Sasson Bar-Yosef

Corporate Governance and Earnings Management in Family-Controlled Companies

The corporate governance literature advances the idea that certain aspects of a board of directors’ structure improve the monitoring of managerial decisions. Among these decisions are a manager’s policies about managing earnings. Prior studies have shown that earnings management in widely held public companies is less prevalent when there is a high level of board independence. However, there is less evidence regarding the effectiveness of board independence on earnings management in family-controlled companies. This issue is particularly interesting as such companies are susceptible to various types of agency concerns. It is the purpose of this study to shed light on the earnings management issue in family-controlled companies characterized by potentially lower board independence and a higher risk of collusion. In this study, board independence is estimated by two parameters: (1) proportion of independent directors on the board; and (2) lack of chief executive officer (CEO)–board chairman duality function. Our empirical results provide evidence that the impact of board independence on earnings management is indeed weaker in family-controlled companies. The same result also holds for the lack of CEO– board chairman duality function. Such effects become stronger in cases in which the CEO is a member of the controlling family.

Accounting Research in Family Firms: Theoretical and Empirical Challenges

Abstract Family firms play a significant role in the global economy. Consistently, over the last two decades academia has turned its attention to the family dimension as a determinant of business phenomena, and this interest has increased over time. While family business research has reached an age of ‘adolescence’ as a field of study, accounting research to date seems to have been rather slow to pick up on the distinctive characteristics of family firms, and their implications for accounting and reporting practices. In an attempt to accelerate and support research in the field, in this article we highlight theoretical and empirical challenges that accounting scholars need to consider when addressing issues related to accounting and reporting in family firms. These challenges include the selection and potential mixing of appropriate theoretical frameworks, and complications in defining operationally what family firms are. We also provide a ‘state of the art’ of studies in financial accounting, management accounting and auditing, identifying which issues in relation to family firms have been addressed in the research, and which theories, research methods and types of data have been used in these studies. We conclude by providing directions for future research that can advance our understanding of accounting and reporting in family firms.

Income Smoothing in Family‐Controlled Companies: Evidence from Italy

Manuscript Type: Empirical.Research Question/Issue: This paper focuses on the relationship between one of the main corporate governance dimensions – ownership structure – and income smoothing. The paper investigates whether family‐controlled companies differ from non‐family‐controlled companies with respect to income smoothing. Due to different incentives of management and owner investment horizons, we hypothesize that income smoothing is less likely among family‐controlled companies than among non‐family‐controlled companies. Additionally, we hypothesize that among family‐controlled firms income smoothing is less likely when CEO and Board Chairman are members of the controlling family. Various definitions of “family control” are applied. A sample of Italian listed companies is used for the empirical analysis.Research Findings/Insights: We find evidence that income smoothing is less likely among family‐controlled companies than non‐family‐controlled companies. Moreover, among family‐controlled companies, income smoothing is less likely for firms whose CEO and Board Chairman are members of the controlling family.Theoretical/Academic Implications: This paper fills a gap in the literature, suggesting that not only the level of ownership concentration or insider ownership but also the nature of the dominant shareholder (family versus non‐family) should be considered when addressing the motivations for income smoothing. Furthermore, our findings indicate that agency theory and stewardship theory are complementary in explaining the role played by family control in income smoothing decisions. While in non‐family‐controlled companies the traditional owner‐manager agency problems tend to prevail and motivate income smoothing, in family‐controlled companies such agency issues become less relevant and a stewardship attitude emerges, rendering income smoothing less likely.Practitioner/Policy Implications: This study is of interest to financial statement users, including analysts and investors, as it shows that different company types (e.g., family versus non‐family) have a different attitude towards income smoothing. In particular, these results aid users in interpreting the companys reported profitability and its potential variability. The conclusions also are of interest to auditors when evaluating the reliability of the reported income of companies characterized by various ownership structures.

Modeling Dividends, Earnings, and Book Value Equity: An Empirical Investigation of the Ohlson Valuation Dynamics

This study empirically investigates the information dynamics of the Ohlson valuation framework. Single-period lagged linear autoregressive relationships among dividends, earnings, and book values of equity are estimated for a sample of stochastically stationary firms and are found not to support the valuation framework. This study further extends the empirical analysis to a multilagged vector autoregressive linear information system. Consistent with the Ohlson valuation framework,the past time series of all three variables are generally found to be relevant for firm valuation. This study brings into question empirical research utilizing the Ohlson framework that presupposes a single-period lagged information dynamic.

