Family Ownership and the Accrual Anomaly

Abstract

Motivated by the unique nature of family firms and the puzzling persistence of the accrual anomaly worldwide, we study the effect of family ownership on the presence and the economic significance of the accrual anomaly. We propose and explore three possible channels linked to family ownership: agency problems, information uncertainty, and barriers to arbitrage. Using a sample of 27,117 observations from 34 capital markets, we find that the negative relation of accruals with future earnings performance and stock returns is more pronounced in family firms than in non-family firms. The economic significance of this finding is highlighted by portfolio-level analysis, which shows that the accrual anomaly is more profitably exploited by family firms with an annual hedge abnormal return of 18.7% versus 3.4% for non-family firms. Our findings are robust to investors sophistication, different measures of family ownership, and the institutional environment.

Keywords: Accrual anomaly, Family ownership, Earnings, Accruals