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Stefano Cascino, Amedeo Pugliese, Donata Mussolino and Chiara Sansone
The Influence of Family Ownership on the Quality of Accounting Information
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DOI: 10.1177/0894486510374302
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The Inf luence of Family Ownership
on the Quality of Accounting
Information
Stefano Cascino
1
, Amedeo Pugliese
2
,
Donata Mussolino
3
, and Chiara Sansone
4
Abstract
This article explores the quality of accounting information in listed family firms. The authors exploit the features
of the Italian equity market characterized by high ownership concentration across all types of firms to disentangle
the effects of family ownership from other major block holders on the quality of accounting information. The
findings document that family firms convey financial information of higher quality compared to their nonfamily
peers. Furthermore, the authors provide evidence that the determinants of accounting quality differ across family
and nonfamily firms.
Keywords
family firms, financial reporting, earnings attributes, accounting quality
Accounting information is essential for all companies
competing to acquire resources on financial markets.
High-quality financial reporting is well appreciated by
market participants as it reduces information asymme-
tries, increases overall transparency, and provides a bet-
ter device for contracting purposes (Watts & Zimmerman,
1986). In turn, financial reporting of higher quality is
associated with positive capital market consequences
such as lower cost of equity and debt capital (Francis,
LaFond, Olsson, & Schipper, 2004), higher market
liquidity (Diamond & Verrecchia, 1991), better firm per-
formance, and higher competiveness.
During the past decade numerous scandals have put
under increased scrutiny the quality of financial report-
ing. Widely held corporations (e.g., Enron, Ahold, and
Tyco) as well as publicly listed family firms (e.g.,
Adelphia, Cirio, and Parmalat) have been indicted for
their bad accounting. This study empirically investigates
whether family ownership affects the quality of finan-
cial reporting in listed firms.
Exploring the quality of accounting information in
family firms is a timely issue because of their prevalence
among listed firms around the world (Burkart, Panunzi,
& Shleifer, 2003). Nevertheless, in spite of the great
attention on family firms (Chrisman, Chua, & Sharma,
2005; Corbetta & Salvato, 2004; Poutziouris, OSullivan,
& Nicolescu, 1997), we still know very little about the
quality and the overall informativeness of their financial
reporting practices (Hutton, 2007). To our knowledge, a
few studies have explored differences between family
and nonfamily firms in terms of earnings quality
(Jiraporn & Dadalt, 2009; Wang, 2006; Zhao & Millet-
Reyes, 2007) and voluntary disclosure (Lakhal, 2005).
However, the extant literature fails to disentangle the
influence of family ownership from other major block
holders on the quality of accounting information because
of an almost exclusive focus on concentrated (rather
1
London School of Economics, London, UK
2
University of Naples Federico II, Naples, Italy
3
Second University of Naples, Naples, Italy
4
Bank of New York Mellon, Bruxelles, Belgium
Corresponding Author:
Stefano Cascino, London School of Economics,
Houghton Street, WC2A 2AE London, UK
Email: s.cascino@lse.ac.uk
at UNIV FED DE MATO GROSSO DO SU on September 1, 2014 fbr.sagepub.com Downloaded from
Cascino et al. 247
than family) ownership. In addition, we are not aware of
studies that investigate the determinants of accounting
quality across family and nonfamily firms.
This study builds on previous research in governance
and accounting that sought to assess the relationship
between ownership structures and the characteristics of
accounting information (Bushman & Smith, 2001). Our
aim is to investigate if family firms provide accounting
information of higher (lower) quality compared to their
nonfamily peers and what type of determinants possibly
drive any differences.
Previous studies mainly investigate the U.S. equity
market where listed firms are generally widely held.
The common proxy utilized to identify family firms is
high ownership concentration. In these studies nonfam-
ily firms are typically those with widespread ownership
structures and whose managers have incentives to oppor-
tunistically maximize their personal wealth (the so-called
agency problem I; hereafter AP I). Family firms are
instead regarded as those with highly concentrated own-
ership whose main problem is related to the risk of expro-
priation of unprotected minorities (the so-called agency
problem II; hereafter AP II). These agency conflicts
potentially induce managers to hide private information
from outside parties with negative consequences on the
quality of financial reports (McConnell & Servaes, 1990).
We exploit the features of the Italian equity market
characterized by high ownership concentration across all
types of companies (La Porta, Lopez-de-Silanes, &
Shleifer, 1999) to disentangle the effects of family owner-
ship from other major block holders on the quality of
accounting information. We analyze a panel of 778 firm-
year observations (507 family firm-year observations and
271 nonfamily firm-year observations) on firms listed on
the Italian Stock Exchange from 1998 to 2004. Our results
show that family firms exhibit on average higher account-
ing quality compared to nonfamily firms. Moreover, we
show that the determinants of accounting quality across
family and nonfamily firms systematically differ along
several dimensions.
This study contributes to the family business litera-
ture in three ways: (a) it sheds some light on the rela-
tively unexplored topic of accounting quality in family
firms, (b) it differentiates the effects of family ownership
vis--vis other major block holders on accounting qual-
ity, and (c) it provides evidence of the positive influence
of family ownership on financial reporting quality.
The reminder of the article unfolds as follows: First,
we discuss the institutional setting. Second, we present
the theoretical foundations and our hypothesis. Third, we
describe the research design and data. Fourth, we illus-
trate the findings and discuss their implications. Last, we
conclude by highlighting the overall contribution and
implications of our study as well as its limitations.
The Institutional Setting:
Corporate Governance in
Italian Listed Companies
The Italian equity market represents an ideal setting
to investigate the influence of family ownership on
accounting quality because of its unique features:
(a) a large number of listed family firms and (b) a
high ownership concentration across all listed firms
(Bianco & Casavola, 1999).
For historical reasons, family firms represent a higher
portion of companies traded on the Italian Stock Exchange.
Similar to other countries with poor financial infrastruc-
tures, the control of a large fraction of the economy is del-
egated to wealthy and well-established families (Pagano,
Panetta, & Zingales, 1998). The Italian equity market is
also characterized by a high level of ownership concentra-
tion across all listed firms.
1
Three different classes of
major block holders are commonly identified: families
with active family members, the state or other public bod-
ies, and coalitions of shareholders with venturesome activ-
ity or entrepreneurial backgrounds. Moreover, controlling
families are usually very much involved in the activities of
the firm as revealed by the regular appointment of family
members to the board of directors or even in CEO posi-
tions (Prencipe, Markarian, & Pozza, 2008). The presence
of a dominant shareholder in Italian listed firms makes the
separation between owners and managers less severe, thus
reducing AP I. On the other hand, it raises a different con-
flict between controlling shareholders and minorities,
known as AP II (Stulz, 1988).
These distinctive features of the Italian setting repre-
sent a unique opportunity to investigate the quality of
financial reporting information in family firms. Concur-
rent U.S.-based research in fact commonly identifies
family firms by relying on high levels of ownership
concentration as the main proxy (Anderson, Duru, &
Reeb, 2009) and provides results that often capture the
248 Family Business Review 23(3)
influence of high ownership concentrationrather than
family ownershipon accounting quality (Givoly,
Hayn, & Katz, in press). The Italian setting allows
us to disentangle better the influence of familism on
accounting quality through a more fine-grained distinc-
tion between family-owned companies and firms with
other major block holders.
Theoretical Framework
Accounting information is crucial for all firms that com-
pete to acquire resources both on equity or debt markets.
