The Impact of Controlling Families and Family CEOs on Earnings Management

Abstract

This study explores the relationships between insider ownership and earnings management in family firms and the impact of family versus nonfamily CEOs on earnings management. The results show that the larger the level of insider ownership, the greater the extent of earnings management, supporting an entrenchment effect of family ownership. Furthermore, consistent with traditional agency analyses, nonfamily CEOs exhibit a greater tendency to manage earnings than do family CEOs.The study suggests that family firms should promote information transparency and quality of accounting reporting to avoid a negative image that suggests that family firms expropriate the interests of outside shareholders.