Earnings Quality, Family Influence and Corporate Governance: Empirical Evidence from Malaysia

Abstract

This study investigates whether family ownership and control, and corporate governance are associated with earnings quality, and whether family influence in firms weakens the association between corporate governance and earnings quality. This study uses a panel sample of 527 publicly traded firms over the period 2003-2008 from the Malaysia Stock Exchange (Bursa Malaysia). Identifying family firms as firms in which family members hold a significant portion of shares and possess control over the board of directors, this study finds that family firms have significantly higher earnings quality. The results remain unchanged, even after using alternative measures of earnings quality and family influence. This study also finds that the earnings quality of firms in Malaysia is positively associated with the size and independence of the audit committee and negatively associated with the size of the board of directors. However, these relationships exist only for nonfamily firms. These results on the corporate governance variables suggest that the effectiveness of corporate governance could be mediated by family influence. Using multivariate regressions that include interaction variables for corporate governance and family firms, the study finds that the relationship between corporate governance and earnings quality is mediated by family ownership and control. The result is consistent with the argument that the monitoring role of corporate governance reduces when there is substantial control by family owners in a firm. Overall, this study concludes that family ownership and control drives higher quality earnings for firms regardless of their corporate governance structure.