Are family firms reluctant to report impairment losses? Evidence from private firms
Journal of Applied Accounting Research
ISSN: 0967-5426
Article publication date: 13 September 2021
Issue publication date: 1 March 2022
Abstract
Purpose
This study examines the reporting of impairment losses in family and non-family private firms. The socioemotional wealth (SEW) theory suggests that the reporting practices in family firms may differ from non-family firms and may vary among family firms.
Design/methodology/approach
The research question is examined using a large-scale archival study. The authors use unique register data on family relationships for Norwegian private firms provided by the CCGR database at BI Norwegian Business School.
Findings
Drawing on the socioemotional wealth theory, the authors predict and find that private family firms are more reluctant to report impairment losses compared to private non-family firms. The results also suggest that both the likelihood to report impairment losses and the impairment amounts increase with board independence in private family firms. The authors also find some evidence suggesting that private family firms with a family CEO report lower impairment losses than private family firms without a family CEO, but this result is less robust and should be interpreted with caution.
Research limitations/implications
The true economic impairment is unobservable. The authors use proxies based on prior research to control for whether impairment losses are faithfully reported or not.
Practical implications
The results suggest a higher risk of impairment losses being managed in private family firms than in private non-family firms and that independent board members mitigate this tendency somewhat in private family firms. Awareness of this risk should have practical value for stakeholders such as non-family owners and creditors, external auditors, supervisory and monitoring bodies, and regulators.
Originality/value
This study contributes to the accounting literature by examining the reporting of a specific accrual (impairment losses) in the setting of private family firms. Prior research in this area is scarce.
Keywords
Acknowledgements
The authors are grateful to the Center for Corporate Governance Research (CCGR) at the BI Norwegian Business School for giving us permission to retrieve data from the CCGR database. The authors thank Kjell Henry Knivsflå, Frøystein Gjesdal, Han Wu, Anna Rossi, two anonymous reviewers, the participants at the FIBE 2020 Conference, and the EAA Virtual Congress 2021 for helpful comments. During the completion of earlier drafts of this paper, Tonny Stenheim was a faculty member at the BI Norwegian Business School.
Citation
Sundkvist, C.H. and Stenheim, T. (2022), "Are family firms reluctant to report impairment losses? Evidence from private firms", Journal of Applied Accounting Research, Vol. 23 No. 2, pp. 434-453. https://doi.org/10.1108/JAAR-04-2021-0095
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited