Founding family ownership and accounting earnings quality

This study investigates the relation between founding family ownership and the quality of accounting earnings using data from S&P 500 companies. Existing literature provides two competing theories about the effect of founding family ownership on earnings quality: entrenchment effect and alignment effect. The preliminary results are consistent with the alignment effect: founding family ownership creates long-term incentives for family firms and thus aligns the interests of founding families and other shareholders which in turn enhances the quality of accounting earnings. Specifically, I find that founding family ownership is associated with lower levels of abnormal accruals, less earnings smoothing and less earnings discretion. In addition, founding family firms are associated with greater analysts' forecast accuracy, indicating that founding family firms disclose more reliable financial information that enhances analysts' forecast ability.