The Impact of Corporate Governance and Earnings Management on Stock Market Liquidity in a Highly Concentrated Ownership Capital Market

We provide insights to the effects of corporate governance mechanisms and earnings management on market liquidity (measured by bid–ask spreads [B_As] and trading volume) in a setting characterized by highly concentrated noninstitutional ownership. First, we document that high noninstitutional ownership increases B_As and depresses trading volumes. Next, we show that volume of trade tends to be higher and B_A tends to be lower for firms with better corporate governance mechanisms (e.g., board independence and CEO–chairman separation) when there is high concentration of noninstitutional ownership. In contrast to prior findings, when controlling for corporate governance quality, B_As are unaffected by earnings management, while trading volume increases when earnings management is higher, presumably due to an increase in investor disagreement. Our results are robust to changes in the market trading system across the sample period.

Economic depreciation, accounting depreciation, and their relation to current cost accounting

The relevancy of changing prices in accounting for asset values for U.S. industries is explored. The analysis compares the economic value of assets with accounting-based valuations—historical and current cost—in an inflationary environment. A simulation is employed to estimate the magnitude of the errors of current cost and historical cost reporting. The results of the simulation indicate that where firms use sum-of-years-digits depreciation, current cost accounting is more accurate than historical cost accounting for all but 1 of the 32 asset classes tested. Where firms use straight-line depreciation, current cost accounting is more accurate for all classes of structures but not for all classes of equipment. For equipment under straight-line depreciation, the relative accuracy of current cost was directly related to the rate of inflation and inversely related to the rate of growth of asset outlays.

Share Price Levels and Beta

In their classic guide for security analysis, Graham and Dodd warn that stocks with a very low price per share are more risky than stocks that sell at higher prices [6, p. 649]. The earliest empirical finding on the relationship of risk and share price was consistent with their warning [5]. Subsequent work has suggested that the warning and the early empirical work may be misleading and that there is no relationship between risk and share price. Strangely enough, both those who warn of a relationship and those who claim there is none may be correct. If a company experiences an unexpected change in its circumstances that substantially increases the systematic risk of its common stock, then, accepting the Capital Asset Pricing Model, the price of its shares will fall. If the change substantially reduces systematic risk, then share price will rise. The observed result for a group of different companies with different changes could be just what Graham and Dodd suspected: lower share price associated with higher risk. If, in contrast, some managements searching for the optimal price range lower share price by splits, then risk should not differ between stocks with low and with high share prices. In this study we have considered combined timeseries and cross-sectional data for two groups of stocks: a non-split group and a split group. Our hypothesis is that only the non-split group will show a negative relationship between share price and risk when risk is properly defined as systematic. The findings are consistent with our hypothesis.

The Effects of Conservative Reporting on Investor Disagreement

We examine whether the level of a firms conditional conservatism affects investor disagreement around earnings announcement dates. Investor disagreement is relevant for its repercussions on stock market efficiency. However, the literature related to the effect of firms’ reporting policies on disagreement is scant. Prior research suggests that conservatism, by requiring higher verifiability of profits, constrains earnings overstatements and encourages more complete revelations of losses, thus improving the information environment. In this paper, we further hypothesize that these effects of conservatism enhance news credibility and decrease information asymmetry, particularly for bad news announcements. This results in a lower disagreement and improved interpretation of earnings news. We consistently find that conservatism measures are negatively associated with proxies of announcement-time investor disagreement and that this effect is stronger when the firm is reporting bad news. Additional analyses indicate that the impact of conservatism is stronger when market surprise to the announcement is greater, while it is weaker in the presence of frequent and precise voluntary disclosure that preempts the earnings announcement. Finally, we show that a higher percentage of institutional investors’ ownership and a higher level of commitment to conservatism reinforce the impact of the latter.

Corporate financial policies: An analysis of interaction

The paper discusses two antithetical statements of the relationship between the value of the firm and its joint financing and dividend decisions. The paper develops an empirically testable model which relies on the Capital Asset Pricing Model. Empirical tests are conducted on a very large and divergent sample. The empirical results are shown to be consistent with the position which suggests that the interaction between these two corporate decisions is relevant for valuation.