Real earnings management in family firms: evidence from Chinese listed firms

Using a large sample of Chinese family firms and nonfamily firms, we examine whether family ownership is associated with higher or lower levels of real earnings management (REM). On the basis of the agency and stewardship theories, we develop two competing hypotheses. Our findings are consistent with the prediction of the stewardship theory that family firms engage in lower levels of real activities manipulation relative to nonfamily firms. Specifically, family businesses are less likely to accelerate sales, over-produce, cut discretionary expenditures, or engage in more than one real activities manipulation. In our analyses, we control for a number of firm properties and fixed effects. Further analysis suggests that the negative association between family ownership and real activities manipulation is more prominent for young family firms than for mature family firms. Our results are robust to different measures of family firms, alternative measures of REM, and potential endogeneity.