The Influence of Blockholders , Bondholders and Families on the Venturers ’ Accounting Behavior

Relying on the opportunistic view of contracting theory, the paper explores the influence of blockholders, bondholders and families on the managerial accounting for interests in jointly controlled entities. In particular, it assumes that the equity method is an opportunistic accounting choice as it improves firm performance and induces managerial self-dealing rather than efficient contracting. The paper examines a sample of Italian listed companies holding interests in jointly controlled entities through a logistic regression analysis. Findings show that the family influence encourages the opportunistic choice of equity method, while the monitoring role played by blockholders and bondholders discourages the use of the performance-improving technique. The research contributes to the literature on contracting theory and corporate governance and has also practical implications for evaluating the appropriateness of IFRS 11.


Introduction
The accounting for jointly controlled entities (hereafter JCEs) has always been a debated issue for scholars, practitioners and regulators (Catuogno, Allini, & D'Ambrosio, 2015a).Even after the issuance of IFRS 11 "Joint Arrangements" (that removes the proportionate consolidation to increase comparability within IFRS and convergence with US GAAPs), the reporting of JCEs remains a controversial accounting topic as witnessed by the ongoing academic debate that does not support the IASB conclusions and brings to light the necessity of additional research (Lourenço, Fernandes, & Curto, 2012;Demerens, Manh, Delvaille, & Paré, 2014;Leitner-Hanetseder & Stockinger, 2014).A further proof on the relevance and timeliness of the JCEs' reporting is also provided by the IASB's intention to start a post-implementation review of IFRS 11 in 2016, so as to obtain information on unexpected costs or difficulties related with the transition towards the equity method.
On the basis of these premises, previous studies have investigated the determinants behind the accounting options for JCEs before the issuance of IFRS 11 (e.g.Lourenço & Curto, 2010;Giner & Veron, 2012;Catuogno et al., 2015a).Nevertheless, none of them has still questioned whether the choice of equity method may conceal managerial opportunistic behavior rather than efficient contracting when some corporate governance determinants occur.The paper builds on the opportunistic view of contracting theory and explores the effect of family influence and monitoring by blockholders and bondholders on managerial accounting behavior.ownership and financial structure of firms.Indeed, it may be considered as representative of a family business environment in which family members play a relevant role in ownership, management and board composition (Zattoni, 1999).Moreover, in this country, debt contracts represent the main source of financing (Di Pietra, Gambovas, Raonic, & Riccaboni, 2008;Miller, Catuohhilli, & Corbetta, 2013).Lastly, a content analysis on the comment letters submitted to the IASB after the publication of the joint venture project "ED 9" by preparers, accounting professions, investors, national standard setters and market regulators, has pointed out that Italy strongly disapproved the withdrawn of proportionate consolidation.Indeed, according to the Italian respondents, on the one hand, the proportionate consolidation better represents the JCEs' business; on the other hand, the equity method results in the omission of important elements from financial statements, such as indebtedness (Alexander, Delvaille, Demerens, Le Manh-Béna, & Saccon, 2012).
Relying on a logistic regression, this paper shows that the managerial opportunism drives the equity method choice.After controlling for a number of variables, the empirical results highlight that, while the growing family influence fosters the opportunistic selection of equity method, the monitoring role played by dominant shareholders and bondholders discourages the use of the performance-improving accounting technique.
The research has both theoretical and practical implications.In detail, the paper contributes to the contracting theory and the governance literature and addresses the general call for more research on the proper accounting for JCEs (Alexander et al., 2012;Demerens et al., 2014).In this sense, it provides a contribution to the international standard setting debate by offering evidence on the managerial opportunism in the adoption of equity method.
The remaining paper unfolds as follow.Section 2 provides the theoretical background.Section 3 formulates the research hypotheses.Section 4 describes the research sample and the variables.Section 5 shows the results.Section 6 concludes and suggests directions for future research.