High-quality accounting information is well appreciated
by market participants as it reduces asymmetric infor-
mation, increases transparency, and provides better
contracting devices (Watts & Zimmerman, 1986). The
accounting literature emphasizes the desirability of high-
quality accounting information for all companies operat-
ing on financial markets and documents positive capital
market consequences such as reduced cost of capital
(both equity and debt) and increased market liquidity,
which makes stocks more attractive to outside investors
(Francis et al., 2004). High-quality financial statements
provide users with more reliable and decision useful
information and better reflect the underlying economic
fundamentals of companies. The quality of accounting
information refers to (a) the informativeness of reported
numbers, (b) the level of disclosure, and (c) the degree
of compliance with generally accepted accounting stan-
dards. However, among the three listed above, the infor-
mativeness of accounting numbers (in particular
earnings) plays a prominent role (Schipper & Vincent,
2003). Earnings have two different components: cash
flow and accruals. The first component is more objec-
tive and hardly manageable through accounting pol-
icies, whereas the latter is more discretionary. The
discretion managers are allowed with accruals should
in theory be exercised to convey private information to
outside parties to the firm to achieve positive outcomes
(lower cost of capital, higher liquidity, etc.). However,
preparers could use their discretion to manipulate earn-
ings (via accruals) to alter financial reports and mis-
lead stakeholders about underlying firm performance,
thus achieving private benefits (Dechow & Dichev,
2002). For this reason, in a large number of studies, the
quality of earnings is usually assessed by looking at
some specific properties of earnings commonly labeled
earnings attributes (accrual quality, persistence, pre-
dictability, smoothness, value relevance, timeliness, and
conservatism).
Ownership Concentration
and Accounting Quality
Although the quality of financial reporting in family
firms is increasingly attracting researchers attention,
we still lack consensus on how family control exercises
its influence on accounting quality (Hutton, 2007). The
greater portion of studies on this topic are U.S.-based
and mainly discriminate between family and nonfamily
firms by looking at the degree of ownership concentra-
tion. Because family control represents the most diffuse
form of concentrated ownership in the United States, the
assumption is that high ownership concentration should
be able to capture whether a firm is family run or not.
However, such operationalization potentially leads one
to consider family firms also as companies with other
major block holders (i.e., governmental bodies, hedge
funds, pension funds, etc.). The features of U.S.-listed
firms play a nontrivial role in the debate about account-
ing quality in family firms (Sanchez-Ballesta & Garcia-
Meca, 2007). Given the dispersion of ownership that
causes separation between providers of resources and
managers, one of the main disciplining mechanisms is
the presence of a major owner who oversees managers
choices. Hence, a major part of the literature has inquired
whether increased managerial ownership could affect
firm value through the release of higher quality account-
ing information (Wang, 2006).
Two competing views are often provided to predict
the quality of accounting information in the case of own-
ership concentration (Givoly et al., in press). According
to the alignment hypothesis, higher ownership concen-
tration is beneficial as it reduces severe agency conflicts
between owners and managers (Jensen & Meckling,
1976). Concentrated ownership reduces the attention
toward stock market fluctuations in the short term and
lowers market pressures caused by meeting or beating
analyst forecasts (Chen, Chen, & Cheng, 2008). High
managerial ownership should therefore increase finan-
cial reporting quality via a reduction of managers incen-
tives to report accounting information that deviates from
the underlying economic performance of the firm (Warfield,
Wild, & Wild, 1995).
Cascino et al. 249
An alternative view, known as the entrenchment
hypothesis, predicts a lower quality of accounting infor-
mation in firms with highly concentrated ownership
(Morck, Shleifer, & Vishny, 1988). Supporters of the
entrenchment theory claim that concentrated ownership,
beyond a given threshold, increases the risk of wealth
expropriation at the expense of minorities (Schulze,
Lubatkin, & Dino, 2003). Firms with concentrated own-
ership have therefore lower incentives to provide high-
quality accounting information and tend to withhold it
internally because perceived benefits of sharing private
information with outside parties are modest (Fan &
Wong, 2002).
Beside the theoretical debate, empirical studies also
provide inconsistent results with regard to the effects of
managerial ownership on accounting quality, show-
ing positive as well as negative or nonlinear relation-
ships. In a recent review article, Sanchez-Ballesta and
Garcia-Meca (2007) suggest that a nonlinear relation-
ship exists between ownership concentration and
quality of financial reporting. In the U.S. context, an
increase in managerial ownership has a positive effect
on the informativeness of earnings (Warfield et al.,
1995), whereas in Europe (Beuselinck & Manigart,
2007; Gabrielsen, Gramlich, & Plenborg, 2002), East
Asia (Fan & Wong, 2002), and Australia (McKinnon &
Dalimunthe, 1993), where the mean and median owner-
ship concentrations are higher, increases in ownership
concentration would worsen the quality of accounting
information. Stated differently, extreme levels of owner-
ship concentration (too low or too high) limit the quality of
financial reporting (also see Jara-Bertin, Lopez-Iturriaga,
& Lopez-de-Foronda, 2008).
Family Ownership and Accounting Quality
As we have argued before, theory and findings are open
to alternative theoretical explanations and fail to address
the relationship between family ownership and account-
ing quality (Hutton, 2007). This is partly related to the
institutional setting that is usually investigated. In our
setting, the vast majority of listed companies are closely
held. Main differences arise in terms of the nature and
type of controlling owner rather than in the ownership
structure or concentration. Family firms differ from other
companies with major block holders in many ways, and
their distinctive features are likely to affect resource allo-
cation decisions and incentives to provide high (or low)
accounting quality (Le Breton-Miller & Miller, 2009).
Family-owned companies have a peculiar ownership
structure, in that founding-families represent a unique
class of shareholders that hold poorly diversified portfo-
lios, are long-term investors (multiple generations), and
often control senior management positions (Anderson
& Reeb, 2003).
On the one side, family firms are considered to be a
less efficient form of organization (Morck & Yeung,
2003). The intention to pass on the business often leads
to destructive nepotism and the dearth of professional
management (Schulze et al., 2003); this is a limitation
of the overall ability to hire valuable external manag-
ers who do not necessarily belong to the controlling
family (Gomez-Mejia, Nuez-Nickel, & Gutierrez, 2001).
Relational-based approaches among board members,
the managerial team, and representatives of owners
tend to overcome the more objective form of evalua-
tion that occurs through market mechanisms: Manag-
ers face a lower turnover and more secure job associated
to higher wages. Furthermore, family firms tend to
appoint family members on the board, reducing moni-
toring activities, thus lowering reliability perceived by
financial markets (Anderson & Reeb, 2003). Ulti-
mately, private information tends to be held within the
family, reducing the flow of information to outsiders
(Ajinkya, Bhojraj, & Sengupta, 2005). Based on the
previous reasoning, listed family firms are expected to
engage in providing lower quality accounting informa-
tion (Wang, 2006).
The extant literature provides also a different view.
Family firms are characterized by long-term orientation
and reputational concerns that are likely to increase
owners commitment toward maximizing the firm value
(Davis, Schoorman, & Donaldson, 1997). In addition,
the relationship-based approach between managers and
owners can profoundly reduce the risk of rent extraction
by the top management team: The lengthy tenures and
lower tendency to use incentive mechanisms reduce
the extent to which family firms manipulate account-
ing information (Chen et al., 2008). Ali, Chen, and
Radhakrishnan (2007) add that in family firms execu-
tives compensation is hardly related to accounting data;
therefore, family firms face lower risk of manipulations.
In addition, family firms are naturally risk adverse and
tend to take risks for different reasons than public com-
panies such as the preservation of family control of the
firm (Gomez-Mejia et al., 2001).
For the reason stated above, whether the quality of
accounting information in family firms is higher (lower)
compared to nonfamily firms becomes an empirical
issue (Wang, 2006) and, accordingly, we propose the
following nondirectional hypothesis:
Hypothesis 1: Accounting quality is systematically
related to the family firm status.
Research Design and Data
Data, Sample Selection,
and Descriptive Statistics
Our analyses are based on nonfinancial listed Italian
firms that are publicly traded over the period from 1998
to 2004. The choice to investigate listed companies is
dictated by the need to use market-based earnings attri-
butes that require measures as returns that are available
only for listed companies (Francis et al., 2004). More-
over, we limit our observation period to 2004 to avoid
any potential bias that might be induced by the manda-
tory adoption of IFRS (International Financial Reporting
Standards) from 2005 onward.
