The Effect of Size on the Level of Earnings Management in Family Firms

Abstract

The purpose of this study is to investigate whether the level of earnings management is likely to be different in large family firms, small family firms, and non-family firms. Our empirical study relies on a sample of UK listed firms and on their level of discretional accruals. Our results demonstrate that large family firms have lower level of earnings management, whereas small family firms have higher level of earnings management as compared to non-family firms. They confirm broad findings from Anglo-Saxon literature which indicate that large family firms face less severe type I agency problems than non-family firms. As for small family firms, our findings are consistent with those of European literature, and suggest that family firms face more severe type II agency problems. This study fills a gap in the literature, suggesting that in addition to the type of ownership, the firm size should also be considered when addressing the incentives for earnings management.