The Impact of Family Control and Corporate Governance Practices on Earnings Quality of Listed Companies: A Study of the Italian Case

Abstract

The study investigates the relation between family governance and firms transparency in the Italian context where family firms are very spread. The literature about the impact of family ownership on earnings quality (EQ) highlights a twofold effect. On the one hand, there is the view that family firms are less efficient because controlling shareholders have incentives to exploit private benefits at the expenses of minority shareholders (Fama and Jensen 1983; Morck et al. 1998, Shleifer and Vishny 1997, Bebchuk, 1999), so that they have incentives to bad quality reporting (Francis et al., 2005, Fan and Wong, 2002). This can be considered an 'entrenchment effect'. On the other hand, ownership concentration generates more effective monitoring by controlling owners (Demsetz and Lehn 1985, Shleifer and Vishny 1986) and families have incentives to high EQ to preserve family's name. This is called 'alignment effect' (Wang, 2005). Our explanation is that the effects of family ownership on EQ depend on the attitude of the family towards corporate governance practices, because these show the family's incentives to good reputation. The purpose of this paper is providing an evidence about the impact of family ownership and governance practices on the earnings quality of Italian companies. The period of the analysis is 2001-2006. A regression analysis statistically examines this correlation. Our dependent variable is an earnings quality metric based on the Dechow-Dichev's model (Dechow-Dichev, 2002). Governance practices are considered in terms of board composition, board independence, CEO characteristics and powers. Control variables are mainly size, profitability, indebtness.