To identify family and nonfamily firms, we adopt
stricter criteria compared to previous studies investigat-
ing the U.S. equity market (e.g., Anderson & Reeb,
2003). These studies usually rely on a 20% ownership
concentration threshold to identify family firms. Given
the peculiarities of our setting, choosing such a thresh-
old would not allow capturing any difference in terms of
firm type (family vs. nonfamily firms). For this reason,
we seek to employ a more fine-grained definition of
family firm that does not uniquely rely on ownership
concentration as major discriminating factor. Therefore,
we identify as family firms those in which 50% of the
voting rights or outstanding shares (either direct or indi-
rect) are held from a family block holder. Furthermore,
we require that at least one member of the controlling
family hold a managerial position (i.e., board member,
CEO or chairman, chair of the syndicate pact). Follow-
ing these criteria, our sample selection procedure starts
with the universe of Italian listed firms covered by
Worldscope in 2004. From this initial sample of 263 firms,
we delete companies that were not consistently listed
during the previous 6 years (115 companies) and com-
panies operating in the financial industry (34 compa-
nies). The initial sample hence comprises 114 companies
(74 family and 40 nonfamily firms) over the period
19982004. Given the panel data structure of our analy-
ses, we pool all observations over our 7-year window
(19982004). Although we would expect a total number
of 798 firm-year observations (114 firms 7 years),
given we delete 20 firm-year observations because of the
lack of available data on Worldscope or Datastream, our
final sample that we regard as the full sample actually
comprises 778 firm-year observations (507 firm-year
observations for family firms and 271 firm-year observa-
tions for nonfamily firms). Moreover, because all our
tests require specific data to compute earnings attributes
metrics, some samples may have fewer observations.
We use floating samples throughout the article to maxi-
mize the amount of observations available and to
increase the statistical power of each separate test. We
winsorize the extreme values of all nontruncated vari-
ables to the 1 and 99 percentiles of their distributions.
2

Our results are not qualitatively affected by this design
choice.
3
The descriptive statistics are presented in Table 1.
The number of observations per accounting period
(Panel A) is almost equally distributed across family
and nonfamily firms, with the fewest observations in
1998. As can be inferred from Panel B, the nonfamily
subsample has a higher proportion of firms that belong
to transport, energy, and utilities industry. That is moti-
vated by the fact that the majority of nonfamily firms
are formerly state-owned public utilities. In general, as
shown in Panel C, nonfamily firms are significantly
larger (in terms of both market capitalization and reported
total assets) than family firms, are less profitable (lower
mean and median for return on assets), report lower
earnings (lower mean and median for net income before
extraordinary items), and have higher market to book
ratios.
Panel D reports the pairwise correlations among vari-
ables, which are low to moderate, with the exception of
our different profitability measures that are correlated
by definition.
To estimate the determinants of accrual quality, we
hand collected ownership structures, board composi-
tions, and auditor data respectively from the Consob
website, annual corporate governance reports, and com-
pany financial statements. As shown in Table 3 Panel A,
family firms generally exhibit a lower proportion of
institutional investors in the ownership, a lower margin,
and a lower intensity in intangible investments.
Cascino et al. 251
Table 1. Full Sample Composition and Descriptive Statistics
Panel A: Family Versus Nonfamily Firms by Year
Full sample Family firms Nonfamily firms
Year Frequency % Frequency % Frequency %
1998 101 12.98 67 13.21 34 12.55
1999 111 14.27 72 14.20 39 14.39
2000 113 14.52 73 14.40 40 14.76
2001 113 14.52 73 14.40 40 14.76
2002 114 14.65 74 14.60 40 14.76
2003 113 14.52 74 14.60 39 14.39
2004 113 14.52 74 14.60 39 14.39
Total 778 507 271
Panel B: Industry Composition
Full sample Family firms Nonfamily firms
Fama-French industry Frequency % Frequency % Frequency %
Mining/construction 35 4.50 14 2.76 21 7.75
Food/textile/chem. 166 21.34 117 23.08 49 18.08
Manufacturing 272 34.96 200 39.45 72 26.57
Trans./energy/utilities 153 19.67 59 11.64 94 34.69
Retail/wholesale trade 27 3.47 27 5.33 0 0.00
Insurance/real estate 56 7.20 35 6.90 21 7.75
Services 63 8.10 49 9.66 14 5.17
Other 6 0.77 6 1.18 0 0.00
Total 778 507 271
Panel C: Descriptive Statistics of Main Variables
Variable M SD Min 25% 50% 75% Max t-value z score
Family firms (n = 507)
LOG(TOTASS) 13.011 1.393 10.829 11.938 12.842 13.986 15.912 -4.40*** -4.01***
LOG(MKTCAP) 12.278 1.427 10.097 11.113 11.974 13.274 15.012 -4.92*** -4.27***
NIBE_MVE 0.038 0.084 -0.182 0.009 0.046 0.080 0.184 3.52*** 3.76***
RET 0.038 0.319 -0.581 -0.177 0.049 0.281 0.560 -0.35 -0.52
LEVERAGE 0.286 0.148 0.022 0.166 0.306 0.389 0.553 1.39 1.24
ROA 0.064 0.051 -0.029 0.025 0.066 0.099 0.160 4.20*** 3.75***
MTB 1.705 1.159 0.562 0.858 1.315 2.124 4.702 -4.38*** -4.95***
Nonfamily firms
(n = 271)
LOG(TOTASS) 13.564 1.886 10.379 12.083 13.492 15.036 16.865
LOG(MKTCAP) 12.977 1.921 10.246 11.389 12.680 14.480 17.075
NIBE_MVE 0.000 0.121 -0.149 -0.012 0.030 0.065 0.134
RET 0.055 0.373 -0.642 -0.201 0.077 0.277 0.812
LEVERAGE 0.269 0.172 0.000 0.109 0.273 0.402 0.565
ROA 0.038 0.071 -0.150 0.022 0.047 0.079 0.143
MTB 2.349 1.887 0.647 1.120 1.708 2.741 7.881
(continued)
Table 1. (continued)
Panel D: Correlations
A B C D E F G
A: LOG(MKTCAP) .860 .221 .257 .424 .464 .108
B: LOG(TOTASS) .853 .110 .168 .172 .087 .321
C: RET .229 .121 .333 .335 .218 .010
D: NIBE_MVE .294 .218 .307 .709 .025 -.134
E: ROA .427 .191 .330 .731 .415 -.153
F: MTB .413 .070 .248 .055 .449 -.007
G: LEVERAGE .100 .351 .008 -.081 -.148 .029
Nonfamily firms (n = 271)
A: LOG(MKTCAP) .895 .165 .229 .286 .186 .195
B: LOG(TOTASS) .901 .033 .106 .157 -.038 .367
C: RET .177 .045 .260 .255 .151 -.040
D: NIBE_MVE .221 .172 .190 .860 -.199 -.122
E: ROA .260 .140 .241 .855 -.151 -.067
F: MTB .350 .077 .208 -.062 .145 .173
G: LEVERAGE .217 .364 -.068 -.078 -.095 .050
The full sample consists of 778 firm-year observations over the fiscal years 1998 to 2004. FAMBUS is a dummy variable indicating whether the
respective firm qualifies as a family firm. To qualify as a family firm, (a) 50% of the voting rights or outstanding shares (either direct or indirect)
should be held from a family block holder and (b) at least one member of the controlling family should hold a managerial position
(i.e., board member, CEO or chairman positions, chair of the syndicate pact). MKTCAP is the market capitalization (WS08001) at the beginning
of the fiscal year, measured in thousand euros. LOG(MKTCAP) is the natural logarithm of MKTCAP. TOTASS is total assets (WS02999) at the
beginning of the fiscal year, measured in thousand euros. LOG(TOTASS) is the natural logarithm of TOTASS. RET is the buy-and-hold return
over the fiscal year. NIBE is net income before extraordinary items (WS01551). NIBE_MVE is NIBE deflated by beginning of fiscal year market
capitalization. ROA is earnings before interest and taxes (WS18191), divided by beginning of the year total assets (WS02999). MTB is the
market capitalization (WS08001) divided by book value of equity (WS05491). LEVERAGE is total debt (WS03255), divided by total assets.
