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Family firms, institutional development and earnings quality: does family status complement or substitute for weak institutions?

  • Stefano MengoliEmail author
  • Federica Pazzaglia
  • Sandro Sandri
Article
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Abstract

This study combines insights from the socioemotional wealth perspective and institutional and resource-based theories to examine the earning quality of family and nonfamily firms operating in countries characterized by different levels of institutional development. Results based on a cross-sectional sample of firms from 12 European countries show that family status and a country’s level of institutional development are positively related to earnings quality. They also show that institutional development moderates the relationship between family status and earnings quality. Comparing insider-oriented countries that are characterized by lower regulatory and financial development with outsider-oriented countries that are characterized by higher regulatory and financial development, we found that family firms have a higher earnings quality in insider-oriented countries than in outsider-oriented ones. Thus, our study finds support for a substitution effect, whereby family status compensates for the limited capacity of less developed regulations and markets to induce virtuous financial reporting behaviors.

Keywords

Earnings quality Family firms Governance Institutional development 

Notes

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© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.University of BolognaBolognaItaly
  2. 2.College of BusinessUniversity College DublinDublinIreland

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