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Family-owned businesses more conservative with their accounts reporting

When it comes to their accounting reporting, family-owned businesses are much more conservative than non-family corporate organisations.

This is potentially hindering their reported profitability, but also improving the company’s long-term reputation, according to new research at the School.

The study also found that family firms with a Chief Executive (CEO) who founded the company are more likely to report conservatively, than those with a CEO who has taken control due to the retirement or death of the founding CEO.

About the research

The study, by Dr Hwa-Hsien Gary Hsu, Associate Professor of Accounting at the School alongside colleagues from the National Central University and the National Pingtung University, was designed to better understand the impact that family ownership has on accounting conservatism, and whether 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:

  1. non-operating accruals averaged over three years, 
  2. good news and bad news timeliness from firms, 
  3. the sum of inventory, research and development and advertising reserves, 
  4. the aggregate effect of individual conservatism measures.

What they found out

The researchers suggest the reason 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.

The results 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.

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