In Panel B, observations are grouped by the first digit of their SIC code (WS07021) are presented according to the Fama-French industry
classification. In Panel C, n stands for number of observations, M stands for mean, SD stands for standard deviation, Min stands for minimum,
and Max stands for maximum. The reported statistics test for differences across the respective family firm sample and the nonfamily firm
sample. A t test (Wilcoxon signed rank test) is used to test for differences in means (medians). In Panel D, Pearson (Spearman) correlations are
reported above (below) the diagonal. Bold indicates two-sided significance below the 5% level.
*Significant at the 10% level, two-tailed. **Significant at the 5% level, two-tailed. ***Significant at the 1% level, two-tailed.
Measures of Earnings Quality
To capture the extent to which family firms use their
discretion to make financial statements more (or less)
informative, we need proxies that measure financial
reporting quality. Following a well-established stream
of literature in accounting, we proxy financial reporting
quality with the narrower concept of earnings quality,
which focuses on specific desired properties of earnings
(Dechow & Dichev, 2002).
According to Francis et al. (2004), two groups of
earnings attributes are commonly identified to measure
earnings quality: accounting-based attributes such as
accrual quality, persistence, predictability, and smooth-
ness and market-based attributes such as value relevance,
timeliness, and conservatism. The difference between
the two classes of earnings properties relies on different
underlying assumptions about the function of earnings.
In particular, accounting-based earnings attributes implic-
itly assume that the function of earnings is the effective
allocation of cash flows to reporting periods via the
accruals process. These attributes take cash flows or
earnings as the reference construct and therefore derive
directly from accounting information (Francis et al.,
2004). Instead, market-based attributes assume that the
function of earnings is to mirror economic income and
for this reason take returns (or prices) as the reference
construct. In our analyses, we employ all of the above-
mentioned attributes whose measures follow prior litera-
ture (Francis, LaFond, Olsson, & Schipper, 2005).
Cascino et al. 253
Table 2. Earnings Attributes
Panel A: Accrual quality
WCACC_TA
t
=
0
+
1
CFO_TA
t-1
+
2
CFO_TA
t
+
3
CFO_TA
t+1
+ (1)
REV_TA
t
+ PPE_TA
t
+
i =
2004
1998
i
YEAR
i,t
+
t
Family firms Nonfamily firms
Parameter Estimate Pr > |t| Estimate Pr > |t|
Intercept -0.022 0.530 -0.044 0.045
CFO_TA
t-1
0.079 0.036 0.076 0.132
CFO_TA
t
-0.700 0.000 -0.712 0.000
CFO_TA
t+1
0.153 0.000 0.216 0.000
REV_TA
t
-0.054 0.000 -0.006 0.776
PPE_TA
t
0.138 0.000 0.140 0.000
Yearly fixed effects Yes Yes
N 208 121
Adj. R
2
.686 .705
Panel B: Persistence and Predictability
NIBE_TA
t
=
0
+
1
NIBE_TA
t-1
+
i =
2004
1998
i
YEAR
i,t
+
t
(2)
Family firms Nonfamily firms Pooled sample
Parameter Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t|
Intercept -0.003 0.884 -0.180 0.403 -0.021 0.404
FAMBUS 0.019 0.000
NIBE_TA
t-1
0.435 0.000 0.648 0.000 0.671 0.000
FAMBUS* NIBE_TA
t-1
-0.240 0.005
Yearly fixed effects Yes Yes Yes
N 434 232 666
Adj. R
2
.207 .312 .263
Panel C: Smoothness
(NIBE
j,t
) / (CFO
j,t
)
Sample n M SD 25% 50% 75%
Family firms 360 0.469 0.333 0.205 0.415 0.665
Nonfamily firms 193 0.529 0.346 0.204 0.430 0.812
Test for sample differences Statistic Pr > |t/Z|
t-value 2.02 0.044
z score 2.04 0.020
(continued)
Panel D: Value Relevance
RET
t
=
0
+
1
NIBE_MVE
t
+
2
NIBE_MVE
t
+
i =
2004
1998
i
YEAR
i,t
+
t
(3)
Family firms Nonfamily firms
Parameter Estimate Pr > |t| Estimate Pr > |t|
Intercept 0.071 0.514 0.052 0.592
NIBE_MVE 1.274 0.000 1.103 0.000
NIBE_MVE -0.617 0.001 -0.787 0.000
Yearly fixed effects Yes Yes
N 507 271
Adj. R
2
.364 .363
Panel E: Timeliness and Conservatism
NIBE_MVE
t
=
0
+
1
NEG
t
+
2
RET
t
+
3
NEG
t
* RET
t
+
i =
2004
1998
i
YEAR
i,t
+
t
(4)
Parameter Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t|
Intercept -0.004 0.901 -0.093 0.019 -0.161 0.673
FAMBUS 0.011 0.456
NEG 0.013 0.305 -0.015 0.513 -0.027 0.139
FAMBUS*NEG 0.037 0.104
RET 0.068 0.007 -0.006 0.881 -0.018 0.591
FAMBUS*RET 0.083 0.050
NEG*RET 0.085 0.026 0.163 0.016 0.117 0.025
FAMBUS*NEG*RET -0.019 0.768
Yearly fixed effects Yes Yes Yes
N 507 271 778
Adj. R
2
.192 .186 .179
Panel F: Summary and Significance Tests
Sample
Earnings attribute Statistic Family firms Nonfamily firms
Accrual quality - (
t
)

from Eq. (1) M -0.042 -0.054***
Mdn -0.043 -0.047***
Persistence
1
from Eq. (2) 0.435 0.648**
Predictability
2
(
t
)
from Eq. (2) M 0.022 0.029*
Mdn 0.019 0.043**
Smoothness (NIBE
j,t
) / (CFO
j,t
) M 0.469 0.529*
Mdn 0.415 0.430*
(continued)
Cascino et al. 255
Accrual quality. Since Dechow and Dichev (2002),
accrual quality has become synonymous with overall
earnings quality. This attribute is based on the assumption
that the role of accruals is to adjust the recognition of cash
flows over time, and therefore the more accruals map
closely into cash flow, the higher their quality (Francis
et al., 2005). Dechow and Dichev model current accruals
as a function of past, present, and future cash flows, inter-
preting the standard deviation of accruals estimation
errors as an inverse measure of accrual quality. The
standard deviation of residuals from the Dechow and
Dichevs model is meant to capture unexpected working
capital accruals and, thus, is a proxy for accrual quality.
Our measure of accrual quality is based on a modified
version of the original Dechow and Dichev model. As in
Francis et al. (2005), we in fact follow the McNichols
(2002) version of the model which also includes changes
in revenues and property, plant, and equipment as addi-
tional explanatory variables.
