Earnings Management in Family Firms: Evidence From R&D Cost Capitalization in Italy

Abstract

Recent accounting-related scandals have underscored the prevalence of earnings management in financial markets. This article provides empirical evidence on the motivations for earnings management in publicly listed family companies, highlighting the differences from public nonfamily firms. Basing our predictions on an analysis of the salient characteristics of family firms in both an agency and a stewardship framework, we hypothesize that family firms are less sensitive to income-smoothing motivations than are nonfamily firms, while they are similarly motivated to manage earnings for debt-covenant and leverage-related reasons. We test our hypotheses by looking at a specific accrual, R&D cost capitalization, where statistical tests confirm our hypothesized relationships.