Conservatism and monitoring by founding family owners

We study the role of conservatism in monitoring managers by founding family owners, the most predominant type of large, under-diversified shareholders in the U.S. We focus on the ownership of founding family members who are not CEOs. Unlike owners with diverse ownership or institutional investors, family owners have both the incentives and the means to monitor CEOs. While conservatism can facilitate family owners' monitoring of managers by reporting bad news earlier, it might be less important for family owners given that they can more directly monitor managers. Therefore, it is unclear ex ante whether conservatism increases with the ownership of family members who are not CEOs. Using an accrual-based measure of conservatism, non-operating accruals, we find that conservatism is positively associated with non-CEO family ownership and non-CEO family directorship, consistent with conservatism facilitating family owners' monitoring of CEOs. However, we find the opposite when the founder serves as the CEO. This is consistent with other family members' inability or unwillingness to monitor the founder CEO. The above results continue to hold after we control for CEO ownership, board independence, outside director ownership, and firm age. Our findings extend the recently developed literature on the monitoring role of conservatism.