Abstract
This study explores the influence of family ownership and family board involvement on earnings management in German-listed firms. We extend existing research by applying a more precise measurement of family involvement that offers new insights into a family’s effect on earnings management behaviour. Our models suggest that the degree of management involvement of families is a significant driver of earnings management, a factor disregarded so far in the literature. Furthermore, the distinction between founding family and family ownership should be carefully considered. Employing a sample of 278 firms from 2000-2013, we find that greater family management presence on the executive board is associated with more earnings-decreasing accrual-based earnings management practices and more real earnings management activities via discretionary expenses. This is viewed as less value-destroying REM activity to meet earning targets. Overall, German family firms seem to use their powerful positions as shareholders and executive board members to expropriate shareholders and manage earnings to meet targets while maintaining family wealth
Highlights
Top executives often use their managerial discretion to influence the reported earnings of their companies
Within the German setting of high ownership concentration (Faccio & Lang, 2002), high average levels of family voting rights (Becht & Boehmer, 2003), and a predominant agency conflict between large controlling and minority shareholders (Gugler & Yurtoglu, 2003), we expect the entrenchment effect of family ownership to be prevalent
This study investigates the influence of family control on earnings management in German-listed family firms
Summary
Top executives often use their managerial discretion to influence the reported earnings of their companies. To the best of our knowledge, no prior study on earnings management in family firms has focused on the various elements of the German corporate governance system and how they are interrelated We find it worthwhile to analyse the precise measures of family influence in Germany, as well as the effects of 1) concentrated ownership structures with heterogeneous blockholders, and 2) the stake of (founding) families in management and supervisory boards on corporate earnings decisions. We find that families use their powerful positions as shareholders and executive board members to manage earnings by discretionary accruals and expenses This is potentially done to reduce dividend pressure and avoid negative market reactions for not meeting earning targets.
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