4
Our accrual quality metric
is based on a pooled estimation of the following model,
WCACC_TA
t
=
0
+
1
CFO_TA
t-1
(1)
+
2
CFO_TA
t
+
3
CFO_TA
t+1
+
REV_TA
t
+ PPE_TA
t
+
i =
2004
1998
i
YEAR
i,t
+
t
where,
WCACC_TA
t
= total working capital accrual at
time t (CA
t
CL
t
CASH
t
+ STDEBT
t
),
deflated by total assets
CFO_TA
t
= operating cash flow in year t (NIBE
t

TA
t
), divided by total assets
NIBE
t
= net income before extraordinary items in
year t
TA
t
= CA
t
CL
t
CASH
t
+ STDEBT
t
DEP
t
CA
t
= change in current assets between time t-1
and t
CL
t
= change in current liabilities between time
t-1 and t
CASH
t
= change in cash between time t-1 and t
STDEBT
t
= change in current debt between time
t-1 and t
DEP
t
= depreciation and amortization expense at
time t
REV_TA
t
= change in revenues between time t-1
and t, divided by total assets
PPE_TA
t
= property, plant and equipment at time
t, deflated by total assets
YEAR
i,t
= year dummy variable
The model is run both for our family and nonfamily
subsamples. Following DeFond, Hung, and Trezevant
(2007), we measure accrual quality as the standard devia-
tion of estimated residuals from Model 1 multiplied
Sample
Earnings attribute Statistic Family firms Nonfamily firms
Value relevance
2
(
t
)
from Eq. (3) M 0.235 0.261*
Mdn 0.192 0.218*
Timeliness
2
(
t
)
from Eq. (4) M 0.060 0.065*
Mdn 0.036 0.038
Conservatism
3
-
2
from Eq. (4) 0.017 0.169
This table details the regression results of Models 1 to 4. Each model is estimated as a yearly fixed-effect model using ordinary least squares
and clustered standard errors to account for the heteroscedasticity and the autocorrelation caused by the panel structure of the data.
Samples are as reported in Table 1. YEAR is a series of yearly fixed effects. WCACC is working capital accruals, which are equal to change in
current assets (WC02201) less change in current liabilities (WC03101) less change in cash and cash equivalents (WC02001) plus change in
current debt (WC03051). WCACC_TA is WCACC divided by total assets. TOTACC is WCACC less depreciation, amortization and depletion
(WC01151). CFO_TA is net income before extraordinary items minus total accruals, deflated by total assets. NIBE_TA net income before
extraordinary items (WS01551), deflated by total assets. REV_TA is change in revenues (WS01001). PPE_TA is property plant and equipment
(WS02501) divided by total assets. NEG is a dummy coded 1 for observations with RET<0 and 0 otherwise. In Panel C, n stands for the
number of observations, M stands for mean, Mdn stands for the median, SD stands for standard deviation, Min stands for minimum, and Max
stands for maximum. All other variables are as previously defined. The significance of mean (median) differences is assessed by t tests (Wilcoxon
signed rank tests). The significance of regression coefficient differences is assessed by fully interacted regressions of pooled samples along with
t tests (
1
from Model 2) or F tests (the difference between the coefficients
3
and
2
from Model 4), respectively.
by 1 (AQ = (
t
)). The standard deviation of estimated
residuals captures the extent to which current accruals
map into current operating cash flow. High (low) values
of AQ correspond to good (poor) accrual quality.
Persistence. Persistent earnings are considered to be
desirable because of their recurrence. Following prior
research (Lev, 1983), we measure the persistence of
earnings with the slope coefficient (
1
) of the following
autoregressive model of earnings on lagged earnings,
NIBE_TA
t
=
0
+
1
NIBE_TA
t-1
+ (2)

i =
2004
1998
i
YEAR
i,t
+
t
where,
NIBE_TA
t
= net income before extraordinary
items at time t, scaled by total assets
YEAR
i,t
Higher persistence is considered a positive and desir-
able attribute of accounting information; therefore, a
large (small) slope coefficient corresponds to good
(poor) earnings persistence. To compare the persistence
of earnings in the case of family and nonfamily firms,
we run Model 2 for both subsamples and estimate a
fully interacted pooled version of the model to assess
the significance of the difference in this metric across
the two samples.
Predictability. This attribute looks at the way past earn-
ings performance improves the ability of financial state-
ment users to forecast future earnings numbers.
Following Lipe (1990), we measure predictability as the
square root of the error variance (
___
2
_
(
_ __
t
)
) from Model 2.
Large (small) values of the square root of the error vari-
ance imply less (more) predictable earnings.
Smoothness. The smoothness of earnings is consid-
ered to be a desirable earnings property because manag-
ers use their private information about future earnings
to smooth transitory fluctuations so as to achieve a
more useful reported earnings number (Demski, 1998;
Ronen & Sadan, 1981). Managers in fact might use
earnings smoothing to signal their private information
to the market and thus reduce information asymmetries.
Basing our construct on Leuz, Nanda, and Wysocki
(2003), we measure smoothness as the ratio of the stan-
dard deviation of earnings before extraordinary items
divided by the standard deviation of cash flow from
operation ( (NIBE
j,t
/ (CFO
j,t
)) calculated over
rolling 3-year windows. Larger values of this ratio sug-
gest less earnings smoothness.
Value relevance. This attribute looks at the ability of
earnings to explain variation in stock returns, where
greater explanatory power is viewed as a desirable prop-
erty and a combined proxy of both relevance and reli-
ability of financial reporting information (Barth, Beaver,
& Landsman, 2001). To measure the value relevance of
earnings for family and nonfamily firms, we follow
Francis and Schipper (1999) and regress returns on the
level and change in earnings,
RET
t
=
0
+
1
NIBE_MVE
t
+
2
NIBE_MVE
t
(3)
+
i =
2004
1998
i
YEAR
i,t
+
t
where,
RET
t
= buy and hold return calculate over the fis-
cal year end
NIBE_MVE
t
items deflated by market value of equity at
time t
NIBE_MVE
t
= change in net income before
extraordinary items deflated by market value
of equity between time t-1 and t
YEAR
i,t
To assess the level of value relevance between the two
different types of firms, we contrast the square root of
the error variance (
___
2
_
(
_ _
t
)
) of Model 3 once run for the
family and the nonfamily samples. Large (small) values
of the square root of the error variance imply less
(more) value-relevant earnings.
Timeliness and conservatism. These two constructs fol-
low the assumption that the role of accounting earnings is
to measure economic income, which is defined as the
change in the market value of equity (Ball, Kothari, &
Robin, 2000) measured through stock returns. Timeliness
is the explanatory power of a reverse regression of
earnings on returns and captures the speed with which
publicly available information (proxied by stock returns)
is incorporated into accounting earnings (Beaver, Rich-
ard, & Ryan, 1987). Publicly available information in this
case is either good news (proxied by positive returns)
or bad news (proxied by negative returns). Timely
earnings imply more information that is useful in decision
making by financial statement users. Like for the value
relevance test, to assess differences in earnings timeliness
Cascino et al. 257
between the two subsamples, we estimated the following
model for both family and nonfamily firms and then
compare the square root of the error variance (
_ __
2
_
(
_ __
t
)
).
Again, large (small) values of the square root of the error
variance imply less (more) timely earnings,
NIBE_MVE
t
=
0
+
1
NEG
t
+
2
RET
t
+ (4)

3
NEG
t
* RET
t
+
i =
2004
1998
i
YEAR
i,t
+
t
where,
NIBE_MVE
t
items deflated by market value of equity at
time t
NEG
t
= Dummy variable that equals 1 if RET
t
< 0
and 0 otherwise
RET
t
= buy and hold return calculate over the fis-
cal year end
YEAR
i,t
Conservatism also looks at the incorporation of pub-
licly available information into accounting earnings as in
the case of timeliness, but the underlying rationale for its
construct is based on a discrimination between good
news (economic gains) and bad news (economic losses).
The difference between timeliness and conservatism
therefore is that the latter takes into account the differ-
ential speed with which bad news (measured as negative
stock returns) versus good news (measured as positive
stock returns) is incorporated into accounting earnings.
