The Persistent Effects of Kinship on Financial Reporting

While prior studies show that financial reporting is shaped by many jurisdiction level attributes, these attributes are highly interdependent and not much is known about the fundamental primitives underlying firms' reporting practices. Using a sample of more than 70 jurisdictions, we show that firms in jurisdictions with tighter ancestral kinship structures have lower financial reporting transparency, measured by earnings management and accounting conservatism. Differences in kinship tightness explain 33 percent and 29 percent of the variation in earnings management and accounting conservatism, respectively. An instrumental variable approach exploiting the Western Church's transformation of kinship system yields consistent inference. The effect of kinship structure on financial reporting transparency is persistent over time. The market reaction to restatement announcements is higher for firms in jurisdictions with tighter kinship structures. Our results suggest that a jurisdiction's historical kin-based institutions - our species’ most fundamental institutions have a large, long lasting, and likely casual influence on contemporary accounting practices.