Tailor made solutions
Recently, the debate on family firms' strategic choices has been evolving with the tendency to frame such choices through the socioemotional wealth (SEW) perspective. The SEW is a novel theoretical approach tailored to family firms (FFs) which mainly focuses on all those non-economic factors related to the "stock of affect-related value a family derives from its ownership position in a particular firm" (Berrone et al., 2012).
In particular, this theoretical framework claims that the primary goal of FF owners is the preservation of the SEW. This would imply that family owners are loss-adverse with regard to threats to their SEW and they would even be willing to make sub-optimal economic decisions to preserve it. For example, FFs may prefer projects that are financially less optimal or hire family members irrespective of their abilities because, regardless of the financial aspects of these choices, these decisions may provide other benefits to the FF, such as improving its reputation or retaining more devoted employees. FFs are also less likely to dismiss family CEOs but pay them less thus providing greater job security but less compensation. The preservation of SEW also affects the composition of boards of directors of FFs. For example, if investors perceive governance problems, FFs appoint outside directors to signal its quality and legitimacy in order to preserve their SEW (Kalm and Gómez-Mejía, 2016).
The preservation of SEW could also be reflected in financial reporting decisions. Thus, our research entitled "Financial Reporting in Family Firms: A Socioemotional Wealth Approach toward Information Quality" aims to understand whether different levels of SEW endowment affect the financial reporting quality of unlisted FFs. It considers an event associated to changes in accounting quality of entities: the voluntary adoption of International Financial Reporting Standards. We examine the two main strategies used to manipulate earnings: accruals and real activities. The former involves the use of those items included in an annual report that are not directly related to immediate cash-flow movements that, therefore, imply a certain degree of estimation and judgment from the management (e.g., depreciation and amortization, provisions, etc.). This type of earnings management is relatively simple to carry out, but it is also easy to detect by external monitors. Real activity manipulation consists of implementing business transactions that do not reflect optimal economic decisions but are undertaken with the objective of influencing accounting numbers (for example, applying aggressive discounts with the aim of temporarily increasing sales). Due to its nature, real activity manipulation is more difficult to detect, because monitoring bodies cannot judge the economic decisions of firms.
We find that FFs highly interested in preserving their SEW, especially those that use the name of the controlling family as part of the company name, are also those that are mainly interested in protecting their status and image in the community and would consider a loss in reputation to be "emotionally devastating". Thus, this type of family firm, if they decided to manipulate earnings around an event that provides opportunities for earnings manipulation, they would be more inclined to engage with real activities manipulation. By contrast, we observe that FFs with lower levels of SEW endowment, in particular those firms that do not use the name of the family in the company name, would be more interested in preserving their dominant position inside the firm and less worried about a loss of reputation. Accordingly, they do not use earnings manipulation strategies that may decrease the firm's future performance but opt for accrual manipulation.
Our research contributes to the understanding of FFs' dynamics since it shows that different levels of SEW endowment could be associated with different earnings management practices, even within the group of family firms. Our study emphasizes the importance of investigating the inherent heterogeneity within the group of FFs, especially between those the use the name of the controlling family as part of the company name and the those that do not, and shows how strategic choices, e.g., accounting choices in the case of our research, can vary depending on the degree of SEW.