2.1. Theoretical Framework
Most CSR disclosure literature relies on Institutional theory, which states that organizations behave in order to achieve external validation for their actions and legitimacy [
4].
According to the legitimacy perspective, organizations try to demonstrate that their actions are consistent with the norms and values shared by society [
31], because they are allowed to continue their operations by means of a social contract. When a company does not operate according to society’s norms, a legitimacy gap emerges [
2], putting the firm’s very durability at risk [
3,
4]. “Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially-constructed systems of norms, values, beliefs, and definitions” [
5] (p. 574). It arises when community and relevant stakeholders endorse a firm’s behavior as proper and useful [
32]; therefore, organizations engage in informing their relevant public that they act consistently with the norms and limitations of society. A firm may also disclose its intended engagement in social issues, or divert attention from sensitive issues [
6], as well as use communication to change the perception of its actions, or mask unethical behavior, or the low quality of its financial information, in order to protect or increase its legitimacy [
7]. Through the lens of Institutional theory, CSR disclosure is viewed as one of the primary means that firms use to demonstrate that they behave consistently with the expectations of the community, or relevant stakeholders, or to affect stakeholders’ perceptions of the firm with the ultimate aim of obtaining and maintaining their legitimacy to operate. A firm’s organizational legitimacy is affected by its CSR reputation as well as by its financial reputation; CSR disclosure and financial reporting are mechanisms that shape the stakeholders’ perceptions of these two reputational aspects. For this reason CSR reporting may be used as a tool for managing the reputational risk and avoid potential legitimacy gaps related to unethical practices [
12].
Organizations engage in signaling their positive qualities [
33] and therefore they behave consistently with ethic values. According to Signaling theory, an effective signal should be observable to the public and costly to imitate [
34]. As a matter of fact, organizations may use a wide range of actions to communicate positive qualities, but not all actions are efficacious as signals. Observability is related to the receiver’s ability to capture the signal; however, this characteristic, per se, is insufficient as, if a signal is imitable, the signaler will not be able to emerge from the crowd and communicate its particular qualities. Therefore, an effective signal should have a cost which cannot be absorbed by any signaler [
35].
CSR disclosure is an observable signal of a firm’s commitment to socially-responsible behavior. It is also a costly practice and its cost increases with the extension of the information provided.
The motivations underlying CSR disclosure [
21] and unethical conduct, including earnings management [
23,
24,
36,
37] in family firms, have been effectively addressed, based on the socioemotional wealth (SEW) approach. According to this relatively recent theoretical construct [
38,
39], family firms’ behaviors are led, not only by financial objectives, but are strongly influenced by the desire to preserve the socioemotional wealth, described as “the non-financial aspects of the firm that meet the families’ affective needs” [
38], i.e., the affective endowment of the owning family in the firm [
40]. Several dimensions characterize SEW [
39]—the main dimension is related to the emotional value that the owning family experiences, by exerting its control and influence over the firm. Family members feel a strong sense of identification with the company that is seen as an extension of it, and through which, it also develops social ties with a wide range of stakeholders, such as employees, suppliers, customers, lenders and the community at large. The firm is the place where family members may satisfy their needs, in terms of belonging and affect [
41]. The firm is also the means for perpetuating the family dynasty—by passing the business to future generations, family values and image survival [
39].
2.2. Literature Review and Hypotheses Development
A few studies have addressed the relationship between earnings management and CSR disclosure. There is empirical evidence for the complementary use of these practices as a response to increased political pressure [
18]. More generally, Yip et al. [
19] suggest that the relationship between earnings management and CSR disclosure is context-specific. They argue that firms in industries with higher political costs show a positive relationship between CSR disclosure and earnings quality, whilst firms in industries with lower political costs employ CSR disclosure as a substitute for low-quality earnings. According to legitimacy arguments, firms involved in earnings management might be more prone to engaging in environmental disclosure, in order to generate the perception that their behavior is environmentally sensitive, and to divert attention from earnings manipulations. However, the literature has not found significant statistical evidence to support this motivation as a factor in explaining a firm’s attitude towards environmental disclosure [
20]. To the best of our knowledge, there are no studies addressing the relationship between earnings management and the extent of CSR disclosure in family firms, although extant literature suggests interesting differences between family and non-family firms, both for CSR disclosure behavior and for earnings management practices.
