The influence of family ownership and corporate governance practices on earnings quality in non-listed SMEs: empirical evidence from Italy

This study investigates whether family ownership and corporate governance practices affect Earning Quality (EQ) in non-listed Italian SMEs. Most firms around the world are family-owned businesses. Empirical evidence on listed family firms shows, on one hand, that the higher information asymmetries generate higher incentives to bad quality financial reporting (Francis et al., 2005; Fan and Wong, 2002) because of the entrenchment effect in concentrated ownership structures (Fama and Jensen, 1983; Morck et al. 1988). But on the other hand, family ownership also generates more effective monitoring by controlling owners (Demsetz and Lehn 1985, Shleifer and Vishny 1986; Ball and Shivakumar, 2005b) and families are interested in a good quality reporting and higher EQ in order to preserve family’s name and reputation because of the alignment effect (Wang, 2006). The aim of this study is to explore the relation between “familism” and EQ, through the lenses of some relevant corporate governance practices typical of non-listed firms, employed as independent variables. We have analysed the financial statements and corporate governance structure data of a final sample of 1,579 Italian non-listed SMEs over the years 2007 to 2012. A regression analysis on a panel data (a total of 9,474 observations) statistically examines the correlation among EQ, family ownership, and some corporate governance practices of non-listed firms. Our dependent variable is an EQ measure (Dechow and Dichev, 2002, as modified by Ball and Shivakumar, 2005b). Governance practices are considered in terms of board independence, auditor choice, CEO duality, IFRS adoption, leverage and taxation. Control variables are age, profitability, size, industry sector and loss