Family firms, institutional development and earnings quality: does family status complement or substitute for weak institutions?

This study combines insights from the socioemotional wealth perspective and institutional and resource-based theories to examine the earning quality of family and nonfamily firms operating in countries characterized by different levels of institutional development. Results based on a cross-sectional sample of firms from 12 European countries show that family status and a country’s level of institutional development are positively related to earnings quality. They also show that institutional development moderates the relationship between family status and earnings quality. Comparing insider-oriented countries that are characterized by lower regulatory and financial development with outsider-oriented countries that are characterized by higher regulatory and financial development, we found that family firms have a higher earnings quality in insider-oriented countries than in outsider-oriented ones. Thus, our study finds support for a substitution effect, whereby family status compensates for the limited capacity of less developed regulations and markets to induce virtuous financial reporting behaviors.