Over the past decades, the literature has widely engaged in the analysis of the determinants of CSR disclosure [
1,
31,
42,
43], but few studies have addressed this issue by focusing on family firms’ behaviors. Campopiano and De Massis [
21] analyzed the CSR disclosure behavior of 98 private and listed family and non-family firms, taking into account a wide range of communication types. Their sample focused on family-controlled companies, whose management is directly influenced by the presence of at least one family member. They found that family firms, relative to their non-family counterparts, are less compliant to Global Reporting Initiative (GRI) standards, but that they adopt a wider variety of CSR reports, as they want to increase actions which may benefit their reputation and improve the dialogue with their stakeholders. They also pointed out that family firms devote attention to different topics—in particular, they are more focused on those related to the environment and philanthropy, in order to protect their socioemotional wealth. Other studies have confirmed that family firms, in comparison with non-family companies, tend to put more emphasis on their involvement in philanthropic activities that give great visibility to the name of the family, promote its image and reinforce its reputation among the public and in the local community [
44].
Research on sustainability reporting highlights heterogeneity in family business disclosure [
22]. It points out that family control increases sustainability reporting when the family exerts a direct influence on the business, by appointing a family CEO, or by having the founder on the board; family ownership stake,
per se, without family involvement on the board, negatively affects sustainability disclosure extent. Consistent with this, Cuadrado-Ballesteros et al. [
45] found that a higher proportion of independent directors on the board lowered the transparency of CSR disclosure in family firms. There is also empirical evidence that social and environmental disclosure in family firms is more affected by media-exposure than in non-family businesses, as they are particularly concerned with the effect of visibility on reputation [
22].
The above-mentioned motivations towards CSR disclosure behavior may also affect earnings management attitudes. Family firms are characterized by the owner family exerting more direct control over the board’s activities, often by appointing family members as directors or having a family CEO, thereby reducing the incentive for managers to manipulate earnings for their own self-interest [
46]. On the other hand, boards tend to be less independent and this fact undermines their monitoring of the controlling family, which may have more incentives for managing earnings, in order to expropriate minority shareholders [
47,
48,
49], although a family firm’s long-term perspective tends to moderate this behavior [
50,
51]. Regarding the effect of family ownership on earnings management, empirical findings are divergent. Wang [
52] provides evidence of a negative association between founding family ownership and the level of abnormal accruals, even if the higher quality of earnings in family firms may be due either to the alignment between the interests of the founding family and those of other shareholders, or to the demand for higher-quality earnings from other shareholders, as compensation for weaker corporate governance mechanisms. Alternatively, Yang [
53] highlights that the level of family ownership is negatively related to earnings quality, suggesting that the entrenchment of controlling families is detrimental to minority shareholders. Moreover, at a given level of family ownership, non-family CEOs have a higher propensity to engage in earnings management than family CEOs, since family firms rely more on earnings-based compensation plans to monitor and motivate these subjects than they do for family CEOs. Research has also examined the effect of certain corporate governance characteristics on earnings management, showing that board independence lowers earnings management. However, this effect is weaker in family than in non-family businesses, notably when the CEO is a family member. These findings suggest that, in family firms, even independent directors behave according to the owning family’s will [
45,
54,
55]. Consistent with these results, there is also evidence from the high-tech industry in Taiwan that board independence moderates a family business’s propensity to resort to earnings management, but the effect is reversed in the presence of CEO duality [
56]. Family and non-family firms show, instead, a similar attitude to using earnings management via R&D cost capitalization, in order to avoid debt covenant violations, since family firms, to preserve the control of the owning family over the firm, distinctly prefer debt than equity capital and act to not harm the long-term relationships with lenders [
28].