Theoretical Background: Managerial Opportunism in Accounting Choices
The contracting theory assumes that managers select particular accounting procedures, either efficiently to attain corporate objectives (i.e.maximize firm value or minimize political exposure and agency costs) or opportunistically to manipulate earnings and reflect accounting numbers for their own benefit (Watts & Zimmerman, 1978;Holthausen, 1990).
The extent of efficiency and opportunism depends on the monitoring devices over managerial accounting discretion.In this sense, the efficient contracting view predicts that accounting practices evolve to mitigate contracting costs by addressing potential conflicts of interests between types of parties.Differently, the opportunistic view suggests that managers choose accounting policies for their own benefit which depends on debt covenants, political costs and bonus plans (Watts & Zimmerman, 1986;Holthausen, 1990).
Most empirical studies on accounting choices mainly focus on their effects on firm income and provide evidence on the incentives to choose income-increasing accounting methods related to leverage and bonus plans (Abdel-Khalik, 1985), as well as to choose income-decreasing accounting treatments related to political visibility and tax minimizing purposes (Karampinis & Hevas, 2013;Beuselinck & Deloof, 2014).This paper builds on the opportunistic view of contracting theory as a focal point to support the discussion on the managerial choice for the accounting treatment of JCEs.
In this sense, before the debated issuance of IFRS 11 revised, the reporting of JCEs followed two accounting treatments allowed by IAS 31: the proportionate consolidation and the equity method.Under the former, the venturer's proportionate share of the JCE assets, liabilities, revenues and expenses are added to its own items in the consolidated financial statements.Under the latter, JCEs are reported as a single line item investment in the statement of financial position, net income, changes in equity and statement of comprehensive income.
It is worth noting that accounting literature suggests that the proportionate consolidation is especially informative for a number of reasons.In particular, it provides a comprehensive view of the venturer financial position and its incumbent risks and rewards (Dieter & Wyatt, 1978).Moreover, it appears useful in predicting future returns on shareholders (Graham, King, & Morrill, 2003) and it is also relevant for explaining price volatility (Kothavala, 2003).Thereby, it offers relevant financial statement measures for bond risk premiums and bond ratings (Stoltzfus & Epps, 2005), avoiding the loss of relevant and forecasting information (Soonawalla, 2006;Bauman, 2007).
Differently, the equity method aggregation leaves out accounting numbers of joint venture, compared to the proportionate consolidation.Indeed, under the equity method, total assets and total liabilities are always lower, and the magnitude of the joint venture indebtedness is hidden.In addition, the leverage of the venture, as reflected by the liabilities to equity, results in a lower percentage (Astami & Tower, 2006).The same effect occurs in the statement of comprehensive income, being revenues and expenses always lower.This phenomenon produces a higher profitability for the venturer, measured in terms of profit margin, as reflected by net income to revenues (Davis & Largay III, 1999;Kothavala, 2003;Lourenço & Curto, 2010).
On the basis of these theoretical assumptions, and arguing that the equity method is a performance-improving accounting technique, the paper assumes that this treatment can be considered opportunistic since it induces managerial self-dealing rather than efficient contracting.
Following the corporate governance literature (Zattoni, 1999), this paper explores the effect of family influence and monitoring role of both blockholders and bondholders on the managerial accounting behavior.
In general terms, controlling shareholders have the incentive to monitor managers and maximize shareholder value (Jensen & Meckling, 1976;Shleifer & Vishny, 1986).Nevertheless, especially in family firms, large blockholders manage the company they control and a problem of separation between ownership and control arises.Indeed, top managers are usually part of the controlling family and have the power to expropriate minority shareholders (La Porta, Lopez-De-Silanes, & Shleifer, 1999), showing an opportunistic behavior.However, the above mentioned conflicts can be hampered or even mitigated when the company is financed by bond issuing.On the one hand, the presence of bondholders may provide incentives for managers to choose opportunistic accounting techniques aimed at improving firm financial position and creditworthiness.On the other hand, the managerial opportunistic use of the accounting treatment can be discouraged by the monitoring role of bondholders and the related market authorities.

