The Impact on Family Firms' Earnings Quality of External Monitoring

This study investigates the impact of family ownership on a company’s earnings quality and monitoring power by using a set of data on Korean firms. From a sample of 3,440 firm-years listed on the Korean stock market, the group of family firms reported low quality of earnings than the group of family firms over a seven-year period of study (2000～2006). The higher is the proportion of minority shareholders and outside directors in a family firm, the greater is the impact on earnings quality. Two distinct measures of earnings quality ― ADA (absolute value of adjusted discretionary accruals from the modified Jones model) and APDA (absolute value of performance-adjusted discretionary accruals) ― were employed to test the difference of means between the two sample groups. The results were in line with our multiple regression models. All these findings support our conceptual framework and hypothesis, which states that family firms’ quality of earnings is lower than that of non-family firms.