More recently, research has referred to the socioemotional wealth perspective, in order to study earnings management practices in family and non-family companies [
24], providing evidence that the former are more prone to downward earnings management by means of higher negative discretionary accruals. Further, they tend to use real earnings management less than their non-family counterparts; an attitude that is accentuated when the founder serves as CEO. This behavior allows family firms to pay out lower dividends and turn resources into investments that increase a firm’s future value, which is also protected from the detrimental effects that real earnings management generates in the long term. Other studies demonstrate that non-acquired family firms exhibit higher earnings quality than acquired family firms, because the former are inclined to avoid unethical practices, such as earnings management, due to closer identification of the family owners with the firm. This leads them to protect the firm’s reputation and, thereby, the family’s reputation, from the negative effects of earnings manipulation falling into the public domain [
36]. Focusing on private family firms, Stokmans et al. [
37] revealed that the need to preserve control over the firm, and subsequently, the SEW, is stronger in first-generation family firms and in founder-led family firms, compared with, respectively, subsequent-generation family firms and descendant-led family firms or externally-led family firms, notably when lenders want to protect their interests by placing covenants or appointing non-family members to the board. In such situations, the first type of family firm shows a greater propensity to use earnings management, in order to increase reported earnings when economic performance is negative or poorer than the prior year’s performance. Martin et al. [
23] found that family firms, compared with non-family firms, are less prone to engaging in earnings management practices, because they are more averse to the risk of earnings manipulations being detected. Such an event would harm the firm’s image and cause a loss in SEW. Further, it would give rise to serious economic consequences, as the family’s wealth is mainly concentrated in the firm. Unlike Stokmans et al. [
37], Martin et al. [
23] point out that the stronger intensity of SEW in founder-family firms, compared to subsequent-generation family firms, explains the lower degree of earnings management of the former. Founder owners are more committed to creating opportunities for the future growth of the firm and to building its reputation than are later generations, so they are mindful of putting their project at risk, which would be the case if questionable practices were revealed. In a similar way, for family owners of smaller firms, due to their closer involvement in the business—which reinforces the sense of identification with the firm—the protection of SEW leads to the avoidance of unethical behaviors, such as earnings management. Conversely, an increase in firm size often results in a loss of control that reduces the intensity of SEW and leaves room for such misconduct.
Extant literature highlights family firms’ distinct reputational concerns [
57], as they are aware that internal and external stakeholders perceive the company as an extension of the family [
39]. Therefore, they are more committed to preventing damage to their constituents [
58], they take more care of stakeholders’ needs [
59] and, for the same reason, they exhibit higher financial information transparency [
23]. Nevertheless, a family firm may be motivated to manage reported earnings in order to preserve the owning family’s financial and non-financial wealth. A family company may manage reported earnings downward, in order to reduce dividends and/or taxation, so as to preserve self-financing, and, therefore, family control [
24], to the detriment of non-family shareholders and the state. On the other hand, a family firm may manage earnings upward, in order to prevent lenders interfering with board member appointments or covenant restrictions, or even to reduce the capability of raising debt financing, which might put family influence and control at risk [
28,
37]. A family business may also inflate reported earnings in order to increase a CEO’s earnings-based compensation, particularly in the presence of a non-family CEO [
53].
This unethical behavior, if detected, may seriously compromise a firm’s image and the owning family’s reputation—which are strictly linked [
39]. A firm may try to divert attention from negative attributes, and/or conduct, which may generate damage. This is done by means of camouflage signals stating organizational legitimacy [
60], such as CSR disclosure, as society positively values firms that engage in reporting their socially-responsible behaviors [
61]. There is also evidence that family firms are particularly committed in stakeholders’ proactive engagement [
62] and that they benefit more significantly than their non-family counterparts from disclosing their involvement in CSR, in terms of market value, as their stakeholders perceive CSR disclosure as a positive signal of ethical commitment [
25]. For the same reasons, family firms are less prone to engaging in unethical practices, such as earnings management, than non-family firms [
23]. Given the owning families’ concerns for reputation and image preservation [
59], we expect that when family firms are involved in earnings management, they are more engaged in CSR disclosure than their non-family counterparts, as they are more motivated to highlight that their behavior complies with stakeholder expectations.
Hypothesis 1. In instances of earnings management practices, family firms are more prone than non-family businesses to resort to CSR disclosure.
Literature suggests that more visible firms, in terms of size or media exposure, attract attention from a broader community and that they react to visibility pressure through a greater commitment to social and environmental disclosure [
43,
63,
64,
65,
66,
67]. An increase in a firm’s size also fosters the capability to absorb signal costs in terms of CSR disclosure extent. However, size may be a SEW moderator, as the management of larger firms implies the involvement of non-family members [
30]. However, on the other hand, the potential reputational damage is higher for larger firms as they are more visible and more exposed to social scrutiny [
43,
65]. Family firms are particularly committed to avoiding the negative impacts of reputation loss [
68] and the visibility of the family is positively associated with the family’s concern for firm reputation [
69]. We therefore expect that, in cases of earnings manipulation, the effect of a larger size on CSR disclosure, is stronger for family than for non-family firms.
Hypothesis 2. Size effect on the relationship between CSR disclosure and earnings management is higher for family than non-family firms.