As per Southern Recension of Mahabharata: Adi Parva: Chapter 87,
त्रीणि श्राद्धे पवित्राणि दौहित्रः कुतपस्तिलाः॥ 1-87-29
The rough English translation of this would be Three things are considered pure in Shraddha, दौहित्र (daughter's son), कुतप (दिवसस्याष्टमे भागे 8th muhurta of the day), and तिल (sesamum-seeds).
There is an interesting story related to this shloka (given in same and previous chapters). King Yayati (father of Yadu [ancestor of Yadavas: Vrishnis, Andhakas etc], and Puru [ancestor of Paurvas: Kaurvas, Pandavas etc]) was thrown down from heaven after his virtues exhausted. When he was thrown from heaven he requested gods that he should fall in virtuous men. Then, he was thrown where Ashtaka, Shibi, Pratardana and Vasumana were doing a yajna. These all were great kings who retired to forest and they all were sons of Madhavai (Yayati's daughter). They all donated their virtues and king Yayati was sent to heaven again and these four kings also ascended to heaven along with Yayati. Then, Yayati said that going forward daughter's sons would be considered pure in Shraddha.
This shloka is found in Vishnu Purana: Book III: Chapter 15 with slight variation:
Three things are held pure at obsequies, a daughter's son, a Nepal blanket, and sesamum-seeds 15;
The same chapter of Vishnu Purana describes who are to be entertained at Śráddhas:
AURVA proceeded.--"Hear next, oh prince, what description of Brahman should be fed at ancestral ceremonies. he should be one studied in various triplets of the Rich and Yajur Vedas 1; one who is acquainted with the six supplementary sciences of the Vedas 2; one who understands the Vedas; one who practises the duties they enjoin 3; one who exercises penance; a chanter of the principal Sáma-veda 4, an officiating priest, a sister's son, a daughter's son, a son-in-law, a father-in-law, a maternal uncle, an ascetic, a Brahman who maintains the five fires, a pupil, a kinsman; one who reverences his parents. A man should first employ the Brahmans first specified in the principal obsequial rite; and the others (commencing with the ministering priest) in the subsidiary ceremonies instituted to gratify his ancestors.
So, daughter's son is allowed in Shraddha in fact they are recommended and considered as important and pure as तिल (sesamum-seeds).