Accounting Choices in Family Firms

Many contributions have investigated the relationship between accounting decisions and the family nature of a business over the last two decades. The reasons for this success are the prominent role family firms play in the economy worldwide, and the importance of economic and non-economic factors in their decision-making process. This chapter provides the foundations of our critical review of the theoretical and empirical literature on accounting decisions in family firms. We stress that the objective is not only to provide a state of the art of this field, but to critically assess the current findings and to support the development of new research questions. We then present our theoretical and methodological choices. Last, we discuss the content of the manuscript by highlighting the key questions addressed in the remaining chapter. This study is useful for academic research, managers, accounting practitioners, and policy makers both at a national and international level.

The family business is an economically relevant worldwide phenomenon. It is widespread in every industry and it takes diverse legal forms, ranging from micro, small and medium sized firms to large public companies. Its economic relevance frequently impacts more than half of the national GDP and it becomes an essential source of employment. After, presenting some facts and figures about the family business around the world, this chapter shows the two main approaches used to define a family firm, namely the essence and component approaches. We thus review more than 180 definitions of family firms and organise them within a table according to the following three main criteria: (1) Percentage of ownership held by the family, (2) Members of the family involved in management and control positions, and (3) Generational stages of the family firm. The intersection of these three criteria gives rise to other four groups of family firm definitions, theoretically proving the multidimensionality of the phenomenon. We then review the studies on family business and accounting and discuss the main theoretical framework used, with a specific focus on the transition from a mainly agency theory-based literature to the derived socioemotional wealth theory. Finally, this chapter pinpoints some early conclusions on the family business providing a bridge with the ensuing chapter stressing the relations between family firms and accounting choices.

This chapter begins the discussion about earnings quality in family firms. It examines whether family firms differently manage their earnings compared to non-family firms. We show that both from a theoretical and an empirical perspective, prior research documents show that family firms manage less their earnings relative to non-family firms. Nonetheless, we also look at deviations from these results, mainly due to the differences in the institutional environment, and/or in the management structure. Moreover, there has been a shift from the agency theory to the socioemotional wealth theory to explain family firms’ decisions with regards to earnings management. We conclude this chapter by suggesting future avenues for research, in particular in terms of theoretical framework and research design. The discussion about earnings quality continues in Chap. 4, where we investigate accounting conservatism in family firms.

This chapter examines another relevant earnings quality in family firms, namely accounting conservatism. We argue that family businesses differ from non-family firms with regard to accounting conservatism due to their long-term investment horizon as well as the importance they place on non-economic factors. In this chapter we first discuss the notion of accounting conservatism, and more specifically of conditional conservatism. We then show that family firms, on average, exhibit higher accounting conservatism than non-family firms. We observe variability in the results due to the differences in the institutional environment, and in the management structure. We corroborate our findings by extending the notion of accounting conservatism. We thus affirm that family firms tend to be less tax-aggressive than non-family firms. Finally, we provide numerous research avenues regarding accounting conservatism in family firms.

Theoretical and empirical evidence demonstrates that accounting choices are strongly influenced by national and organisational cultures. Following the discussion of previous chapter we argue that the family business constitutes a very flourishing field which is interesting to investigate particularly in terms of the role played by the culture on accounting choices. Moving from the first anthropological definitions of culture and grounding on the premises of prior literature, we develop a conceptual model on the influences of accounting and family cultures on accounting decisions. This chapter also considers accounting harmonisation and the literature on earnings management and culture. Finally, as in the previous part of the book, we close the chapter by presenting challenges and opportunities for future research, in particular on the interplay amongst family firms, accounting choices and culture.

This manuscript has examined the accounting decisions in family firms. By discussing theoretical and empirical evidence, we have identified several areas ripe for future research in the fields of theoretical development, earnings quality, disclosure, and accounting culture. Building upon our findings, we discuss the theoretical and practical contributions of the manuscript. This study is of interest for a large audience, namely academic researchers, managers, accounting practitioners, and policy makers. Our results help in the understanding of the dynamics within the governance system of family firms, as well as their decision-making process, with a focus on accounting decisions. We show the need of additional academic research in the fields of behavioural accounting, operation management/economics, and critical use of accounting information. We then discuss the methodological limitations of the current works. Last, we adopt a broad perspective to propose three additional areas for future research on the relationship between family firms and accounting decisions, such as (1) the improvement of the research designs, (2) evidence from developing countries, and (3) the impact of the technological changes in the ‘New Economy’.