The Influence of Blockholders
There is considerable evidence that large shareholders play an active role in the corporate governance process (Shleifer & Vishny, 1997).
Literature suggests that managers of firms characterized by a dominant shareholder may experience less discretionary power (Dhaliwal, Salomon, & Dan Smith, 1982;La Porta et al., 1999;Ahmad-Zaluki, Campbell, & Goodacre, 2011).In this sense, ownership concentration is likely to reduce agency problems by increasing the level of internal monitoring.Indeed, ownership concentration over one or few investors leads to more efficient and direct supervision on managerial behavior and prevents opportunistic selection of accounting techniques for their personal benefits.Thereby, under this view, managers of blockholder-dominated firms are less likely to opportunistically choose accounting techniques that improve the firm profitability.
Scholars have tested the relationship between blockholder monitoring and managerial discretion but the empirical evidence is inconclusive.Whilst some studies find a negative correlation (Yeo, Tan, Ho, & Chen, 2002;Missonier-Piera, 2004;Astami & Tower, 2006), other research reports a non-significant association between blockholder monitoring and managerial discretion (Davidson, Goodwin-Stewart, & Kent, 2005;García-Meca & Sánchez-Ballesta, 2009;Waweru, Ntui, & Mangena, 2011).This paper assumes that the presence of blockholders can be seen as an effective internal monitoring mechanism to constrain managerial discretional use of equity method that opportunistically improves profitability and leverage ratios.Therefore, a negative relationship between blockholder monitoring and choice of equity method can be predicted by hypothesizing that: HP1: The presence of blockholders reduces the likelihood of choosing the equity method for the accounting treatment of JCEs.

The Influence of Families
Controlling families are usually appointed to the board of directors or even fulfill a CEO position (Markarian, Pozza, & Prencipe, 2008).Families are a unique class of shareholders as they typically hold undiversified portfolios, show concern over firm and family reputation, and have substantially long term investment horizons.Family influence can occur via the extent of their ownership, governance and managerial involvement in the company (Astrachan, Klein, & Smyrnios, 2002).In spite of the growing attention to the effects of family ownership (Poutziouris, O'Sullivan, & Nicolescu, 1997;Chrisman, Chua, & Sharma, 2005), the research on their influence on accounting choices is still limited.
Two different sides of the optimal contracting view are often used to predict the managerial behavior in family firms.According to the alignment perspective, the family involvement is beneficial for companies as it mitigates the overall agency problems and reduces managerial incentives to report accounting information that deviate from the underlying firm's economic performance (Jensen & Meckling, 1976;Fama & Jensen, 1983;Chrisman, Chua, & Litz, 2004;Salvato & Moores, 2010).Differently, the entrenchment perspective (Morck, Schleifer, & Vishny, 1988;Morck & Yeung, 2003) predicts that the family involvement has the potential to increase agency threats as dominant inside shareholders can expropriate the minorities' wealth through earnings management.This is especially true when governance mechanisms do not work properly (Catuogno, Saggese, Sarto, & Viganò, 2015b).
On the basis of the confounding results on the influence of families on accounting choices, a non-directional hypothesis can be formulated: HP2: The family influence affects the likelihood of choosing the equity method for the accounting treatment of JCEs.

