The purpose of this paper is to provide evidence that the quality of earnings of family run firms is superior to that of the other firms and that firms run by founding family members exhibit this trait even more prominently. Using insights from the fundamental accounting valuation model, this study also hypothesizes that financial markets place a higher weightage on earnings than book value for founding family-run firms in Thailand as these firms report a more reliable earnings number.
This is an empirical archival research.
The authors report evidence that financial markets place a higher weightage on earnings than book value for founding family-run firms. The evidence is consistent with the insight that current earnings of the founding family-run firms offer more information about future earnings and cash flow compared to book value than those for family (FAM) and non-family (NonCS) firms. The authors also provide evidence that earnings persistence and the accrual quality of the founding family firms are higher compared to the other firms. This evidence is contrary to the notion that family firms have more opaque disclosures, lower earnings quality and higher implied cost of equity capital.
The authors find support for the alignment hypothesis of the long-term family ownership of Thai firms. The authors consider these evidences consistent with the shareholder interest alignment hypothesis of the controlling shareholders as opposed to the entrenchment hypothesis.
The study implies that earnings of the Thai firms run by founding family members are more reliable and can be relied on more for firm valuation. Additionally, the authors also offer a different methodology by appealing to the valuation properties of the reported accounting numbers besides looking at the quality of accruals and earnings persistence tests offered in the existing literature.
The society is better off if there are more opportunities to invest in Thai firms run by founding family members. The finding of the quality difference in governance by firms with founding family members is new. Therefore, the study points to the need of finer partition of the family firms while looking at their corporate governance practices. The fact that the FF firms offer a higher quality of earnings implies that they are less engaged in opportunistic manipulation of earnings and cash flow and, thus, are self-motivated to protect the longer term interest of the firms.
This if the first time the accounting fundamental valuation theory has been used to provide evidence of higher earnings quality.
The authors thank Yue Li (the Guest Associate Editor), Haiyan Zhou (the Editor), two anonymous referees, Dushyant Vyas (the Discussant), Uthai Tanlamai, Agnes Cheng, Joseph Fan, Rajib Doogar, Steve Holland, Valerie Li, Hyung II Oh, Surya Pathak, Chris Skousen, Chad Simon, Nate Stephens, Devon Erickson, and the comments of workshop participants at the 2018 International Accounting Symposium Asian Review of Accounting in Taiwan, University of Washington, Bothell, Utah State University, the 39th Annual Congress of the European Accounting Association in Maastricht, and Chulalongkorn University. The first author appreciates the grant from the Thailand Research Fund (TRF), Thailand (Project No. MRG5280037). The second author thanks Chulalongkorn University for the support on the author’s visiting scholarship at Chulalongkorn University.
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