Since Basu (1997), this asymmetric timeliness of earn-
ings has been measured as the difference between the
slope coefficient of negative returns (
3
) and the slope
coefficient of positive returns (
2
) from Model 4. Timeli-
ness and conservatism together are sometimes regarded
as transparency and are considered desirable attributes
of accounting earnings (Ball et al., 2000). To capture dif-
ferences in the level of conservatism between our family
and nonfamily firm samples, beside running Model 4 for
each subsample, we also perform a fully interacted
pooled regression analysis.
Determinants of Financial
Reporting Quality
To investigate the drivers of earnings quality in family and
nonfamily firms, our last test looks at the determinants of
accrual quality. Accrual quality is unanimously considered
as an overall measure of earnings quality; therefore, fac-
tors influencing the level of accrual quality can be easily
considered as general determinants of earnings quality
(Dechow & Dichev, 2002).
We perform both a sample-level and a pooled sam-
ple analysis on our family and nonfamily firm data.
Below is our determinant model,
AQ
j
=
0
+
1
LOG(TOTASS)
j
+ (5)

2
LEVERAGE
j
+
3
INDEP_BOARD
j
+

4,
INST_OWNER
j
+
5
MTP
j
+
6
ROA
j
+

7
MARGIN
j
+
8
GROWTH
j
+

9
INT_INTENSITY
j
+
10
AUDIT
j
+

i =
8
1
i
INDCONTROLS
j
+
j
where,
AQ
j
= standard deviation of the residuals from
Model 1 multiplied by 1 (-(
t
))
LOG(TOTASS)
j
= natural logarithm of total assets
LEVERAGE
j
= total debt divided by total assets
INDEP_BOARD
t
= ratio of the number of inde-
pendent directors divided by the total number
of directors
INST_OWNER
j
= dummy variable indicating sig-
nificant institutional ownership in the firm
MTB
j
= market to book ratio as a proxy for growth
opportunities
ROA
j
= return on assets
MARGIN
j
= gross margin percentage, calculated
as net sales less cost of goods sold, scaled by
net sales
GROWTH
j
= growth in sales, calculated as net
sales minus net sales from the previous year,
scaled by net sales from the previous year
INT_INTENSITY
j
= intangible intensity, calcu-
lated as intangible assets, divided by total assets
AUDIT
j
= dummy variable indicating whether the
financial statements of the respective firm have
been audited by a Big 4 audit firm
INDCONTROLS
j
= industry first digit Standard
Industrial Classification (SIC) controls
The dependent variable AQ measures the level of accrual
quality. The higher (lower) the level of AQ, the higher
(lower) the accrual quality.
Our determinant model has to be interpreted as a
model where accrual quality is regressed over a family
firm dummy variable and a set of controls (the other
accrual quality determinants in the model). In other
words, we test whether, after controlling for other
determinants of accrual quality (already identified in the
literature), the family status still affects accrual quality
(i.e., the family firm dummy variable is still loading
after controlling for other accrual quality drivers).
Following prior literature on determinants of account-
ing quality (Healy & Palepu, 2001), we include industry,
size (log(TOTASS)), profitability (ROA), presence of
growth opportunities (MTB), and financial distress
(LEVERAGE) to control for the operating environ-
ment and the financing needs of the investigated firms.
Because large firms are more visible and therefore face
greater public demands for high-quality financial report-
ing, we expect a positive association between size and
accrual quality. Highly leveraged firms face higher
agency costs and therefore a higher demand for moni-
toring. If accounting information is regarded as comple-
mentary to other monitoring information creditors
utilize, we would expect a positive relation between
leverage and accrual quality. On the other hand, if credi-
tors use monitoring information that can be regarded as
a substitute for accounting information, the likelihood
that a positive relation holds is lower. Accordingly, as in
previous studies that underline an ambiguous influence
of leverage on reporting quality (Healy & Palepu, 2001),
we make no prediction on the sign of this association.
Outside board members are generally regarded as a
sign of efficient governance (Anderson & Reeb, 2003).
As outside controlling stakeholders, independent board
members should require a higher level of accrual qual-
ity, and hence we predict a positive coefficient on AQ.
As market-based governance is assumed to be poorly
developed in Italy (Pagano et al., 1998), institutional
ownership should generally exercise a positive effect on
governance and hence on the level of accounting qual-
ity. But following the entrenchment hypothesis (Fan &
Wong, 2002), it seems also plausible that institutional
owners might decide to collude with managers so as to
withhold information internally with negative conse-
quences for accounting quality. Consequently, we make
no sign prediction on INST_OWNER.
Firms facing higher operating uncertainty because of the
presence of growth options (MTB) might face higher incen-
tives to produce high-quality financial reports to reduce the
information asymmetries with external capital providers.
For this reason, in line with Healy and Palepu (2001), we
expect a positive association between MTB and AQ.
High levels of profitability (ROA) signal the pres-
ence of economic rents. These rents could proxy for a
rich investment opportunity set that calls for additional
external financing and hence provide an incentive for
higher quality financial information. On the other hand,
these economic rents might be contestable by competi-
tors and lead to higher proprietary costs, which nega-
tively affect the quality of financial reporting information
(Leuz & Verrecchia, 2007). As a consequence, follow-
ing previous studies on the determinants of financial
reporting quality, we make no sign prediction for profit-
ability. A very similar argument applies to MARGIN,
and we do not make any prediction for this variable
either (Healy & Palepu, 2001).
Fast-growing firms are also likely to have noisier
accruals because of absorption-costing distortions to
income when inventory buildups are used to antici-
pate the effects of future sales growth (Revsine, Col-
lins, & Johnson, 2005). Consequently, as in prior
literature (Skaife, Collins, Kinney, & LaFond, 2009),
we expect GROWTH to be positively associated with
accrual quality.
The level of intangible asset intensity (INT_
INTENSITY) is used to capture differences in firms
asset structures that require accrual adjustments at the
fiscal year end (Francis et al., 2005; Skaife et al., 2009).
Firms that tend to expense a substantial portion of their
intangibles (low intangible intensity firms) actually pro-
vide conservative (and less volatile) earnings (Penman
& Zhang, 2002). For this reason, in line with prior research
(Francis et al., 2004), we expect INT_INTENSITY to be
negatively association with accrual quality.
Finally, as shown by DeAngelo (1981), we expect
larger audit firms that have brand-name reputations to pro-
tect to provide higher audit quality. Large auditors are in
fact believed to enforce their clients to provide high-qual-
ity accounting information to avoid potential litigation
risks. For this reason, we expect, as in previous studies
(Francis et al., 2004; Francis et al., 2005; Skaife et al.,
2009), a positive association between AUDITOR and AQ.
