Exploring the Causes of Accounting Restatements by Family Firms
Forthcoming in Journal of Business Finance and Accounting
Posted: 24 May 2013
Date Written: May 23, 2013
Prior research shows that family firms have better earnings quality than non-family firms in common-law countries and highly developed markets. In contrast, we do not find a significant difference in the financial reporting quality between family and non-family firms in the context of a civil-law system and less developed market. We show that the financial reporting quality of family firms is conditioned on (1) the divergence between the controlling shareholders’ voting rights and their cash flow rights, and (2) the firm’s reputation for integrity, while these two conditions do not explain the restatement likelihood for non-family firms. Moreover, when accounting irregularities are detected in the case of family firms, they are associated with more serious accounting restatements. Together, these results imply that the severity of the conflict between ultimate and minority shareholders, and a lack of integrity, explain the propensity for making financial restatements among family firms in a regime characterized as having weak investor protection and concentrated ownership structures.
Keywords: accounting restatement, agency problems, family firms, integrity
JEL Classification: D82, G32, G34, M41
Suggested Citation: Suggested Citation