers are allowed with accruals should

in theory be exercised to convey private information to

outside parties to the firm to achieve positive outcomes

(lower cost of capital, higher liquidity, etc.). However,

preparers could use their discretion to manipulate earn-

ings (via accruals) to alter financial reports and mis-lead stakeholders about underlying firm performance,

thus achieving private benefits (Dechow & Dichev,

2002). For this reason, in a large number of studies, the

quality of earnings is usually assessed by looking at

some specific properties of earnings commonly labeled

earnings attributes (accrual quality, persistence, pre-

dictability, smoothness, value relevance, timeliness, and

conservatism).

Ownership Concentration

and Accounting QualityAlthough the quality of financial reporting in family

firms is increasingly attracting researchers attention,

we still lack consensus on how family control exercises

its influence on accounting quality (Hutton, 2007). The

greater portion of studies on this topic are U.S.-based

and mainly discriminate between family and nonfamily

firms by looking at the degree of ownership concentra-

tion. Because family control represents the most diffuse

form of concentrated ownership in the United States, the

assumption is that high ownership concentration should

be able to capture whether a firm is family run or not.

However, such operationalization potentially leads one

to consider family firms also as companies with other

major block holders (i.e., governmental bodies, hedge

funds, pension funds, etc.). The features of U.S.-listed

firms play a nontrivial role in the debate about account-

ing quality in family firms (Sanchez-Ballesta & Garcia-

Meca, 2007). Given the dispersion of ownership that

causes separation between providers of resources and

managers, one of the main disciplining mechanisms is

the presence of a major owner who oversees managers

choices. Hence, a major part of the literature has inquired

whether increased managerial ownership could affect

firm value through the release of higher quality account-

ing information (Wang, 2006).

Two competing views are often provided to predict

the quality of accounting information in the case of own-

ership concentration (Givoly et al., in press). According

to the alignment hypothesis, higher ownership concen-

tration is beneficial as it reduces severe agency conflicts

between owners and managers (Jensen & Meckling,

1976). Concentrated ownership reduces the attention

toward stock market fluctuations in the short term and

lowers market pressures caused by meeting or beating

analyst forecasts (Chen, Chen, & Cheng, 2008). Highmanagerial ownership should therefore increase finan-

cial reporting quality via a reduction of managers incen-

tives to report accounting information that deviates from

the underlying economic performance of the firm (Warfield,

Wild, & Wild, 1995).



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Cascino et al. 24

An alternative view, known as the entrenchment

hypothesis, predicts a lower quality of accounting infor-

mation in firms with highly concentrated ownership

(Morck, Shleifer, & Vishny, 1988). Supporters of the

entrenchment theory claim that concentrated ownership,

beyond a given threshold, increases the risk of wealth

expropriation at the expense of minorities (Schulze,

Lubatkin, & Dino, 2003). Firms with concentrated own-

ership have therefore lower incentives to provide high-

quality accounting information and tend to withhold it

internally because perceived benefits of sharing private

information with outside parties are modest (Fan &

Wong, 2002).

Beside the theoretical debate, empirical studies also

provide inconsistent results with regard to the effects of

managerial ownership on accounting quality, show-

ing positive as well as negative or nonlinear relation-

ships. In a recent review article, Sanchez-Ballesta and

Garcia-Meca (2007) suggest that a nonlinear relation-

ship exists between ownership concentration and

quality of financial reporting. In the U.S. context, an

increase in managerial ownership has a positive effect

on the informativeness of earnings (Warfield et al.,

1995), whereas in Europe (Beuselinck & Manigart,

2007; Gabrielsen, Gramlich, & Plenborg, 2002), East

Asia (Fan & Wong, 2002), and Australia (McKinnon &

Dalimunthe, 1993), where the mean and median owner-

ship concentrations are higher, increases in ownership

concentration would worsen the quality of accounting

information. Stated differently, extreme levels of owner-

ship concentration (too low or too high) limit the quality of

financial reporting (also see Jara-Bertin, Lopez-Iturriaga,

& Lopez-de-Foronda, 2008).

Family Ownership and Accounting Quality

As we have argued before, theory and findings are open

to alternative theoretical explanations and fail to address

the relationship between family ownership and account-

ing quality (Hutton, 2007). This is partly related to the

institutional setting that is usually investigated. In our

setting, the vast majority of listed companies are closelyheld. Main differences arise in terms of the nature and

type of controlling owner rather than in the ownership

structure or concentration. Family firms differ from other

companies with major block holders in many ways, and

their distinctive features are likely to affect resource allo-

cation decisions and incentives to provide high (or low)

accounting quality (Le Breton-Miller & Miller, 2009)

Family-owned companies have a peculiar ownership

structure, in that founding-families represent a uniqu

class of shareholders that hold poorly diversified portfo

lios, are long-term investors (multiple generations), an

often control senior management positions (Anderso

& Reeb, 2003).

On the one side, family firms are considered to be

less efficient form of organization (Morck & Yeung

2003). The intention to pass on the business often lead

to destructive nepotismand the dearth of professiona

management (Schulze et al., 2003); this is a limitatio

of the overall ability to hire valuable external manag

ers who do not necessarily belong to the controllin

family (Gomez-Mejia, Nuez-Nickel, & Gutierrez, 2001)

Relational-based approaches among board members

the managerial team, and representatives of owner

tend to overcome the more objective form of evalua

tion that occurs through market mechanisms: Manag

ers face a lower turnover and more secure job associate

to higher wages. Furthermore, family firms tend t

appoint family members on the board, reducing moni

toring activities, thus lowering reliability perceived by

financial markets (Anderson & Reeb, 2003). Ulti

mately, private information tends to be held within th

family, reducing the flow of information to outsider

(Ajinkya, Bhojraj, & Sengupta, 2005). Based on th

previous reasoning, listed family firms are expected t

engage in providing lower quality accounting informa

tion (Wang, 2006).