Results
The results from our earnings attributes tests are pre-
sented in Table 2. Panel A illustrates the results obtained
Cascino et al. 259
Table 3. Determinants of Accrual Quality
Panel A: Descriptive Statistics and Correlations
Variable M SD Min 25% 50% 75% Max t-value z score
LOG(TOTASS) 13.272 1.000 10.879 12.208 12.993 14.283 15.912 -2.27* -1.46
LEVERAGE 0.270 0.134 0.017 0.185 0.293 0.354 0.538 0.54 0.21
INDEP_BOARD 0.338 0.170 0.000 0.214 0.333 0.455 0.714 -4.48*** -3.25**
INST_OWNER 0.388 -2.45**
MTB 1.811 1.356 0.552 0.790 1.325 2.327 5.229 -2.53** -3.55**
ROA 0.067 0.053 -0.036 0.030 0.068 0.103 0.160 3.16** 3.15**
MARGIN 0.436 0.146 0.182 0.328 0.420 0.535 0.843 -3.69*** -3.30**
GROWTH 0.074 0.162 -0.185 -0.031 0.047 0.147 0.597 -0.21 0.69
INT_INTENSITY 0.081 0.076 0.001 0.020 0.065 0.113 0.296 -3.25** 1.42
AUDIT 0.857 -3.89***
Nonfamily firms (n = 169)
LOG(TOTASS) 14.012 2.208 10.379 12.208 14.167 15.314 17.984
LEVERAGE 0.262 0.172 0.000 0.095 0.282 0.404 0.568
INDEP_BOARD 0.434 0.329 0.000 0.273 0.333 0.615 0.889
INST_OWNER 0.509
MTB 2.338 1.816 0.618 1.114 1.843 2.635 7.631
ROA 0.046 0.061 -0.103 0.024 0.051 0.079 0.155
MARGIN 0.492 0.169 0.160 0.363 0.488 0.620 0.805
GROWTH 0.084 0.253 -0.309 -0.042 0.034 0.126 0.944
INT_INTENSITY 0.123 0.135 0.000 0.018 0.061 0.191 0.439
AUDIT 0.970
A B C D E F G H I J
Family firms
A: LOG(TOTASS) .300 .059 .069 -.110 .113 .010 .098 -.164 .185
B: LEVERAGE .251 .255 .037 .043 -.180 -.267 .111 .326 -.053
C: INDEP_BOARD .113 .236 .052 .119 -.159 -.242 -.014 .118 .140
D: INST_OWNER .080 .026 .062 .078 .139 .020 -.050 .022 -.181
E: MTB .005 .026 .186 .064 .409 .104 .232 .395 .070
F: ROA .085 -.196 -.115 .140 .475 .293 .371 .171 -.014
G: MARGIN -.021 -.242 -.249 .063 .157 .338 -.018 .142 .052
H: GROWTH .160 .118 -.026 -.038 .310 .452 .037 .138 .007
I: INT_INTENSITY -.083 .347 .126 .035 .373 .183 .138 .151 -.108
J: AUDIT .201 -.064 .142 -.181 .081 -.040 .047 .013 -.086
A B C D E F G H I J
Nonfamily firms
A: LOG(TOTASS) -.083 -.003 -.349 -.046 .184 .019 -.047 -.424 -.252
B: LEVERAGE -.095 .005 .277 .105 -.123 .167 .123 .560 .060
C: INDEP_BOARD -.009 .076 .130 .210 .121 .195 .049 .560 .060
D: INST_OWNER -.339 .276 .175 .030 .081 -.001 .123 .096 .172
E: MTB .035 -.030 .222 .084 .029 .372 .107 .266 .402
F: ROA .254 -.131 .120 .066 .229 .131 .280 -.032 -.227
G: MARGIN -.025 .151 .162 .006 .350 .112 .075 .332 .036
H: GROWTH .014 .175 .111 .157 .204 .310 .110 .148 -.089
I: INT_INTENSITY -.398 .605 .123 .208 .183 -.073 .189 .179 .027
J: AUDIT -.291 .048 .129 .172 .233 -.206 .044 -.130 .086
(continued)
from the accrual quality test. In line with prior literature
(Dechow & Dichev, 2002; McNichols, 2002), we find a
positive sign on past cash flow, future cash flow, and
property, plant, and equipment but a negative sign on cur-
rent cash flow and change in revenues for both the family
and nonfamily subsamples. When comparing our accrual
Panel B: Accrual Quality Determinant Model
AQ
j
=
0
+
1
LOG(TOTASS)
j
+
2
LEVERAGE
j
+
3
INDEP_BOARD
j
+ (5)

4,
INST_OWNER
j
+
5
MTP
j
+
6
ROA
j
+
7
MARGIN
j
+
8
GROWTH
j
+

9
INT_INTENSITY
j
+
10
AUDIT
j
+
i =
8
1
i
INDCONTROLS
j
+
j
Parameter Predicted sign Estimate Pr > |t| Estimate Pr > |t| Estimate Pr > |t|
Intercept +/- -0.984 0.000 -0.138 0.000 -0.109 0.000
FAMBUS 0.023 0.002
LOG(TOTASS) + 0.035 0.000 0.082 0.000 0.082 0.000
FAMBUS*LOG(TOTASS) -0.068 0.000
LEVERAGE +/- 0.041 0.000 -0.009 0.545 -0.024 0.073
FAMBUS*LEVERAGE 0.070 0.000
INDEP_BOARD + 0.044 0.000 -0.020 0.000 -0.014 0.003
FAMBUS* INDEP_BOARD 0.056 0.000
INST_OWNER +/- -0.008 0.002 0.010 0.050 0.022 0.000
FAMBUS* INST_OWNER -0.035 0.000
MTB +/- 0.001 0.795 -0.003 0.051 -0.005 0.000
FAMBUS*MTB 0.006 0.000
ROA +/- -0.002 0.742 -0.031 0.384 -0.049 0.164
FAMBUS*ROA 0.072 0.132
MARGIN +/- 0.025 0.029 0.025 0.106 0.021 0.105
FAMBUS*MARGIN 0.017 0.286
GROWTH + 0.001 0.981 0.007 0.366 -0.002 0.720
FAMBUS*GROWTH 0.003 0.776
INT_INTENSITY - 0.026 0.191 -0.106 0.000 0.120 0.000
FAMBUS*INT_INTENSITY -0.121 0.000
AUDIT + 0.016 0.000 0.013 0319 0.026 0.019
FAMBUS*AUDIT -0.014 0.234
Industry fixed effects Yes Yes Yes
N 245 169 414
Adj. R
2
.545 .480 .439
The family and nonfamily firm samples contain observations fulfilling the data requirements for estimating the models of Panel B. AQ is the standard
deviation of the residuals from Equation 1 multiplied by -1. INDEP_BOARD is the ratio of the number of independent directors divided by the
total number of directors. INST_OWNER is a dummy variable indicating significant institutional ownership in the firm (2% of outstanding equity is
the threshold established by the Italian capital market regulator (Consob) for institutional owners to publicly disclose interest in listed companies).
MARGIN is gross margin percentage, calculated as net sales (WS01001) less cost of goods sold (WS01051), scaled by net sales. GROWTH is growth
in sales, calculated as net sales minus net sales from the previous year, scaled by net sales from the previous year. INT_INTENSITY is intangible
intensity, calculated as intangible assets (WS02649), divided by total assets. AUDIT is a dummy variable indicating whether the financial statements of
the respective firm have been audited by a dominant audit supplier (PWC, KPMG, Deloitte, or Ernst & Young). All other variables are as previously
defined. In Panel A, n stands for number of observations, M stands for mean, SD stands for standard deviation, Min stands for minimum, and Max
stands for maximum. The reported statistics test for differences across samples. A t test (Wilcoxon signed rank test) is used to test for differences in
means (medians). Pearson (Spearman) correlations are reported above (below) the diagonal. Bold indicates two-sided significance below the 5% level.
The models of Panel B are estimated using ordinary least squares and industry fixed effects. Probabilities are two-sided.
Cascino et al. 261
quality metric across subsamples, we find a higher level
of accrual quality (AQ = (
t
)) for family firms com-
pared to nonfamily firms. Moreover, as reported in Panel F,
this difference in accrual quality is significant for both the
mean and the median. Panel B presents results from our
persistence and predictability tests. The coefficient on
NIBE_TA
t-1
is larger for nonfamily firms. The interacted
version of Model 2 shows that this difference is signifi-
cant. Thus, we conclude that nonfamily firms tend to have
more persistent earnings than family firms. With regard to
predictability, we observe that the square root of the error
variance (
_ __
2
_
(
_ __
t
)
) from Model 2 is significantly smaller
for family firms, implying more predictable earnings
(Panel F). Panel C shows results for our smoothness test.
Both the mean and the median of the smoothness metric
are higher in the case of nonfamily firms, and the differ-
ences are statistically significant, thus indicating that
family firms tend to report smoother earnings compared
to nonfamily firms.
Results from our value relevance test are presented in
Panel D. The explanatory powers of the family and non-
family firm models are compared through the square
root of the variance of the residuals (
___
2
_
(
_ __
t
)
); as shown
in Panel F, we find lower levels of residuals for our fam-
ily firm subsample, thus suggesting that family firms
report more value-relevant earnings.
