EARNING QUALITY IN LISTED FIRMS: HOW MUCH AN ACTIVE FAMILY GOVERNANCE IS DESIRABLE?

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Abstract

The study investigates the relationship between family involvement in the governance of Italian listed companies and earnings quality (EQ). Family firms set incentives to extract private benefits (‘entrenchment’ effect), but, they also contribute to higher alignment between owners and managers (‘alignment’ effect). The literature shows mixed results about the relationship between EQ and family firms. We argue that family involvement in the governance affects EQ. The empirical evidence shows that in the Italian context, there is higher EQ in case of higher family involvement in the board, but only if the CEO is not belonging to the controlling family. On the contrary, in case of a family CEO, the higher family involvement in the board increases his entrenchment, reducing EQ. The results are valuable because we find that EQ in family firms is affected both by family ownership and by the attitude of the family toward governance practices.

Keywords: Family Firms, Board Familiness, Governance Practices, Earnings Quality, Alignment Effect, Entrenchment Effect

How to cite this paper: Tiscini, R., & di Donato, F. (2012). Earning quality in listed firms: How much an active family governance is desirable? Corporate Ownership & Control, 10(1-7), 681-691. https://doi.org/10.22495/cocv10i1c7art4