The extant literature provides also a different view

Family firms are characterized by long-term orientatio

and reputational concerns that are likely to increas

owners commitment toward maximizing the firm valu

(Davis, Schoorman, & Donaldson, 1997). In addition

the relationship-based approach between managers an

owners can profoundly reduce the risk of rent extraction

by the top management team: The lengthy tenures and

lower tendency to use incentive mechanisms reduc

the extent to which family firms manipulate account

ing information (Chen et al., 2008). Ali, Chen, an

Radhakrishnan (2007) add that in family firms executives compensation is hardly related to accounting data

therefore, family firms face lower risk of manipulations

In addition, family firms are naturally risk adverse an

tend to take risks for different reasons than public com

panies such as the preservation of family control of th

firm (Gomez-Mejia et al., 2001).



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For the reason stated above, whether the quality of

accounting information in family firms is higher (lower)

compared to nonfamily firms becomes an empirical

issue (Wang, 2006) and, accordingly, we propose the

following nondirectional hypothesis:

Hypothesis 1:Accounting quality is systematically

related to the family firm status.

Research Design and Data

Data, Sample Selection,

and Descriptive Statistics

Our analyses are based on nonfinancial listed Italian

firms that are publicly traded over the period from 1998

to 2004. The choice to investigate listed companies is

dictated by the need to use market-based earnings attri-

butes that require measures as returnsthat are available

only for listed companies (Francis et al., 2004). More-

over, we limit our observation period to 2004 to avoid

any potential bias that might be induced by the manda-

tory adoption of IFRS (International Financial Reporting

Standards) from 2005 onward.

To identify family and nonfamily firms, we adopt

stricter criteria compared to previous studies investigat-

ing the U.S. equity market (e.g., Anderson & Reeb,

2003). These studies usually rely on a 20% ownership

concentration threshold to identify family firms. Given

the peculiarities of our setting, choosing such a thresh-

old would not allow capturing any difference in terms of

firm type (family vs. nonfamily firms). For this reason,

we seek to employ a more fine-grained definition of

family firm that does not uniquely rely on ownership

concentration as major discriminating factor. Therefore,

we identify as family firms those in which 50% of the

voting rights or outstanding shares (either direct or indi-

rect) are held from a family block holder. Furthermore,

we require that at least one member of the controlling

family hold a managerial position (i.e., board member,

CEO or chairman, chair of the syndicate pact). Follow-

ing these criteria, our sample selection procedure startswith the universe of Italian listed firms covered by

Worldscope in 2004. From this initial sample of 263 firms,

we delete companies that were not consistently listed

during the previous 6 years (115 companies) and com-

panies operating in the financial industry (34 compa-

nies). The initial sample hence comprises 114 companies

(74 family and 40 nonfamily firms) over the period

19982004. Given the panel data structure of our analy-

ses, we pool all observations over our 7-year window

(19982004). Although we would expect a total number

of 798 firm-year observations (114 firms 7 years),given we delete 20 firm-year observations because of the

lack of available data on Worldscope or Datastream, our

final sample that we regard as the full sample actually

comprises 778 firm-year observations (507 firm-year

observations for family firms and 271 firm-year observa-

tions for nonfamily firms). Moreover, because all our

tests require specific data to compute earnings attributes

metrics, some samples may have fewer observations.

We use floating samples throughout the article to maxi-

mize the amount of observations available and to

increase the statistical power of each separate test. We

winsorize the extreme values of all nontruncated vari-

ables to the 1 and 99 percentiles of their distributions.2

Our results are not qualitatively affected by this design

choice.3

The descriptive statistics are presented in Table 1.

The number of observations per accounting period

(Panel A) is almost equally distributed across family

and nonfamily firms, with the fewest observations in

1998. As can be inferred from Panel B, the nonfamily

subsample has a higher proportion of firms that belong

to transport, energy, and utilities industry. That is moti-

vated by the fact that the majority of nonfamily firms

are formerly state-owned public utilities. In general, as

shown in Panel C, nonfamily firms are significantly

larger (in terms of both market capitalization and reported

total assets) than family firms, are less profitable (lower

mean and median for return on assets), report lower

earnings (lower mean and median for net income before

extraordinary items), and have higher market to book

ratios.

Panel D reports the pairwise correlations among vari-

ables, which are low to moderate, with the exception of

our different profitability measures that are correlated

by definition.

To estimate the determinants of accrual quality, we

hand collected ownership structures, board composi-tions, and auditor data respectively from the Consob

website, annual corporate governance reports, and com-

pany financial statements. As shown in Table 3 Panel A,

family firms generally exhibit a lower proportion of

institutional investors in the ownership, a lower margin,

and a lower intensity in intangible investments.



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Cascino et al. 25

Table 1.Full Sample Composition and Descriptive StatisticsPanel A: Family Versus Nonfamily Firms by Year

Full sample Family firms Nonfamily firms

Year Frequency % Frequency % Frequency %

1998 101 12.98 67 13.21 34 12.51999 111 14.27 72 14.20 39 14.32000 113 14.52 73 14.40 40 14.72001 113 14.52 73 14.40 40 14.72002 114 14.65 74 14.60 40 14.72003 113 14.52 74 14.60 39 14.32004 113 14.52 74 14.60 39 14.3Total 778 507 271

Panel B: Industry Composition

Full sample Family firms Nonfamily firms

Fama-French industry Frequency % Frequency % Frequency %

Mining/construction 35 4.50 14 2.76 21 7.7Food/textile/chem. 166 21.34 117 23.08 49 18.0Manufacturing 272 34.96 200 39.45 72 26.5Trans./energy/utilities 153 19.67 59 11.64 94 34.6Retail/wholesale trade 27 3.47 27 5.33 0 0.0Insurance/real estate 56 7.20 35 6.90 21 7.7Services 63 8.10 49 9.66 14 5.1Other 6 0.77 6 1.18 0 0.0Total 778 507 271

Panel C: Descriptive Statistics of Main Variables

Variable M SD Min 25% 50% 75% Max t-value zscore

Family firms (n=507)LOG(TOTASS) 13.011 1.393 10.829 11.938 12.842 13.986 15.912 -4.40*** -4.01***LOG(MKTCAP) 12.278 1.427 10.097 11.113 11.974 13.274 15.012 -4.92*** -4.27***NIBE_MVE 0.038 0.084 -0.182 0.009 0.046 0.080 0.184 3.52*** 3.76***RET 0.038 0.319 -0.581 -0.177 0.049 0.281 0.560 -0.35 -0.52LEVERAGE 0.286 0.148 0.022 0.166 0.306 0.389 0.553 1.39 1.24ROA 0.064 0.051 -0.029 0.025 0.066 0.099 0.160 4.20*** 3.75***MTB 1.705 1.159 0.562 0.858 1.315 2.124 4.702 -4.38*** -4.95***

