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The corporate governance literature advances the idea that certain aspects of a board of directors’ structure improve the monitoring of managerial decisions. Among these decisions are a manager’s policies about managing earnings. Prior studies have shown that earnings management in widely held public companies is less prevalent when there is a high level of board independence. However, there is less evidence regarding the effectiveness of board independence on earnings management in family-controlled companies. This issue is particularly interesting as such companies are susceptible to various types of agency concerns. It is the purpose of this study to shed light on the earnings management issue in family-controlled companies characterized by potentially lower board independence and a higher risk of collusion. In this study, board independence is estimated by two parameters: (1) proportion of independent directors on the board; and (2) lack of chief executive officer (CEO)–board chairman duality function. Our empirical results provide evidence that the impact of board independence on earnings management is indeed weaker in family-controlled companies. The same result also holds for the lack of CEO– board chairman duality function. Such effects become stronger in cases in which the CEO is a member of the controlling family.

Manuscript Type: EmpiricalResearch Question/Issue: This paper focuses on the relationship between one of the main corporate governance dimensions -ownership structure -and income smoothing. The paper investigates whether family-controlled companies differ from non-family-controlled companies with respect to income smoothing. Due to different incentives of management and owner investment horizons, we hypothesize that income smoothing is less likely among family-controlled companies than among non-family-controlled companies. Additionally, we hypothesize that among family-controlled firms income smoothing is less likely when CEO and Board Chairman are members of the controlling family. Various definitions of "family control" are applied. A sample of Italian listed companies is used for the empirical analysis. Research Findings/Insights: We find evidence that income smoothing is less likely among family-controlled companies than non-family-controlled companies. Moreover, among family-controlled companies, income smoothing is less likely for firms whose CEO and Board Chairman are members of the controlling family. Theoretical/Academic Implications: This paper fills a gap in the literature, suggesting that not only the level of ownership concentration or insider ownership but also the nature of the dominant shareholder (family versus non-family) should be considered when addressing the motivations for income smoothing. Furthermore, our findings indicate that agency theory and stewardship theory are complementary in explaining the role played by family control in income smoothing decisions. While in non-family-controlled companies the traditional owner-manager agency problems tend to prevail and motivate income smoothing, in family-controlled companies such agency issues become less relevant and a stewardship attitude emerges, rendering income smoothing less likely. Practitioner/Policy Implications: This study is of interest to financial statement users, including analysts and investors, as it shows that different company types (e.g., family versus non-family) have a different attitude towards income smoothing. In particular, these results aid users in interpreting the company's reported profitability and its potential variability. The conclusions also are of interest to auditors when evaluating the reliability of the reported income of companies characterized by various ownership structures.

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I. INTRODUCTIONWHEREAS THE COSTS OF STOCK SPLITS are readily apparent (e.g., stock issue taxes, listing fees, mailing costs), the benefits accruing to holders of split shares are less evident.' Several rationale for stock splits have been offered including: (1) increased marketability of firms' shares, (2) conveyance of information regarding superior investment opportunities, (3) increased ownership base to avoid mergers, (4) increased product sales, and (5) improved employer/employee relations.2 Market lore dictates that the first argument, the "marketability" criterion, is paramount. Its proponents maintain that stock splits, per se, benefit shareholders by increasing securities' popularity and marketability via bringing share prices into more favorable trading ranges.3'4 The finance literature has concentrated upon the second, the "information content," argument as the motivating force behind stock splits. Advocates of this position contend that stock splits only provide shareholders with lasting benefits when followed, or accompanied, by favorable financial information such as superior investment opportunities expected to result in increased future earnings and cash dividends.As early as 1956, C. Austin Barker [4] examined stock splits and showed that rates of return are substantially higher to holders of split shares undergoing cash dividend increases, but not to holders of split shares not culminating in increased total cash dividends. Perhaps the best known "information content" study was undertaken by Fama, Fisher, Jensen, and Roll [8] (hereafter FFJR). Using the capital asset pricing model developed by Sharpe [16] and Lintner [13], FFJR confirmed Barker's earlier findings regarding the effect of cash dividend changes. To ascertain each split security's "abnormal performance" around the time of a split (i.e., its rate of return unaccounted for by the security's ordinary risk-return relationship vis-a-vis the market), FFJR estimated systematic risk after eliminating * Baruch College, City University of New York, and The University of Iowa respectively. The authors are indebted to Eugene Fama, Richard Kolodny, Michael Rozeff, Ashok Vora, and Keith B. Johnson and Marshall Blume, referees of this journal, for their valuable comments and suggestions. Any remaining errors and omissions remain with the authors. 1. These costs and others are discussed by Sosnick [17]. 2. For an exposition of these arguments, see Bellmore and Blucher [6]. 3. While Johnson [12] contends that stock splits, per se, benefit investors, Hausman, et al., [10] show that, contrary to Johnson's conclusions, investors in split shares cease to benefit once the split is announced. 4. The marketability argument can be found in Accounting Research Bulletin 43 (Chapter 7B, Paragraph 2): "...(a stock split) is prompted mainly by a desire to increase the number of outstanding shares for the purpose of affecting a reduction in their price and thereby, of obtaining wider distribution and improved marketability of the shares." 1069