CEO career horizons and earnings quality in family firms

Abstract

PurposeThe present study examines the effect of the chief executive officer (CEO) career horizon (CH) problem on earnings quality (ERN) for selected family-controlled firms known to have a unique operational goal.Design/methodology/approachThe generalised method of moment linear regression model was used on a sample of family-controlled firms in Malaysia from 2005 to 2016.FindingsThe study found a negative relationship between CH and ERN, measured by earnings persistence and earnings predictability. However, in the earnings predictability model, the reverse was found to be the case after interacting CH with CEO family affiliation, CEO experience and CEO equity. However, the use of a reputable auditor could not mitigate the CH problem. Also, the study obtained a closely related result in the earnings persistence model. The result aligns with the socio-emotional wealth (SEW) theory, which states that the goals of family-controlled firms go beyond financial objectives to include other non-financial objectives, and hence, their commitment to perpetuating their dynasty encourages them to preserve the quality of their earnings.Originality/valueExisting studies on family firms and ERN have treated family firms as homogeneous entities by comparing family and non-family firms, using the underlying theoretical justification of the agency theory. However, this study departs from the agency theory, by considering those factors (i.e. the extent of CEO alignment with family owners and the choice of auditor), using the SEW theory, which establishes the differences among family firms. This work builds on that of Chen et al., (2018) and Ali and Zhang (2015), which suggested that corporate governance can mitigate the CH problem. Therefore, the strength of a CEO's attachment to the family firm (measured by CEO equity ownership and CEO affiliation to family members in family firms) and the choice of the auditor can explain the variation in the effect of the CH problem in family firms.

Board governance mechanisms and sustainability reporting quality: A theoretical framework

“…board gender diversity, board communication, board integrity, politically connected firms, external assurance) and SRQ. (3) That FCFs moderates the relationship between the board attributes and SRQ (Bansal et al, 2018;Che-Ahmad et al, 2020;Hashmi et al, 2018). Consequently, this study contributes to the body of knowledge through the examination of these board attributes that have received the least scholarly attention in terms of SRQ in the context of this study.…”

“…Thereby, having more attachment for non-economic values (family image and reputation, firm continuity, future generation considerations, building social legitimacy, and others) and with more motivation to be responsible sustainability wise (Cui et al, 2018;Zellweger et al, 2012). Consequently, several studies in both developed and emerging economies have documented that FCFs demonstrates better performance in both financial and sustainability commitments compared to the non-family counterparts (Abdul-Manaf et al, 2013;Amran & Che Ahmad, 2014;Bansal et al, 2018;Che-Ahmad et al, 2020;Cui et al, 2018;Gavana et al, 2017;Lourenço et al, 2019). Such performance is credited to family firms due to their uniqueness 9 in terms of the style of governance (Abdul-Manaf et al, 2013).…”

“…That is, where there is a mixed or an inconsistent relationship between the IV and the DV, an interaction term through an indirect effect possibly could explain the scenario (Baron & Kenny, 1986). Moreover, choosing FCFs as an interaction term is to replicate the works of Bansal et al (2018) which used a sample from 29 countries; Hashmi et al (2018) in Pakistan; and Che- Ahmad et al (2020) in Malaysia who employed family firms as moderating variable in their investigations. These authors discovered that family firms could moderate board attributes like board independence, political connection, and CEO career horizons in their associations with CSR disclosure and earnings quality.…”

The development of corporate governance literature in Malaysia: a systematic literature review and research agenda

“…Furthermore, some scholars took their research a step further by using the moderating impact of firm characteristics on this association, such as audit committee attributes (Al-Rassas and Kamardin, 2016), family ownership (Abdullah and Ismail, 2016), firm size (Ali et al , 2008) and CEO characteristics (Che-Ahmad et al , 2020). These studies provided empirical evidence that CG variables and some of the firms’ characteristics have an interactive influence on earnings management (Al-Rassas and Kamardin, 2016; Ali et al , 2008).…”

“…Furthermore, the GMM estimation technique is considered an efficient estimator, as it creates the first difference of all variables to address the endogeneity issue, which is well documented in the governance literature. Interestingly, only four studies applied GMM estimation in the sample literature (Al-Jaifi et al , 2017; Che-Ahmad et al , 2020; Kallamu and Saat, 2015). GMM estimation controls unobservable heterogeneity, simultaneity and the influence of past performance on the present firm’s decisions (Che-Ahmad et al , 2020).…”