Nonfamily firms(n=271)LOG(TOTASS) 13.564 1.886 10.379 12.083 13.492 15.036 16.865LOG(MKTCAP) 12.977 1.921 10.246 11.389 12.680 14.480 17.075NIBE_MVE 0.000 0.121 -0.149 -0.012 0.030 0.065 0.134RET 0.055 0.373 -0.642 -0.201 0.077 0.277 0.812LEVERAGE 0.269 0.172 0.000 0.109 0.273 0.402 0.565ROA 0.038 0.071 -0.150 0.022 0.047 0.079 0.143MTB 2.349 1.887 0.647 1.120 1.708 2.741 7.881

(continued



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Table 1.(continued)Panel D: Correlations

A B C D E F G

Family firms (n=507)A: LOG(MKTCAP) .860 .221 .257 .424 .464 .108

B: LOG(TOTASS) .853 .110 .168 .172 .087 .321C: RET .229 .121 .333 .335 .218 .010D: NIBE_MVE .294 .218 .307 .709 .025 -.134E: ROA .427 .191 .330 .731 .415 -.153F: MTB .413 .070 .248 .055 .449 -.007G: LEVERAGE .100 .351 .008 -.081 -.148 .029

Nonfamily firms (n=271)A: LOG(MKTCAP) .895 .165 .229 .286 .186 .195B: LOG(TOTASS) .901 .033 .106 .157 -.038 .367C: RET .177 .045 .260 .255 .151 -.040D: NIBE_MVE .221 .172 .190 .860 -.199 -.122E: ROA .260 .140 .241 .855 -.151 -.067F: MTB .350 .077 .208 -.062 .145 .173

G: LEVERAGE .217 .364 -.068 -.078 -.095 .050The full sample consists of 778 firm-year observations over the fiscal years 1998 to 2004. FAMBUS is a dummy variable indicating whether therespective firm qualifies as a family firm. To qualify as a family firm, (a) 50% of the voting rights or outstanding shares (either direct or indirect)should be held from a family block holder and (b) at least one member of the controlling family should hold a managerial position(i.e., board member, CEO or chairman positions, chair of the syndicate pact). MKTCAP is the market capitalization (WS08001) at the beginningof the fiscal year, measured in thousand euros. LOG(MKTCAP) is the natural logarithm of MKTCAP. TOTASS is total assets (WS02999) at thebeginning of the fiscal year, measured in thousand euros. LOG(TOTASS) is the natural logarithm of TOTASS. RET is the buy-and-hold returnover the fiscal year. NIBE is net income before extraordinary items (WS01551). NIBE_MVE is NIBE deflated by beginning of fiscal year marketcapitalization. ROA is earnings before interest and taxes (WS18191), divided by beginning of the year total assets (WS02999). MTB is themarket capitalization (WS08001) divided by book value of equity (WS05491). LEVERAGE is total debt (WS03255), divided by total assets.In Panel B, observations are grouped by the first digit of their SIC code (WS07021) are presented according to the Fama-French industryclassification. In Panel C, nstands for number of observations,M stands for mean, SDstands for standard deviation, Min stands for minimum,and Max stands for maximum. The reported statistics test for differences across the respective family firm sample and the nonfamily firmsample. A ttest (Wilcoxon signed rank test) is used to test for differences in means (medians). In Panel D, Pearson (Spearman) correlations arereported above (below) the diagonal. Bold indicates two-sided significance below the 5% level.*Significant at the 10% level, two-tailed. **Significant at the 5% level, two-tailed. ***Significant at the 1% level, two-tailed.

Measures of Earnings Quality

To capture the extent to which family firms use their

discretion to make financial statements more (or less)

informative, we need proxies that measure financial

reporting quality. Following a well-established stream

of literature in accounting, we proxy financial reporting

quality with the narrower concept of earnings quality,

which focuses on specific desired properties of earnings(Dechow & Dichev, 2002).

According to Francis et al. (2004), two groups of

earnings attributesare commonly identified to measure

earnings quality: accounting-based attributes such as

accrual quality, persistence, predictability, and smooth-

ness and market-based attributes such as value relevance,

timeliness, and conservatism. The difference between

the two classes of earnings properties relies on different

underlying assumptions about the function of earnings.

In particular, accounting-based earnings attributes implic-

itly assume that the function of earnings is the effective

allocation of cash flows to reporting periods via the

accruals process. These attributes take cash flows or

earnings as the reference construct and therefore derive

directly from accounting information (Francis et al.,2004). Instead, market-based attributes assume that the

function of earnings is to mirror economic income and

for this reason take returns (or prices) as the reference

construct. In our analyses, we employ all of the above-

mentioned attributes whose measures follow prior litera-

ture (Francis, LaFond, Olsson, & Schipper, 2005).



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Cascino et al. 25

Table 2.Earnings Attributes

Panel A: Accrual quality

WCACC_TAt=0+1CFO_TAt-1+2CFO_TAt+3CFO_TAt+1+ (1

REV_TAt+PPE_TAt+i=2004

1998iYEARi,t+t

Family firms Nonfamily firms

Parameter Estimate Pr >|t| Estimate Pr >|t

Intercept -0.022 0.530 -0.044 0.04CFO_TAt-1 0.079 0.036 0.076 0.13CFO_TAt -0.700 0.000 -0.712 0.00CFO_TAt+1 0.153 0.000 0.216 0.00REV_TAt -0.054 0.000 -0.006 0.77PPE_TAt 0.138 0.000 0.140 0.00Yearly fixed effects Yes Yes

N 208 121Adj. R2 .686 .705

Panel B: Persistence and Predictability

NIBE_TAt=0+1NIBE_TAt-1+i=2004

1998iYEARi,t+t (2

Family firms Nonfamily firms Pooled sample

Parameter Estimate Pr >|t| Estimate Pr >|t| Estimate Pr >|t

Intercept -0.003 0.884 -0.180 0.403 -0.021 0.404

FAMBUS 0.019 0.000NIBE_TAt-1 0.435 0.000 0.648 0.000 0.671 0.000FAMBUS* NIBE_TAt-1 -0.240 0.005Yearly fixed effects Yes Yes YesN 434 232 666Adj. R2 .207 .312 .263

