The impact of family influence on financial reporting quality in small and medium family firms

In this study, we investigate whether accounting information quality is affected by the special characteristics of small- and medium-sized family firms. These companies have a particular power and management structure and different stockholder interests, compared to large companies. We go a step further than prior literature and use a multidimensional approach based on the Family Influence on Power, Experience, and Culture (F-PEC) scale to assess heterogeneity among family firms. Additionally, we develop a comprehensive approach that considers discretional accruals, real earnings, and accounting information quality measurements such as conservatism and earnings persistence. Our findings, based on a sample of 252 small- and medium-sized Spanish family manufacturing firms, show that the 'Power' dimension decreases the quality of financial reporting, whereas 'Experience' promotes earnings persistence and conservatism; finally, 'Culture' curbs earnings management in terms of real earnings and favours both earnings persistence and conservatism. Consequently, according to our results, family businesses that resemble our sample firms should promote family involvement in terms of culture and experience, while limiting power inside the company.