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Family firms, institutional development and earnings quality: does family status complement or substitute for weak institutions?

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  • Stefano Mengoli

    (University of Bologna)

  • Federica Pazzaglia

    (University College Dublin)

  • Sandro Sandri

    (University of Bologna)

Abstract

This study combines insights from the socioemotional wealth perspective and institutional and resource-based theories to examine the earning quality of family and nonfamily firms operating in countries characterized by different levels of institutional development. Results based on a cross-sectional sample of firms from 12 European countries show that family status and a country’s level of institutional development are positively related to earnings quality. They also show that institutional development moderates the relationship between family status and earnings quality. Comparing insider-oriented countries that are characterized by lower regulatory and financial development with outsider-oriented countries that are characterized by higher regulatory and financial development, we found that family firms have a higher earnings quality in insider-oriented countries than in outsider-oriented ones. Thus, our study finds support for a substitution effect, whereby family status compensates for the limited capacity of less developed regulations and markets to induce virtuous financial reporting behaviors.

Suggested Citation

  • Stefano Mengoli & Federica Pazzaglia & Sandro Sandri, 2020. "Family firms, institutional development and earnings quality: does family status complement or substitute for weak institutions?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(1), pages 63-90, March.
    • Handle: RePEc:kap:jmgtgv:v:24:y:2020:i:1:d:10.1007_s10997-019-09466-0
    DOI: 10.1007/s10997-019-09466-0
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