Panel C: Smoothness

(NIBEj,t) / (CFOj,t)

Sample n M SD 25% 50% 75%

Family firms 360 0.469 0.333 0.205 0.415 0.665

Nonfamily firms 193 0.529 0.346 0.204 0.430 0.812Test for sample differences Statistic Pr >|t/Zt-value 2.02 0.044

zscore 2.04 0.020

(continued



10/21


Table 2. (continued)

Panel D: Value Relevance

RETt=0+1NIBE_MVEt+ 2NIBE_MVEt+i=2004

1998iYEARi,t+t (3)

Family firms Nonfamily firms

Parameter Estimate Pr >|t| Estimate Pr >|t|

Intercept 0.071 0.514 0.052 0.592NIBE_MVE 1.274 0.000 1.103 0.000NIBE_MVE -0.617 0.001 -0.787 0.000Yearly fixed effects Yes YesN 507 271Adj. R2 .364 .363

Panel E: Timeliness and Conservatism

NIBE_MVEt=0+1NEGt+2RETt+3NEGt*RETt+i=2004

1998iYEARi,t+t (4)


Parameter Estimate Pr >|t| Estimate Pr >|t| Estimate Pr >|t|

Intercept -0.004 0.901 -0.093 0.019 -0.161 0.673FAMBUS 0.011 0.456NEG 0.013 0.305 -0.015 0.513 -0.027 0.139FAMBUS*NEG 0.037 0.104RET 0.068 0.007 -0.006 0.881 -0.018 0.591FAMBUS*RET 0.083 0.050NEG*RET 0.085 0.026 0.163 0.016 0.117 0.025

FAMBUS*NEG*RET -0.019 0.768Yearly fixed effects Yes Yes YesN 507 271 778Adj. R2 .192 .186 .179

Panel F: Summary and Significance Tests

Sample

Earnings attribute Statistic Family firms Nonfamily firms

Accrual quality -(t)from Eq. (1) M -0.042 -0.054***Mdn -0.043 -0.047***

Persistence 1from Eq. (2) 0.435 0.648**

Predictability 2(t) from Eq. (2) M 0.022 0.029*Mdn 0.019 0.043**

Smoothness (NIBEj,t) / (CFOj,t) M 0.469 0.529*Mdn 0.415 0.430*

(continued)



11/21

Cascino et al. 25

Accrual quality. Since Dechow and Dichev (2002),

accrual quality has become synonymous with overall

earnings quality. This attribute is based on the assumption

that the role of accruals is to adjust the recognition of cash

flows over time, and therefore the more accruals map

closely into cash flow, the higher their quality (Francis

et al., 2005). Dechow and Dichev model current accruals

as a function of past, present, and future cash flows, inter-

preting the standard deviation of accruals estimation

errors as an inverse measure of accrual quality. The

standard deviation of residuals from the Dechow and

Dichevs model is meant to capture unexpected working

capital accruals and, thus, is a proxy for accrual quality.

Our measure of accrual quality is based on a modified

version of the original Dechow and Dichev model. As in

Francis et al. (2005), we in fact follow the McNichols

(2002) version of the model which also includes changes

in revenues and property, plant, and equipment as addi-

tional explanatory variables.4Our accrual quality metric

is based on a pooled estimation of the following model,

WCACC_TAt=0+1CFO_TAt-1 (1) +2CFO_TAt+3CFO_TAt+1+

REV_TAt+PPE_TAt+i=2004

1998iYEARi,t+t

where,

WCACC_TAt= total working capital accrual attime t (CAt CLt CASHt+STDEBTt),deflated by total assets

CFO_TAt=operating cash flow in year t(NIBEtTAt), divided by total assets

NIBEt=net income before extraordinary items inyear t

TAt=CA

tCL

tCASH

t+STDEBT

t DEP

tCAt=change in current assets between time t-1and t

CLt=change in current liabilities between timet-1 and t

CASHt=change in cash between time t-1 and tSTDEBTt=change in current debt between time

t-1 and t

DEPt=depreciation and amortization expense attime t

REV_TAt=change in revenues between time t-1and t, divided by total assets

PPE_TAt=property, plant and equipment at timet, deflated by total assetsYEARi,t=year dummy variable

The model is run both for our family and nonfamil

subsamples. Following DeFond, Hung, and Trezevan

(2007), we measure accrual quality as the standard devia

tion of estimated residuals from Model 1 multiplied


Sample

Earnings attribute Statistic Family firms Nonfamily firm

Value relevance 2(t) from Eq. (3) M 0.235 0.261*

Mdn 0.192 0.218*Timeliness 2(t) from Eq. (4) M 0.060 0.065*Mdn 0.036 0.038

Conservatism 3-2from Eq. (4) 0.017 0.169

This table details the regression results of Models 1 to 4. Each model is estimated as a yearly fixed-effect model using ordinary least squaresand clustered standard errors to account for the heteroscedasticity and the autocorrelation caused by the panel structure of the data.Samples are as reported in Table 1. YEAR is a series of yearly fixed effects. WCACC is working capital accruals, which are equal to change incurrent assets (WC02201) less change in current liabilities (WC03101) less change in cash and cash equivalents (WC02001) plus change incurrent debt (WC03051). WCACC_TA is WCACC divided by total assets. TOTACC is WCACC less depreciation, amortization and depletion(WC01151). CFO_TA is net income before extraordinary items minus total accruals, deflated by total assets. NIBE_TA net income beforeextraordinary items (WS01551), deflated by total assets. REV_TA is change in revenues (WS01001). PPE_TA is property plant and equipment(WS02501) divided by total assets. NEG is a dummy coded 1 for observations with RET


12/21


by 1 (AQ =(t)). The standard deviation of estimatedresiduals captures the extent to which current accruals

map into current operating cash flow. High (low) values

of AQ correspond to good (poor) accrual quality.

Persistence. Persistent earnings are considered to be

desirable because of their recurrence. Following prior

research (Lev, 1983), we measure the persistence of

earnings with the slope coefficient (1) of the followingautoregressive model of earnings on lagged earnings,

NIBE_TAt=0+1NIBE_TAt-1+ (2)

i=2004

1998iYEARi,t+t

where,

NIBE_TAt = net income before extraordinaryitems at time t, scaled by total assets

YEARi,t=year dummy variable

Higher persistence is considered a positive and desir-

able attribute of accounting information; therefore, a

large (small) slope coefficient corresponds to good

(poor) earnings persistence. To compare the persistence

of earnings in the case of family and nonfamily firms,

we run Model 2 for both subsamples and estimate a

fully interacted pooled version of the model to assess

the significance of the difference in this metric across

the two samples.

Predictability. This attribute looks at the way past earn-

ings performance improves the ability of financial state-

ment users to forecast future earnings numbers.

Following Lipe (1990), we measure predictability as the

square root of the error variance (___2_(___

t)) from Model 2.

Large (small) values of the square root of the error vari-

ance imply less (more) predictable earnings.

Smoothness. The smoothness of earnings is consid-

ered to be a desirable earnings property because manag-

ers use their private information about future earnings

to smooth transitory fluctuations so as to achieve a

more useful reported earnings number (Demski, 1998;

Ronen & Sadan, 1981). Managers in fact might useearnings smoothing to signal their private information

to the market and thus reduce information asymmetries.

Basing our construct on Leuz, Nanda, and Wysocki

(2003), we measure smoothness as the ratio of the stan-

dard deviation of earnings before extraordinary items

divided by the standard deviation of cash flow from

operation ( (NIBEj,t / (CFOj,t)) calculated over

rolling 3-year windows. Larger values of this ratio sug-

gest less earnings smoothness.

Value relevance. This attribute looks at the ability of

earnings to explain variation in stock returns, where

greater explanatory power is viewed as a desirable prop-

erty and a combined proxy of both relevance and reli-

ability of financial reporting information (Barth, Beaver,

& Landsman, 2001). To measure the value relevance of

earnings for family and nonfamily firms, we follow

Francis and Schipper (1999) and regress returns on the

level and change in earnings,

RETt=0+1NIBE_MVEt+ 2NIBE_MVEt (3)

+i=2004

1998iYEARi,t+t

where,

RETt=buy and hold return calculate over the fis-cal year end

NIBE_MVEt= net income before extraordinaryitems deflated by market value of equity at

time t

NIBE_MVEt = change in net income beforeextraordinary items deflated by market value

of equity between time t-1 and t

YEARi,t=year dummy variable

To assess the level of value relevance between the two

different types of firms, we contrast the square root of

the error variance (___2_(__t)) of Model 3 once run for thefamily and the nonfamily samples. Large (small) values

of the square root of the error variance imply less

(more) value-relevant earnings.

Timeliness and conservatism. These two constructs fol-

low the assumption that the role of accounting earnings is

to measure economic income, which is defined as the

change in the market value of equity (Ball, Kothari, &

Robin, 2000) measured through stock returns. Timeliness

is the explanatory power of a reverse regression of

earnings on returns and captures the speed with which

publicly available information (proxied by stock returns)is incorporated into accounting earnings (Beaver, Rich-

ard, & Ryan, 1987). Publicly available information in this

case is either good news (proxied by positive returns)

or bad news (proxied by negative returns). Timely

earnings imply more information that is useful in decision

making by financial statement users. Like for the value

relevance test, to assess differences in earnings timeliness



13/21

Cascino et al. 25

between the two subsamples, we estimated the following

model for both family and nonfamily firms and then

compare the square root of the error variance (___2_(___

t)).

Again, large (small) values of the square root of the error

variance imply less (more) timely earnings,

NIBE_MVEt=0+1NEGt+2RETt+ (4)

3NEGt*RETt+i=2004

1998iYEARi,t+t

where,

NIBE_MVEt= net income before extraordinaryitems deflated by market value of equity at

time t

NEGt=Dummy variable that equals 1 if RETt


14/21


Our determinant model has to be interpreted as a

model where accrual quality is regressed over a family

firm dummy variable and a set of controls (the other

accrual quality determinants in the model). In other

words, we test whether, after controlling for other

determinants of accrual quality (already identified in the

literature), the family status still affects accrual quality

(i.e., the family firm dummy variable is still loading

after controlling for other accrual quality drivers).

Following prior literature on determinants of account-

ing quality (Healy & Palepu, 2001), we include industry,

size (log(TOTASS)), profitability (ROA), presence of

growth opportunities (MTB), and financial distress

(LEVERAGE) to control for the operating environ-

ment and the financing needs of the investigated firms.

Because large firms are more visible and therefore face

greater public demands for high-quality financial report-

ing, we expect a positive association between size and

accrual quality. Highly leveraged firms face higher

agency costs and therefore a higher demand for moni-

toring. If accounting information is regarded as comple-

mentary to other monitoring information creditors

utilize, we would expect a positive relation between

leverage and accrual quality. On the other hand, if credi-

tors use monitoring information that can be regarded as

a substitute for accounting information, the likelihood

that a positive relation holds is lower. Accordingly, as in

previous studies that underline an ambiguous influence

of leverage on reporting quality (Healy & Palepu, 2001),

we make no prediction on the sign of this association.

Outside board members are generally regarded as a

sign of efficient governance (Anderson & Reeb, 2003).

As outside controlling stakeholders, independent board

members should require a higher level of accrual qual-

ity, and hence we predict a positive coefficient on AQ.

As market-based governance is assumed to be poorly

developed in Italy (Pagano et al., 1998), institutional

ownership should generally exercise a positive effect on

governance and hence on the level of accounting qual-

ity. But following the entrenchment hypothesis (Fan &

Wong, 2002), it seems also plausible that institutional

owners might decide to collude with managers so as towithhold information internally with negative conse-

quences for accounting quality. Consequently, we make

no sign prediction on INST_OWNER.

Firms facing higher operating uncertainty because of the

presence of growth options (MTB) might face higher incen-

tives to produce high-quality financial reports to reduce the

information asymmetries with external capital providers.

For this reason, in line with Healy and Palepu (2001), we

expect a positive association between MTB and AQ.