Finally, Panel E exhibits the results for our timeli-
ness and conservatism tests. The square root of the vari-
ance of the errors (
___
2
_
(
_ __
t
)
) in Model 4, as shown in
Panel F, is slightly higher in the case of nonfamily firms,
hence indicating that family firms report more timely
earnings. However, the difference in the level of residu-
als is only marginally significant for the mean and non-
significant for the median. The difference between the
bad news coefficient (
3
) and the good news coef-
ficient (
2
) is lower in the case of family firms. We find
evidence that the difference between the two samples is
nonsignificant.
Results from the accrual quality determinant model
(Equation 5) are presented in Table 3, Panel B. The model
has a high explanatory power for the family and nonfamily
subsamples and for the pooled sample (R
2
is greater
than .439). Two interesting results come up from the ratio
of independent directors (INDEP_BOARD) and presence
of institutional owners (INST_OWNER). The two vari-
ables have different effects on accrual quality in family and
nonfamily firms: Although family firms benefit in terms of
higher accrual quality having more independent directors
on the board, in nonfamily firms independent board mem-
bers increase noise in accruals and reduce its quality. In a
similar vein, institutional owners have different effects on
accrual quality: Although in family firms the presence of
institutional owners seem to decrease accrual quality,
in nonfamily firms accrual quality appears to increase
with the presence of institutional owners. The incidence
of intangible assets (INT_ INTENSITY) significantly
decreases accrual quality in nonfamily firms, whereas it
is not significant in the case of family firms. Moreover,
results show that the presence of a renowned audit firm
(AUDIT) significantly increases the accrual quality in fam-
ily firms whereas the association is not significant for non-
family firms. Finally, evidence from the pooled sample
analysis shows that the coefficient on the firm type (FAM-
BUS) is positive and significant, providing evidence of an
overall superiority accrual quality for family firms.
Discussion
Our results contribute to the ongoing debate about owner-
ship structure and its effects on financial reporting quality.
Consistent with our hypothesis, we find that accounting
quality is systematically related to the family firm status
being different across family and nonfamily firms. Over-
all, our results indicate that earnings of family firms are of
higher quality relative to their nonfamily counterparts.
Moreover, we find that the determinants of accounting
quality in family and nonfamily firms tend to be different.
Accounting quality in family firms is positively associated
with leverage, board independence, and audit quality,
whereas institutional ownership exhibits a negative asso-
ciation. Accounting quality in nonfamily firms appears to
be influenced by other determinants: Although institu-
tional ownership has a positive effect, the degree of intan-
gible intensity is negatively related to quality.
Our findings support the rationale of governance
mechanisms being complements: Increasing leverage
seems to discipline family owners who experience more
tight control from debt holders and reduced accounting
discretion (Shleifer & Vishny, 1997). A higher propor-
tion of independent directors would counterbalance the
tendency to occupy all managerial positions by family
members, increasing scrutiny and control also on the
financial reporting process, thus leading to a lower use
of discretionary accruals (Bushman & Smith, 2001). The
presence of a renowned audit firm increases accrual
quality because higher audit quality enhances a higher
degree of compliance (DeAngelo, 1981). Institutional
ownership instead has a negative impact on accrual qual-
ity in family firms: The presence of conflicting voices
(family and institutional owners) among equity holders
may in fact worsen governance practices by increasing
conflicts between the parties, thus affecting the quality
of accounting information (Hoskisson, Hitt, Johnson, &
Grossman, 2002).
Altogether, our study informs the current debate on
the influence of family ownership on accounting qual-
ity. We try to better disentangle the effect of familism on
the quality of accounting information through a more
fine-grained distinction between family-run companies
and firms with other major block holders. By exploring
a setting where ownership concentration is high across
all firms, we go beyond the classical alignment versus
entrenchment argument and show that it is the presence
of a family itself, rather than ownership concentration,
that produces beneficial effects on accounting quality.
Conclusion, Limitations, and
Directions for Future Research
This article provides empirical evidence of accounting
quality in listed family firms and highlights differences
with their nonfamily peers. Previous studies provided
only limited attention to this issue, albeit the importance
of financial reporting for the purpose of resource acqui-
sition on equity and debt markets (Leuz & Verrecchia,
2007). Moreover, a great part of previous research inves-
tigates the U.S. equity market and typically employs
high ownership concentration as a proxy to identify
family firms. This design choice may potentially mis-
represent the family firm category by including in it
firms with major block holders other than families. We
exploit the unique features of the Italian equity market
characterized by high levels of ownership concentration
across all types of companies. This set allows us to dis-
tinguish family from nonfamily firms on criteria other
than high ownership concentration and therefore pro-
vides more fine-grained evidence of the relation between
family ownership and financial reporting quality. Our
results show that family firms generally report earnings
of higher quality when compared to nonfamily firms.
Also, we find that the determinants of accounting qual-
ity are different across the two types of firms. Our
results have important implications for theory and prac-
tice, suggesting that financial reporting in family firms
is both more transparent and less prone to managerial
opportunism.
However, we acknowledge that our results come
with some potential caveats. In terms of external valid-
ity, because we investigate the Italian equity market,
the evidence provided might not necessarily generalize
to all listed firms. Moreover, as with every other study
employing earnings attributes, we cannot rule out the
influence of other non-earnings-based attributes (e.g.,
the quality of disclosure) on the overall concept of
accounting quality.
Finally, we believe a promising avenue for future
research is to investigate the economic consequences of
financial reporting quality in family firms by assessing
whether the higher quality of accounting information
effectively translates into positive capital market out-
comes (i.e., lower cost of capital, higher liquidity, and
more efficient contracting) for this type of firm.
Acknowledgments
We thank the editors, two anonymous referees, Joachim Gassen,
Pietro Mazzola, Giovanna Michelon, and Riccardo Vigan for
useful discussions and comments. We also thank conference
participants at the 2007 IFERA Conference, the 2007 Family
Business Review Conference, the 2007 GSA Financial Market
Workshop, and the 2008 European Accounting Association
Annual Congress.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interests with
respect to the authorship and/or publication of this article.
Financial Disclosure/Funding
The authors acknowledge financial support by the Italian
Ministry of Education, University and Research (MIUR).
Notes
1. According to Bianco and Casavola (1999), ownership con-
centration in Italian listed companies is high: The major
shareholder has on average 52% of voting rights, whereas
the first three shareholders cumulate 62% of shares and
voting rights.
2. We also employ trimming as an alternative treatment for
sample outliers, and our results equally hold.
3. As a robustness check, we rerun all our analyses by
employing a stable sample for all our tests obtaining
similar results. The choice to use floating samples allows
us to maximize the power of our tests.
Cascino et al. 263
4. In a sensitivity analysis (untabulated) we also run the origi-
nal Dechow and Dichev (2002) model obtaining similar
results.
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Bios
Stefano Cascino is a research fellow at the London School of
Economics. He earned a PhD in accounting from the University
of Naples Federico II in 2008. Prior to his current position, he
was a visiting postdoctoral researcher at Humboldt University
of Berlin.
Amedeo Pugliese is an assistant professor in accounting and
governance at the University of Naples Federico II, where he
received his PhD in accounting. His research is currently
focused on the effects of ownership structures on the quality of
financial reporting.
Donata Mussolino is an assistant professor in accounting at the
Second University of Naples. She earned her PhD in accounting
from the University of Naples Federico II. Her primary research
interests include family business, the internationalization pro-
cess, paternalism construct, and entrepreneurial orientation.
Chiara Sansone is currently a business analyst at the Bank of
New York Mellon, Bruxelles, Belgium. She earned her PhD in
accounting at the University of Naples Federico II. Her main area of
interest covers hedge funds and financing choices of corporations.

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