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Exploring the role of excess control rights on real earnings management in family-controlled firms

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  • Chen, Ching-Lung
  • Weng, Pei-Yu
  • Fan, Hung-Shu

Abstract

Family-controlled firms are associated with financial reporting quality in two competing ways: incentives alignment hypothesis versus entrenchment hypothesis. Prior studies have investigated the potential effect of family-controlled firms on earnings management and/or the quality of financial reporting, but with inconsistent conclusions. This study uses the divergence between control rights and cash flow rights as a moderating variable and examines the association of family-controlled firms with real earnings management (REM) as compared to nonfamily-controlled firms in Taiwan. Taiwan is an emerging market where family owners play a dominant role in the decision-making process and are characterized by excess control rights. Based on unbalanced-panel data, empirical results indicate that family-controlled firms are more likely than nonfamily-controlled firms to engage in REM, which in turn results in poor subsequent operating performance. Further evidence reveals that this result is particularly pronounced for family-controlled firms with excessively high control rights. This suggests that excess control rights trigger family-controlled firms’ engaging in REM, thereby actually destroy operating performance. Our study performs several diagnostic tests and shows the results are robust in various specifications.

Suggested Citation

  • Chen, Ching-Lung & Weng, Pei-Yu & Fan, Hung-Shu, 2023. "Exploring the role of excess control rights on real earnings management in family-controlled firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:jiaata:v:50:y:2023:i:c:s1061951823000058
    DOI: 10.1016/j.intaccaudtax.2023.100526
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    More about this item

    Keywords

    Family-controlled; Real earnings management; Excess control rights; Incentives alignment; Entrenchment;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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