Family control, socioemotional wealth and financial reporting under adversity

Disclosure of financial data is subject to substantial managerial discretion and for this reason it may be subject to opportunistic reporting. Income smoothing in particular is not illegal, yet it may be used in a manipulative fashion to level fluctuations in net income across reporting periods and thus project a more consistent earnings flow over time under crisis or bad financial conditions. Using a large data set of 4634 firm year observations during a period that included the “Great Recession” of 2008, we support the hypothesis that family firms are less likely to engage in income smoothing when the firm is experiencing external shocks and financial pressures. Furthermore, this more transparent family reporting practice is positively associated with future financial performance.