Managerial ability and real earnings management in family firms

Abstract

PurposeThis study aims to examine the effect of managerial ability on real earnings management (hereafter REM) in family firms.Design/methodology/approachThe sample consists of 864 firms-years listed in the Indonesian Stock Exchange. REM is measured by abnormal activities. Managerial ability is measured by data envelopment analysis. Data analysis uses random-effect regression analysis.FindingsFamily firms reduce the possibility of higher ability managers to engage in REM. Compare to non-family firms, higher ability managers in family firms are more likely to engage in REM to improve future earnings.Research limitations/implicationsThis research only uses efficiency score data envelopment analysis to measure managerial ability while the managerial ability is, by nature, multi-dimensional and unobservable. This research also does not find the role of professional Chief Executive Officer (hereafter CEO) in the family firms in REM behavior because does not consider the professional CEO motivation (e.g. compensation structure).Practical implicationsThis research is expected to help family firms formulate managers' selection based on managerial ability. This research also is expected to help investors and creditors to put their funds in the family firms with higher ability managers that reduce earnings information distortion.Originality/valueTo the best of the author’s knowledge, this research is the first research that examines the managerial ability on REM in Indonesian family firms. This research also contributes to fil the findings gap in managerial ability and REM.