Conservatism and Equity Ownership of the Founding Family

47 Pages Posted: 4 Jun 2013

See all articles by Shuping Chen

Shuping Chen

University of Texas at Austin - Red McCombs School of Business

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 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: M41, D8, G32

Suggested Citation

Chen, Shuping and Chen, Xia and Cheng, Qiang, Conservatism and Equity Ownership of the Founding Family (May 1, 2013). European Accounting Review (Special Section on Accounting and Reporting in Family Firms), Forthcoming . Available at SSRN: https://ssrn.com/abstract=2273327

Shuping Chen

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

Austin, TX 78712
United States
521.471.5328 (Phone)

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

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