The Influence of Bondholders
Prior literature links financial debt and accounting policy choice because debt covenants are usually based on reported accounting numbers, and violations of debt covenants impose costs (Dhaliwal et al., 1982;Holtausen & Leftwick, 1983).In this sense, accounting decisions are influenced by the creditors' use of accounting data in their loan agreements and lending decisions.Thereby, managers aiming at reducing debt covenant costs and improving firm financial position may adopt the accounting methods that display favorable financial statements in terms of creditworthiness.Furthermore, managers may try to improve the firm's financial flexibility in order to prevent the reporting of a financial distress position.These considerations become more relevant when the firm uses bonds as financing solution.
Many scholars hypothesize that high contracting costs, in the form of bond covenant limitations on leverage (a typical public debt restriction), provide incentive for managers to choose accounting techniques aimed at avoiding constraints (Leftwich, 1981;Labelle, 1990;Beneish & Press, 1993).Indeed, the selection of accounting techniques that positively affect the company reported performance can decrease the probability of lending agreements violation as financial ratios are used in the definition of bond covenants (Thornton & Bryant, 1986;Demerjian, 2011).
However a political visibility argument, similar to that originally proposed by Watts and Zimmerman (1978), may also apply.In this perspective, firms issuing corporate bonds undergo the monitoring of the National authorities in charge of supervising the investors' safeguard and the financial market transparency as well as the market authority for listed companies.Indeed, regulatory agencies are likely to impose more stringent inspection on the managerial opportunism of firms using public debt.In this sense, venturers issuing bonds are more vulnerable to political pressure by market monitors and regulators.In particular, the monitoring role played by bondholders and related market authorities may discourage the managerial opportunistic use of the equity method that produces a cosmetic improvement in profitability and leverage ratios.
Taking into consideration both the contracting costs and the political visibility arguments, it can be hypothesized that: HP3: The presence of external bondholders affects the likelihood of choosing the equity method for the accounting treatment of JCEs.

Sample and Data Collection
To test the hypotheses, the paper relies on firms listed on the Italian Stock Exchange.A focus on Italian companies is timely because of the pervasiveness of blockholder dominated, family controlled and highly leveraged firms (Shleifer & Vishny, 1997;Linciano, Ciavarella, & Signoretti, 2014;Pagano, Panetta, & Zingales, 1996).
The sample consists of 257 firm-year observations of Italian listed companies that report interests in JCEs in their financial statement for the fiscal year-ends between 2008 and 2012.The sample selection procedure is shown in Table 1, while Table 2 provides the industry composition and the distribution of firms using equity and proportionate accounting methods.Data is hand-collected from financial statements and corporate governance reports of each company.

Variables
The hypotheses are tested by a multiple regression analysis.In particular, the paper uses a logistic regression since it is especially appropriate when the response variable follows a binomial distribution (McCullagh & Nelder, 1989;Agresti, 2013), and applies a Generalized Linear Mixed Model (GLMM) with the logit function as link function (or mixed-effects logistic model) (Lee, Nelder & Pawitan, 2006).The Equation model is the following and it is applied controlling for year and industry as defined according to the SIC codes.
The variables are defined as follow.
The dependent variable represents the reporting method for the accounting interests in JCEs used by venturers in their annual financial statement.In line with the results of the literature review, the use of the equity method for reporting JCEs is assumed as a proxy for the managerial opportunism in accounting choice.Hence, EQUITY_METHOD is defined as a dummy variable that is equal to 1 if the venturer chooses to report interests in JCEs by the equity method and 0 if the venturer reports interests in JCEs by the proportionate consolidation method.
BLOCK_MON is the dependent variable that proxies for the blockholders' influence.The international accounting literature generally considers the threshold of 10% or more of the voting rights as symptomatic of the presence of a controlling shareholder (Dhaliwal et al., 1982;Chen & Jaggi, 2001;Park & Shin, 2004).Since scholars report that, in Italian listed firms, the average and the median ownership concentration approximate to 51% of total voting rights (Zattoni, 1999;Cascino et al., 2010), the paper uses a more stringent threshold to define the dominant shareholder.The variable is a dummy that assumes value 1 if the ultimate shareholder owns more than 50% of the total voting rights and 0 otherwise.
FAM_INFLUENCE captures the family influence and is measured by the F-Pec score (Astrachan et al., 2002).
The primary advantage of this measure is grouping into a single index a series of dimensions suggested by the literature, namely the family ownership and the family involvement into the board of director and the top management team (Jaskiewicz, Gonzales, Mendez, & Schiereck, 2005;Caselli & Gatti, 2006;Giovannini, 2010).
BOND_HOLDER is the proxy for the presence of bondholders and is measured as a dummy variable that assumes value 1 if the venturer reports own corporate bonds in its financial statement and 0 if no bonds are issued over the year.
In order to take into consideration the organizational aspects that affect the accounting choices, the model is applied controlling for the following variables: (i) JCE_TYPE, (ii) SIZE, (iii) LEV.
JCE_TYPE measures the type of JCEs.Similarly to Lourenço and Curto (2010), information on each JCE's business and the venturers' business are collected from their Notes to financial statement or from their website.
When the business of the venturer is different from that of other venturers, the JCE is a case of heterogeneous cooperation and is therefore classified as a Link JCE.Differently, when the venturers undertake a similar business, the JCE is a case of homogeneous cooperation and is classified as a Scale JCE.Thereby, JCE_TYPE is defined as a dummy variable that assumes value 1 if the majority of JCEs is Scale and 0 if the majority of JCEs is Link.
Since the magnitude of political costs is related to firm dimension, the model is applied also controlling for firm size (SIZE) as measured by the logarithm of total sales (Patelli & Prencipe, 2007).Indeed, the visibility of large companies, especially in terms of available wealth, tends more easily to attract the attention of numerous stakeholders including politicians, regulatory bodies, customers, and competitors (Waweru et al., 2011).Consequently, managers of large politically sensitive firms are more inclined to make accounting choices so as to avoid or minimize political costs and political pressures (Missonier-Piera, 2004).
LEV is the proxy for indebtedness, measured by long-term financial liabilities to equity (Astami & Tower, 2006).In this sense, empirical studies show recurrent associations between accounting choices and firm leverage as a proxy for the proximity to violation and the debt covenant costs (Fields, Lys, & Vincent, 2001).
Table 3 provides the variable definition and the source of data.

