Earnings Management and Corporate Governance in Family Firms

Abstract

Earnings management and corporate governance relationships are examined for a sample of 49 Portuguese listed firms considering an unbalanced panel for the period 2002-2017, using panel corrected standard errors models and considering the family ownership effect. Empirical findings reveal that there is a positive relationship between corporate board independence and earnings management and that the presence of women on board decreases earnings management practices. Results are consistent with the hypothesis that earnings management practices are lower in family firms than in non-family firms. Size, being audited by the Big 4 companies, return on assets, loss, and the existence of an audit committee on board influence positively earnings management, but leverage, age, and ownership control are negatively related to earnings management. Results indicate that further auditing and control is necessary for Portuguese listed companies leading to strict recommendations to be followed by policymakers regarding control of these firms.

Related party transactions and earnings management in family firms: the moderating role of board characteristics

“…According to H2b, we find a weakly significant association between the interaction “women on the board-RPTs and downward AEM”. Like previous literature, we find that the presence of women on the board, per se , exerts a lowering effect on the propensity to manipulate earnings using discretionary accrual (Vieira and Madaleno, 2019). On the other hand, our results suggest that when family firms' management engages in high levels of RPTs, extracting resources from the company, gender diversity tends to produce an opposite effect and might enhance the level of downward EM in order to reduce the exit of resources from the company via dividends or taxation.…”

“…The literature has investigated the influence of women directorship on EM in family firms. Findings point out that the presence of women on a board decreases EM (Vieira and Madaleno, 2019; Mnif and Cherif, 2020), although a previous study carried out in Malaysia showed that family ownership does not interact with women on boards to influence the propensity for EM (Abdullah and Ismail, 2016).…”

“…In fact, taking into account board characteristics, we find that CEO duality, the weight of family members on board size and the presence of women on the board positively moderate, respectively, the association between RPTs and RMCFO, upward AEM and downward AEM. The last result also add to the stream of studies that analyses the effect of gender diversity in family firms' accounting choices (Abdullah and Ismail, 2016;Vieira and Madaleno, 2019;Mnif and Cherif, 2020).…”

“…The latest stream of the literature has provided mixed results, suggesting a more grained analysis of family firms in order to take into account their heterogeneity. The effect of a family CEO (Yang, 2010;Ansari et al, 2021), family involvement in C-suite roles (Ferramosca and Allegrini, 2018), board independence (Prencipe and Bar-Yosef, 2011;Jaggi et al, 2009) and female directorship (Vieira and Madaleno, 2019;Abdullah and Ismail, 2016;Mnif and Cherif, 2020) on EM have been analyzed, pointing out that family firms' governance characteristics affect their propensity to manipulate earnings.…”

“…, 2021), family involvement in C-suite roles (Ferramosca and Allegrini, 2018), board independence (Prencipe and Bar-Yosef, 2011; Jaggi et al. , 2009) and female directorship (Vieira and Madaleno, 2019; Abdullah and Ismail, 2016; Mnif and Cherif, 2020) on EM have been analyzed, pointing out that family firms' governance characteristics affect their propensity to manipulate earnings.…”