Family-owned businesses report their accounts more conservatively, reveal researchers

Family-owned businesses are much more conservative when it comes to their accounting reporting than non-family corporate organisations, potentially hindering their reported profitability, but also improving the company’s long-term reputation, according to new research from Durham University Business School.

The study also found that family firms with a founder CEO are more likely to report conservatively than those with a descendent CEO.

Conducted by Dr. Hwa-Hsien Gary Hsu, Associate Professor of Accounting at Durham University Business School, alongside colleagues from the National Central University and the National Pingtung University, the study was designed to better understand the impact that family ownership has on accounting conservatism, and whether or not this makes firms more cautious and understated in their accounting reporting.

The researchers reviewed accounting data from over 5,500 financial reports issued by family firms based in Taiwan, operating between 1996 and 2015. The level of accounting conservatism of these firms was assessed through four different measures; non-operating accruals averaged over three years, good news and bad news timeliness from firms, the sum of inventory, R&D, and advertising reserves, and the aggregate effect of individual conservatism measures.

The researchers suggest the reason that family firms are more conservative is likely due to family owners being highly motivated to maintain the firm’s long-term viability by protecting its image and reputation, therefore not overstating their accounting records.

Dr. Hsu says,

“Family owners’ incentives and motivations can have a huge impact on the choice of their accounting practices. Family firm owners have a greater, long-term attachment to their companies and therefore want the company to seen in the best light possible.

This non-economic motive can drive family owners to avoid the aggressive accounting practices typically employed by corporates as these could potentially cause long-term damage to their firm’s viability and reputation. Instead, they choose to utilise the monitoring effect of accounting conservatism for enhancing or preserving their reputational wealth.”

The results of this study reveal that positive reputational effects associated with high family ownership and the presence of a founder CEO can motivate family firms to adopt accounting practices that facilitate effective monitoring. As a result, Dr Hsu says, owners’ family identity and reputation in the capital markets and society are preserved, and external stakeholders are benefited, in turn.

However, the results show when family ownership is reinforced through the use of enhanced control mechanisms, a great sense of family control and influence can drive family owners to avoid increased monitoring by using less conservative accounting. This approach allows them to exploit valuable information at the expense of external stakeholders.