1 Descriptive Statistic
Table 4 shows the descriptive statistics while table 5 presents the correlation matrix among the numerical variables.It is worth noting that EQUITY_METHOD has a mean value of 0.491 and a standard deviation of 0.500.This means that the accounting treatment adopted by venturers is equally distributed across proportionate and equity method.Differently, BLOCK_MON has a mean value of 0.563 and a standard deviation of 0.496 as sample firms are characterized by a notable ownership concentration.FAM_INFLUENCE varies between 0 and 1.329 and presents a mean value of 0.408, while the variable BOND_HOLDER has a mean value of 0.479 and a standard deviation equal to 0.501, suggesting that firms issuing bonds are approximately 48%.

Regression Model
Table 6 shows the regression analysis using three different models.In particular, the model in column 1 includes the predictors and the firm level controls, while the model in column 2 adds the control for industry and JCE type.Finally, column 3 illustrates the full model.By looking at the model in column 3, the regression coefficient for BLOCK_MON is negative and significant (β = -2.908),suggesting that the presence of blockholders reduces the use of the equity method.This result confirms the hypothesis HP1 and is consistent with the role of large shareholders acting as monitor, suggesting less opportunity for accounting manipulation.Findings also confirm previous studies emphasizing that the ultimate shareholders have incentives to monitor managers and enough voting rights to oust them through takeovers (Yeo et al., 2002;Missonier-Piera, 2004;Astami & Tower, 2006;Giner & Veron, 2012).
Differently, the regression coefficient of FAM_INFLUENCE is positive and significant (β = 1.983), showing that the family influence increases the likelihood of choosing the equity method for the accounting treatment of JCEs.This result supports the hypothesis HP2 and suggests that the growing family involvement in ownership and control reduces the capital market pressures on efficient contracting in the accounting choices.Thereby, the lack of market discipline leads executives to make opportunistic accounting treatments that reflect personal motives and increase their own wealth.In this sense, the research findings support the family entrenchment perspective, consistently with previous evidence (Sánchez-Ballesta & García-Meca, 2007;Cornett et al., 2008;Yang, 2010;Gopalan & Sudarshan, 2012).
Moreover, the regression coefficient of BOND_HOLDER is negative and significant (β = -3.429),highlighting that the presence of external bond-holders reduces the likelihood of choosing the equity method for the accounting treatment of JCEs.Thereby, in line with previous research (Catuogno et al., 2015a), the hypothesis HP3 is supported emphasizing that venturers issuing corporate bonds as a source of financing are more vulnerable to political scrutiny.In this regard, the research results provide evidence that the monitoring role played by bondholders discourages the opportunistic managerial use of the equity method that produces an improvement in profitability and leverage ratios.
As for the control variables, JCE_TYPE is significant with a positive coefficient, emphasizing that the type of JCE plays an important role in the management decision to report interests in JCEs (Mian & Smith, 1990;Lourenço & Curto, 2010).Finally, both leverage and firm size do not help explaining the managerial selection of the equity method.As for the former, findings reflect the existence of constraints that are not related to financial statement numbers but to private information due to the close relationship that may exist between Italian managers and lenders, especially banks (Ball, Li, & Shivakumar, 2015).As for the latter, the results are inconsistent with the political cost hypothesis to the extent that the firm's total sales do not explain the accounting policy choice for the Italian listed companies (Labelle, 1990;Missonier-Piera, 2004;Astami & Tower, 2006;Lourenço & Curto, 2010).

