Earnings management and the contest to the control: an international analysis of family-owned firms

Abstract

In this paper, we focus on the conflict of interests among shareholders as a possible determinant of earnings management. Using a sample of 3559 listed firms from the United States, Canada, the United Kingdom, France, Spain and Italy between 2008 and 2013, we analyse how the distribution of power among shareholders affects earnings management in family-owned firms. We find that the contest to the dominant family shareholder is relevant: namely, the more challenge to the control of dominant shareholders, the less earnings management in family firms. This contest is more important in civil law countries in which the shareholders rights are less protected. We also find that the nature of the blockholders can be relevant: consistent with the view that non-family shareholders are under more public scrutiny and have more difficulty to agree with the largest family shareholder to extract private benefits, our results suggest that a second or third non-family shareholder can reduce or alleviate earnings management.

En el presente trabajo estudiamos cómo los posibles conflictos de intereses entre distintos tipos de accionistas pueden influir en la gestión del resultado. Para ello analizamos la distribución del control corporativo en una muestra de 3559 empresas cotizadas de propiedad familiar de EE.UU., Canadá, Gran Bretaña, Francia, España e Italia entre 2008 y 2013. Nuestros resultados indican que la contestación al control del principal accionista familiar influye negativamente en la gestión del resultado, siendo esta influencia más destacada en los países de ley civil, en los que los accionistas gozan de peor protección legal. Asimismo, encontramos que la identidad de los propietarios de participaciones significativas también es un factor relevante, de modo que los accionistas de naturaleza no familiar reducen la gestión del resultado en las empresas de propiedad familiar. Este resultado está motivado por la mayor supervisión de los mercados a que están sometidos los accionistas de naturaleza no familiar y sus mayores dificultades para alcanzar acuerdos tendentes a apropiarse de beneficios privados.

Keywords:

• earnings management
• discretionary accruals
• family firms
• ownership structure
• corporate governance
• institutional environment

JEL classification:

• G32
• G34

Palabras clave:

• gestión del resultado
• ajustes por devengo
• empresas familiares
• estructura de propiedad
• gobierno corporativo
• entorno institucional

JEL clasificatión:

• G32
• G34

Acknowledgements

The authors wish to thank Valentín Azofra, Luis Castrillo, José Antonio Gonzalo, Óscar López de Foronda, Juan Monterrey, Pilar Pérez García, Juan Antonio Rodríguez, Emiliano Ruiz, Fernando Tejerina, Javier Gil-Bazo, Beatriz García Osma (associate editor), Alisa Larson and two anonymous referees for their comments on previous versions of this work. Any possible errors are our responsibility.

Notes

1. The term reference shareholder is key to our study. According to Chen and Steiner (1999), Harbula (2007) and Short, Zhang, and Keasey (2002), we define a reference shareholder as any blockholder who owns more than 5% of the shares. This percentage is likely to enable the shareholder to accumulate enough voting power to be taken into account in some strategic decisions. Databases such as Thomson Financial use 5% of total shares as a threshold to be considered a reference shareholder.

2. Several studies have pointed to the importance of family firms. In broad terms, family firms account for 53% of European firms (Barontini & Caprio, 2006), 44% of Western Europe firms (Faccio & Lang, 2002), 37% of US firms (Villalonga & Amit, 2006), more than 65% of East Asia firms (Claessens, Djankov, & Lang, 2000) and half of the Spanish quoted firms (Santana & Aguiar, 2006).

3. To estimate the discretionary accruals models, we use data from 26,222 observations from listed companies from the United States, Canada, the United Kingdom, Italy, France and Spain throughout the period from 2008 to 2013. To improve the reliability of our results, we require at least 10 country-year-sector observations based on the INDC3 or INDC4 Datastream industrial code classification. For the United States and the United Kingdom, we use INDC4, since it provides a higher number of year-industry observations. For the other countries, we use the INDC3 sector code due to the smaller number of firms.

4. We add the stake of all the members of the same family, so that a firm whose largest shareholder is not an individual investor can be considered family-owned when the addition of the stakes of all family members is higher than the one of the largest non-family shareholder.

5. Results are available from the authors upon request.

6. The CONTEST variable has the same value both for a company where P₁ is 55%, P₂ is 25% and P₃ is 20%, as for another company where P₁ is 5.5%, P₂ is 2.5% and P₃ is 2%.

7. HERF1 = (P₁–P₂)² + (P₂–P₃)², where P_i is the cash flow rights of the first, second and third shareholder.

8. HERF2 = P₁² + P₂² + P₃².

9. Coherently with Miguel, Pindado, and Torre (2004), we regress MTB against P1 and P1². This non-monotonic relation implies an initially increasing trend (alignment zone) which turns into a declining trend (entrenchment interval) after a threshold of 39%. Thus, we define the dummy variable TENT that equals 1 when the largest family shareholder owns more than 39% of the shares (it accounts for 32.59% of family firms). Non-linear regressions are available from the authors upon request.

10. Although there are a number of proxies for growth opportunities, Adam and Goyal (2008) show that the assets market to book ratio is the best measure of growth opportunities.

11. We use the nine industry codes classifications in INDC4 Datastream.

12. We control for the financial crisis period contagion by CRISIS, a dummy variable that equals 1 for 2008 and 2009, and zero otherwise (Longstaff, 2010).