Conservatism and Equity Ownership of the Founding Family

49 Pages Posted: 24 Aug 2008 Last revised: 1 May 2013

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Xia Chen

Singapore Management University - School of Accountancy

Qiang Cheng

Singapore Management University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: April 2013

Abstract

We investigate the impact of founding family ownership on accounting conservatism. Family ownership is characterized by large, under-diversified equity stake and long investment horizon. These features give family owners both the incentives and the ability to implement conservative financial reporting to reduce legal liability and mitigate agency conflicts with other stakeholders. Since CEOs can have different incentives toward conservatism, we focus on ownership of non-CEO founding family members in our investigation. We find that conservatism increases with non-CEO family ownership, supporting our prediction. This relationship becomes insignificant in family firms with founders serving as CEOs, either due to founder CEOs’ incentives to implement more conservative financial reporting or their power to thwart non-CEO family owners’ demand for conservatism. Overall, our paper adds to the literature on the impact of founding family ownership on firms’ financial reporting policy. Our findings are consistent with the recent evidence in the family firm literature that founding families exhibit substantial incentives to reduce agency and litigation costs and to maximize firm value.

Keywords: Family firms, conservatism, family ownership, family control

JEL Classification: G32, M40, M41

Suggested Citation

Chen, Shuping and Chen, Xia and Cheng, Qiang, Conservatism and Equity Ownership of the Founding Family (April 2013). AAA 2010 Financial Accounting and Reporting Section (FARS) Paper, Available at SSRN: https://ssrn.com/abstract=1250102 or http://dx.doi.org/10.2139/ssrn.1250102

Shuping Chen

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
521.471.5328 (Phone)

Xia Chen (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore

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