Conclusions and Directions for Future Research
Following the contracting theory and the corporate governance literature, the paper uses an ante IFRS 11 perspective in order to question the appropriateness of this accounting standard and investigate the determinants behind the choice of the equity method for the accounting of JCEs in Italy.The paper supposes that managers opportunistically adopt this treatment for their own benefit as it improves firm leverage and profitability.By applying a logistic model, the research considers the equity method as a baseline outcome category and controls for type of JCEs and sector.
Taken together, the empirical findings confirm that family influence, blockholders and bondholder monitoring all matter for choosing the equity method as the accounting treatment of JCEs.In particular, the research shows that the equity method is the opportunistic technique that may induce managerial self-dealing rather than efficient contracting.Indeed, the analysis highlights that the monitoring role played by blockholders and bondholders limits the managerial opportunism in the adoption of the equity method for the accounting of JCEs.Differently, the growing family influence fosters the entrenchment of controlling shareholders, leading to the selection of performance-improving accounting technique.
The paper provides several theoretical and practical contributions and addresses the ongoing international academic and standard setting debate by providing results that do not support the IASB decision to require merely the equity method.
First of all, it answers the general call for more research on the proper accounting for JCEs in order to assess the IASB decision to eliminate the proportionate consolidation and provide an accurate understanding of financial statement numbers for investor economic decisions.This is an important research topic since various stakeholders rely, to some extent, on publicly available accounting information for their decision-making.In this sense, paper findings suggest that requiring all ventures to report interests in JCEs using the equity method would encourage managerial opportunism.
Second, the paper adds knowledge to the literature on the determinants of accounting choice bringing evidence on the extent to which Italian managers exercise discretion to improve their own wealth rather than mitigate the conflicting interests among contracting parties.
Third, the paper provides an original extension of the accounting choice literature by investigating the effect of family influence and both blockholder and bondholder monitoring besides the variables usually employed in the contracting theory.
With regard to the contributions for practitioners and policy makers, the paper addresses the international standard setting debate by providing results that witness the managerial opportunism in JCE reporting through the equity method.In particular, the research suggests that the accounting technique under examination is an additional tool in the hands of powerful managers to opportunistically increase their wealth, especially in the Italian family firms.These findings are of general interest for continental Europe and other countries with large family involvement.
In this sense, the present study is timely since it casts doubts on the appropriateness of the equity method and highlights the need for a future reconsideration of the IASB decision to withdraw the proportionate consolidation.
However, when drawing these conclusions, it is important to acknowledge that the paper results have certain limitations and potential caveats for future research.First, the study focuses only on one country, thereby further research might extend the analysis to different settings.Second, the paper does not provide empirical evidence on the increase in managerial wealth.Thus, there would be further research potential in empirically testing the managerial opportunism through the bonus plan hypothesis.

Table 1 .
Full sample composition

Table 3 .
Variable definition

Table 4 .
Descriptive statistics of numerical variables