High levels of profitability (ROA) signal the pres-

ence of economic rents. These rents could proxy for a

rich investment opportunity set that calls for additional

external financing and hence provide an incentive for

higher quality financial information. On the other hand,

these economic rents might be contestable by competi-

tors and lead to higher proprietary costs, which nega-

tively affect the quality of financial reporting information

(Leuz & Verrecchia, 2007). As a consequence, follow-

ing previous studies on the determinants of financial

reporting quality, we make no sign prediction for profit-

ability. A very similar argument applies to MARGIN,

and we do not make any prediction for this variable

either (Healy & Palepu, 2001).

Fast-growing firms are also likely to have noisier

accruals because of absorption-costing distortions to

income when inventory buildups are used to antici-

pate the effects of future sales growth (Revsine, Col-

lins, & Johnson, 2005). Consequently, as in prior

literature (Skaife, Collins, Kinney, & LaFond, 2009),

we expect GROWTH to be positively associated with

accrual quality.

The level of intangible asset intensity (INT_

INTENSITY) is used to capture differences in firms

asset structures that require accrual adjustments at the

fiscal year end (Francis et al., 2005; Skaife et al., 2009).

Firms that tend to expense a substantial portion of their

intangibles (low intangible intensity firms) actually pro-

vide conservative (and less volatile) earnings (Penman

& Zhang, 2002). For this reason, in line with prior research

(Francis et al., 2004), we expect INT_INTENSITY to be

negatively association with accrual quality.

Finally, as shown by DeAngelo (1981), we expect

larger audit firms that have brand-name reputations to pro-

tect to provide higher audit quality. Large auditors are in

fact believed to enforce their clients to provide high-qual-

ity accounting information to avoid potential litigation

risks. For this reason, we expect, as in previous studies

(Francis et al., 2004; Francis et al., 2005; Skaife et al.,2009), a positive association between AUDITOR and AQ.

Results

The results from our earnings attributes tests are pre-

sented in Table 2. Panel A illustrates the results obtained



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Cascino et al. 25

Table 3.Determinants of Accrual QualityPanel A: Descriptive Statistics and Correlations

Variable M SD Min 25% 50% 75% Max t-value zscore

Family firms (n=245)LOG(TOTASS) 13.272 1.000 10.879 12.208 12.993 14.283 15.912 -2.27* -1.46

LEVERAGE 0.270 0.134 0.017 0.185 0.293 0.354 0.538 0.54 0.21INDEP_BOARD 0.338 0.170 0.000 0.214 0.333 0.455 0.714 -4.48*** -3.25**INST_OWNER 0.388 -2.45**MTB 1.811 1.356 0.552 0.790 1.325 2.327 5.229 -2.53** -3.55**ROA 0.067 0.053 -0.036 0.030 0.068 0.103 0.160 3.16** 3.15**MARGIN 0.436 0.146 0.182 0.328 0.420 0.535 0.843 -3.69*** -3.30**GROWTH 0.074 0.162 -0.185 -0.031 0.047 0.147 0.597 -0.21 0.69INT_INTENSITY 0.081 0.076 0.001 0.020 0.065 0.113 0.296 -3.25** 1.42AUDIT 0.857 -3.89***

Nonfamily firms (n=169)LOG(TOTASS) 14.012 2.208 10.379 12.208 14.167 15.314 17.984LEVERAGE 0.262 0.172 0.000 0.095 0.282 0.404 0.568INDEP_BOARD 0.434 0.329 0.000 0.273 0.333 0.615 0.889

INST_OWNER 0.509MTB 2.338 1.816 0.618 1.114 1.843 2.635 7.631ROA 0.046 0.061 -0.103 0.024 0.051 0.079 0.155MARGIN 0.492 0.169 0.160 0.363 0.488 0.620 0.805GROWTH 0.084 0.253 -0.309 -0.042 0.034 0.126 0.944INT_INTENSITY 0.123 0.135 0.000 0.018 0.061 0.191 0.439AUDIT 0.970

A B C D E F G H I J

Family firmsA: LOG(TOTASS) .300 .059 .069 -.110 .113 .010 .098 -.164 .185B: LEVERAGE .251 .255 .037 .043 -.180 -.267 .111 .326 -.053C: INDEP_BOARD .113 .236 .052 .119 -.159 -.242 -.014 .118 .140D: INST_OWNER .080 .026 .062 .078 .139 .020 -.050 .022 -.18E: MTB .005 .026 .186 .064 .409 .104 .232 .395 .070F: ROA .085 -.196 -.115 .140 .475 .293 .371 .171 -.014G: MARGIN -.021 -.242 -.249 .063 .157 .338 -.018 .142 .052H: GROWTH .160 .118 -.026 -.038 .310 .452 .037 .138 .007I: INT_INTENSITY -.083 .347 .126 .035 .373 .183 .138 .151 -.108

J: AUDIT .201 -.064 .142 -.181 .081 -.040 .047 .013 -.086

A B C D E F G H I J

Nonfamily firmsA: LOG(TOTASS) -.083 -.003 -.349 -.046 .184 .019 -.047 -.424 -.252B: LEVERAGE -.095 .005 .277 .105 -.123 .167 .123 .560 .060C: INDEP_BOARD -.009 .076 .130 .210 .121 .195 .049 .560 .060D: INST_OWNER -.339 .276 .175 .030 .081 -.001 .123 .096 .172E: MTB .035 -.030 .222 .084 .029 .372 .107 .266 .402F: ROA .254 -.131 .120 .066 .229 .131 .280 -.032 -.227G: MARGIN -.025 .151 .162 .006 .350 .112 .075 .332 .036H: GROWTH .014 .175 .111 .157 .204 .310 .110 .148 -.089I: INT_INTENSITY -.398 .605 .123 .208 .183 -.073 .189 .179 .027

J: AUDIT -.291 .048 .129 .172 .233 -.206 .044 -.130 .086

(continued



16/21


from the accrual quality test. In line with prior literature

(Dechow & Dichev, 2002; McNichols, 2002), we find a

positive sign on past cash flow, future cash flow, and

property, plant, and equipment but a negative sign on cur-

rent cash flow and change in revenues for both the family

and nonfamily subsamples. When comparing our accrual


Panel B: Accrual Quality Determinant Model

AQj=0+1LOG(TOTASS)j+2LEVERAGEj+3INDEP_BOARDj+ (5)

