Family Control, International Accounting Standards, and Access to Foreign Banks: Evidence from International Entrepreneurial Firms^*

^*This research is partially supported by SSHRC 410-2009-0210 and Canada Research Chair Grant 950-226325 for Wu.

Abstract

This article aims to understand if a change in accounting standards offers new avenues for helping entrepreneurial firms, especially those family-controlled ones, to obtain debt financing from foreign banks. We find that amid the global wave of adopting International Accounting Standards (IAS), family-controlled firms tend not to voluntarily switch from local generally accepted accounting principles to IAS. After self-selection issues are taken into account, furthermore, entrepreneurial firms adopting IAS experience less difficulty accessing loans from international banks. However, IAS adoption differentially influences private firms, family owned versus nonfamily controlled, in terms of their access to debt capital.

Notes

^* This research is partially supported by SSHRC 410-2009-0210 and Canada Research Chair Grant 950-226325 for Wu.

1 Prior studies (McMahon 2001; Moores and Mula 1993) in the literature address the relationship between financial reporting practices and small and medium-sized enterprises’ growth and performance. However, no research sheds light on adoption of IAS or the relationship between financial reporting practices and entrepreneurial firms' debt financing.

2 A more recent survey, that is, the World Bank Enterprise Survey (2011), has been conducted, but the data set drawn from this survey cannot be used for this study mainly for two reasons. First, our focal point is to examine debt access to foreign banks by family-controlled firms. This key variable of family control is not available on WBES 2011. Second, possibly more important, the WBES 2011 no longer provides information on whether a private firm has voluntarily adopted the IAS or IFRS. Our examination of family firms’ access to foreign capital is in the context of accounting standards adoption; without this key variable, the WBES 2011 data are not adopted by our study.

3 Contradictory evidence exists, suggesting that the positive association of IAS/IFRS adoption and global capital flow is more complicated (e.g., Shima and Gordon 2011).

4 The industry dummies represent (1) manufacturing; (2) services; (3) commerce; (4) agriculture, hunting, fishing, and forestry; (5) mining and quarrying; (6) electricity, gas, and water; and (7) construction. The seven region dummies represent Africa, Mediterranean and North Africa, Transition Europe, East Asia, South Asia, Latin America, and OECD, respectively.

5 It is worth pointing out that the WBES 2000 database does not provide information about firm's total assets, and therefore, the financial leverage is proxied by the ratio between total liabilities and fixed assets. Consequently, unreasonable values of the variable LEVERAGE are excluded from the analysis.

6 As described earlier, the variable JUDCONF characterizes the extent to which a firm is confident in its country's judicial system, and lower values indicate that entrepreneurs are more confident.

7 The authors thank an anonymous referee for this point.

8 The authors thank anonymous referees for bringing this to our attention.

Additional information

Notes on contributors

Qiu Chen

Qiu Chen is assistant professor at Sprott School of Business, Carleton University.

Shujun Ding

Shujun Ding is associate professor at Telfer School of Management, University of Ottawa.

Zhenyu Wu

Zhenyu Wu is Canada Research Chair in Entrepreneurship and Innovation, and associate professor at Asper School of Business, University of Manitoba.

Fan Yang

Fan Yang is associate professor at Edward School of Business, University of Saskatchewan.