What Form of Visibility Affects Earnings Management? Evidence from Italian Family and Non-Family Firms

Giovanna Gavana,Pietro Gottardo,Anna Moisello

doi:10.3390/admsci9010020

Giovanna Gavana, Pietro Gottardo + Show 1 more

Open Access

https://doi.org/10.3390/admsci9010020

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Abstract

This paper addresses the issue of financial communication quality by studying the determinants of earnings management practices in family and non-family businesses. Previous literature has highlighted the effect of a company’s size, as a form of visibility, on earnings management practices. This study focuses on the analysis of the relationship between different forms of visibility—exposure to financial press, proximity to the consumer, size of assets, sales and firm age—and earnings quality. The results show that the forms of visibility taken into consideration have a different effect on earnings management practices. Furthermore, they show that family businesses are less likely to resort to these unethical practices, especially in the presence of financial press exposure and proximity of the business to the consumer.

Highlights

Over the past twenty years, literature has extensively investigated the phenomenon of earnings management, given the potential harm that this unethical practice entails for a company’s stakeholders, in particular for investors (Chih et al 2008)
The article develops as follows: paragraph two introduces the theoretical framework; the third analyses the peculiarities of agency conflicts in family businesses; the fourth presents the results of the studies on earnings management in family businesses; the fifth presents the methodology and data; the sixth analyses and discusses the results and the seventh concludes by highlighting the limits and possible future developments on the topic
This article investigated the effect of different forms of visibility on the earnings quality of family and non-family businesses through a longitudinal analysis of a sample of non-financial listed companies

Summary

Introduction

Over the past twenty years, literature has extensively investigated the phenomenon of earnings management, given the potential harm that this unethical practice entails for a company’s stakeholders, in particular for investors (Chih et al 2008). Recent studies suggest that family businesses are more sensitive to the potential reputational effects of earnings management than non-family businesses; they are more likely to distract attention from this unethical practice by showing their social and environmental commitment through sustainability reporting and this behaviour is significantly accentuated when companies have high visibility in terms of size (Gavana et al 2017a). The determinants of the quality of the accounting information of family businesses are of particular interest given the diffusion and economic relevance of this ownership structure all over the world (La Porta et al 1999) and the potential impact of the manipulation of profits on shareholders as well as for other types of stakeholder. The article develops as follows: paragraph two introduces the theoretical framework; the third analyses the peculiarities of agency conflicts in family businesses; the fourth presents the results of the studies on earnings management in family businesses; the fifth presents the methodology and data; the sixth analyses and discusses the results and the seventh concludes by highlighting the limits and possible future developments on the topic

Agency Conflicts and Earnings Quality

Earnings Management

Methodology

Results and Discussion

Conclusions