4,INST_OWNERj+5MTPj+6ROAj+7MARGINj+8GROWTHj+

9INT_INTENSITYj+10AUDITj+i=8

1iINDCONTROLSj+j


Parameter Predicted sign Estimate Pr >|t| Estimate Pr >|t| Estimate Pr >|t|

Intercept +/- -0.984 0.000 -0.138 0.000 -0.109 0.000FAMBUS 0.023 0.002LOG(TOTASS) + 0.035 0.000 0.082 0.000 0.082 0.000FAMBUS*LOG(TOTASS) -0.068 0.000LEVERAGE +/- 0.041 0.000 -0.009 0.545 -0.024 0.073FAMBUS*LEVERAGE 0.070 0.000INDEP_BOARD + 0.044 0.000 -0.020 0.000 -0.014 0.003

FAMBUS* INDEP_BOARD 0.056 0.000INST_OWNER +/- -0.008 0.002 0.010 0.050 0.022 0.000FAMBUS* INST_OWNER -0.035 0.000MTB +/- 0.001 0.795 -0.003 0.051 -0.005 0.000FAMBUS*MTB 0.006 0.000ROA +/- -0.002 0.742 -0.031 0.384 -0.049 0.164FAMBUS*ROA 0.072 0.132MARGIN +/- 0.025 0.029 0.025 0.106 0.021 0.105FAMBUS*MARGIN 0.017 0.286GROWTH + 0.001 0.981 0.007 0.366 -0.002 0.720FAMBUS*GROWTH 0.003 0.776INT_INTENSITY - 0.026 0.191 -0.106 0.000 0.120 0.000FAMBUS*INT_INTENSITY -0.121 0.000AUDIT + 0.016 0.000 0.013 0319 0.026 0.019

FAMBUS*AUDIT -0.014 0.234Industry fixed effects Yes Yes YesN 245 169 414Adj. R2 .545 .480 .439

The family and nonfamily firm samples contain observations fulfilling the data requirements for estimating the models of Panel B. AQ is the standarddeviation of the residuals from Equation 1 multiplied by -1. INDEP_BOARD is the ratio of the number of independent directors divided by thetotal number of directors. INST_OWNER is a dummy variable indicating significant institutional ownership in the firm (2% of outstanding equity isthe threshold established by the Italian capital market regulator (Consob) for institutional owners to publicly disclose interest in listed companies).MARGIN is gross margin percentage, calculated as net sales (WS01001) less cost of goods sold (WS01051), scaled by net sales. GROWTH is growthin sales, calculated as net sales minus net sales from the previous year, scaled by net sales from the previous year. INT_INTENSITY is intangibleintensity, calculated as intangible assets (WS02649), divided by total assets. AUDIT is a dummy variable indicating whether the financial statements ofthe respective firm have been audited by a dominant audit supplier (PWC, KPMG, Deloitte, or Ernst & Young). All other variables are as previouslydefined. In Panel A, nstands for number of observations,Mstands for mean, SDstands for standard deviation, Min stands for minimum, and Maxstands for maximum. The reported statistics test for differences across samples. A ttest (Wilcoxon signed rank test) is used to test for differences inmeans (medians). Pearson (Spearman) correlations are reported above (below) the diagonal. Bold indicates two-sided significance below the 5% level.The models of Panel B are estimated using ordinary least squares and industry fixed effects. Probabilities are two-sided.*Significant at the 10% level, two-tailed. **Significant at the 5% level, two-tailed. ***Significant at the 1% level, two-tailed.



17/21

Cascino et al. 26

quality metric across subsamples, we find a higher level

of accrual quality (AQ =(t)) for family firms com-pared to nonfamily firms. Moreover, as reported in Panel F,

this difference in accrual quality is significant for both the

mean and the median. Panel B presents results from our

persistence and predictability tests. The coefficient on

NIBE_TAt-1is larger for nonfamily firms. The interacted

version of Model 2 shows that this difference is signifi-

cant. Thus, we conclude that nonfamily firms tend to have

more persistent earnings than family firms. With regard to

predictability, we observe that the square root of the error

variance (___2_(___

t)) from Model 2 is significantly smaller

for family firms, implying more predictable earnings

(Panel F). Panel C shows results for our smoothness test.

Both the mean and the median of the smoothness metric

are higher in the case of nonfamily firms, and the differ-

ences are statistically significant, thus indicating that

family firms tend to report smoother earnings compared

to nonfamily firms.

Results from our value relevance test are presented in

Panel D. The explanatory powers of the family and non-

family firm models are compared through the square

root of the variance of the residuals (___2_(___

t)); as shown

in Panel F, we find lower levels of residuals for our fam-

ily firm subsample, thus suggesting that family firms

report more value-relevant earnings.

Finally, Panel E exhibits the results for our timeli-

ness and conservatism tests. The square root of the vari-

ance of the errors (___2_(___

t)) in Model 4, as shown in

Panel F, is slightly higher in the case of nonfamily firms,

hence indicating that family firms report more timely

earnings. However, the difference in the level of residu-

als is only marginally significant for the mean and non-

significant for the median. The difference between the

bad news coefficient (3) and the good news coef-ficient (2) is lower in the case of family firms. We findevidence that the difference between the two samples is

nonsignificant.

Results from the accrual quality determinant model

(Equation 5) are presented in Table 3, Panel B. The model

has a high explanatory power for the family and nonfamily

subsamples and for the pooled sample (R

2

is greaterthan .439). Two interesting results come up from the ratio

of independent directors (INDEP_BOARD) and presence

of institutional owners (INST_OWNER). The two vari-

ables have different effects on accrual quality in family and

nonfamily firms: Although family firms benefit in terms of

higher accrual quality having more independent directors

on the board, in nonfamily firms independent board mem

bers increase noise in accruals and reduce its quality. In

similar vein, institutional owners have different effects o

accrual quality: Although in family firms the presence o

institutional owners seem to decrease accrual quality

in nonfamily firms accrual quality appears to increas

with the presence of institutional owners. The incidenc

of intangible assets (INT_ INTENSITY) significantl

decreases accrual quality in nonfamily firms, whereas i

is not significant in the case of family firms. Moreover

results show that the presence of a renowned audit firm

(AUDIT) significantly increases the accrual quality in fam

ily firms whereas the association is not significant for non

family firms. Finally, evidence from the pooled sampl

analysis shows that the coefficient on the firm type (FAM

BUS) is positive and significant, providing evidence of a

overall superiority accrual quality for family firms.

