The Reporting Strategy of Earnings before Family CEO Succession

Abstract

Family firms are deeply associated with a family¡¦s specific connections with stakeholders. A critical issue for family businesses is how a family firm can successfully transit these specific assets to later generations in order to perpetuate a family dynasty. Although the CEO transition process plays a key role in determining the prospects of a family firm, stakeholders may doubt the family successors at the time of transition. It is important for the family to preserve the entirety of these unique assets upon succession, as failure to do so may result in detrimental effects for the firm. To sustain the prospects of a family business, a firm may intend to manage its image by increasing earnings in order to sustain relationships with its stakeholders. This study is an attempt to contribute to the study of family succession and earnings management by analyzing whether a family heir affects the behavior of a family firm in regard to reporting earnings before succession. This study found that firms with family succession CEOs experience significantly positive earnings management before succession. Moreover, firms with younger family succession CEOs are more likely to manage earnings prior to succession. In addition, voluntary turnover CEO¡¦s have a positive moderating effect on the relationship between family succession and prior-succession earnings management. Only in firms where the succeeding CEOs are family heirs and have founders who still serve on the board is there higher incentive to inflate earnings before CEO turnover. Finally, for firms with a higher percentage of family ownership as well as a family succession CEO, higher prior-turnover earnings management is also evident.