Discussion

Our results contribute to the ongoing debate about owner

ship structure and its effects on financial reporting quality

Consistent with our hypothesis, we find that accountin

quality is systematically related to the family firm statu

being different across family and nonfamily firms. Over

all, our results indicate that earnings of family firms are o

higher quality relative to their nonfamily counterparts

Moreover, we find that the determinants of accountin

quality in family and nonfamily firms tend to be differen

Accounting quality in family firms is positively associate

with leverage, board independence, and audit quality

whereas institutional ownership exhibits a negative asso

ciation. Accounting quality in nonfamily firms appears t

be influenced by other determinants: Although institu

tional ownership has a positive effect, the degree of intan

gible intensity is negatively related to quality.

Our findings support the rationale of governanc

mechanisms being complements: Increasing leverag

seems to discipline family owners who experience mor

tight control from debt holders and reduced accountin

discretion (Shleifer & Vishny, 1997). A higher propor

tion of independent directors would counterbalance thtendency to occupy all managerial positions by family

members, increasing scrutiny and control also on th

financial reporting process, thus leading to a lower us

of discretionary accruals (Bushman & Smith, 2001). Th

presence of a renowned audit firm increases accrua

quality because higher audit quality enhances a highe



18/21


degree of compliance (DeAngelo, 1981). Institutional

ownership instead has a negative impact on accrual qual-

ity in family firms: The presence of conflicting voices

(family and institutional owners) among equity holders

may in fact worsen governance practices by increasing

conflicts between the parties, thus affecting the quality

of accounting information (Hoskisson, Hitt, Johnson, &

Grossman, 2002).

Altogether, our study informs the current debate on

the influence of family ownership on accounting qual-

ity. We try to better disentangle the effect offamilismon

the quality of accounting information through a more

fine-grained distinction between family-run companies

and firms with other major block holders. By exploring

a setting where ownership concentration is high across

all firms, we go beyond the classical alignment versus

entrenchment argument and show that it is the presence

of a family itself, rather than ownership concentration,

that produces beneficial effects on accounting quality.

Conclusion, Limitations, and

Directions for Future Research

This article provides empirical evidence of accounting

quality in listed family firms and highlights differences

with their nonfamily peers. Previous studies provided

only limited attention to this issue, albeit the importance

of financial reporting for the purpose of resource acqui-

sition on equity and debt markets (Leuz & Verrecchia,

2007). Moreover, a great part of previous research inves-

tigates the U.S. equity market and typically employs

high ownership concentration as a proxy to identify

family firms. This design choice may potentially mis-

represent the family firm category by including in it

firms with major block holders other than families. We

exploit the unique features of the Italian equity market

characterized by high levels of ownership concentration

across all types of companies. This set allows us to dis-

tinguish family from nonfamily firms on criteria other

than high ownership concentration and therefore pro-

vides more fine-grained evidence of the relation between

family ownership and financial reporting quality. Ourresults show that family firms generally report earnings

of higher quality when compared to nonfamily firms.

Also, we find that the determinants of accounting qual-

ity are different across the two types of firms. Our

results have important implications for theory and prac-

tice, suggesting that financial reporting in family firms

is both more transparent and less prone to managerial

opportunism.

However, we acknowledge that our results come

with some potential caveats. In terms of external valid-

ity, because we investigate the Italian equity market,

the evidence provided might not necessarily generalize

to all listed firms. Moreover, as with every other study

employing earnings attributes, we cannot rule out the

influence of other non-earnings-based attributes (e.g.,

the quality of disclosure) on the overall concept of

accounting quality.

Finally, we believe a promising avenue for future

research is to investigate the economic consequences of

financial reporting quality in family firms by assessing

whether the higher quality of accounting information

effectively translates into positive capital market out-

comes (i.e., lower cost of capital, higher liquidity, and

more efficient contracting) for this type of firm.

Acknowledgments

We thank the editors, two anonymous referees, Joachim Gassen,

Pietro Mazzola, Giovanna Michelon, and Riccardo Vigan for

useful discussions and comments. We also thank conference

participants at the 2007 IFERA Conference, the 2007 Family

Business Review Conference, the 2007 GSA Financial Market

Workshop, and the 2008 European Accounting Association

Annual Congress.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interests with

respect to the authorship and/or publication of this article.

Financial Disclosure/Funding

The authors acknowledge financial support by the Italian

Ministry of Education, University and Research (MIUR).

Notes

1. According to Bianco and Casavola (1999), ownership con-

centration in Italian listed companies is high: The major

shareholder has on average 52% of voting rights, whereas

the first three shareholders cumulate 62% of shares and

voting rights.

2. We also employ trimming as an alternative treatment for

sample outliers, and our results equally hold.

3. As a robustness check, we rerun all our analyses by

employing a stable sample for all our tests obtaining

similar results. The choice to use floating samples allows

us to maximize the power of our tests.



19/21

Cascino et al. 26

4. In a sensitivity analysis (untabulated) we also run the origi-

nal Dechow and Dichev (2002) model obtaining similar

results.

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Bios

Stefano Cascinois a research fellow at the London School of

Economics. He earned a PhD in accounting from the University

of Naples Federico II in 2008. Prior to his current position, he

was a visiting postdoctoral researcher at Humboldt University

of Berlin.

Amedeo Puglieseis an assistant professor in accounting an

governance at the University of Naples Federico II, where h

received his PhD in accounting. His research is currently

focused on the effects of ownership structures on the quality o

financial reporting.

Donata Mussolinois an assistant professor in accounting at th

Second University of Naples. She earned her PhD in accountin

from the University of Naples Federico II. Her primary researc

interests include family business, the internationalization pro

cess, paternalism construct, and entrepreneurial orientation.

Chiara Sansoneis currently a business analyst at the Bank o

New York Mellon, Bruxelles, Belgium. She earned her PhD i

accounting at the University of Naples Federico II. Her main area o

interest covers hedge funds and financing choices of corporations

family business review 2010 cascino 246 65

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