Strategic earnings management in family firms

Abstract

We examine how family firms strategically manage earnings by using discretionary accruals (AEM) and real activities (REM). Using a sample of privately controlled but publicly listed firms in China between 2007 and 2018, we find that, under normal circumstances, family firms are less (more) likely than nonfamily firms to use REM (AEM) for earnings management, and they use REM and AEM as substitutes. However, when firms are under pressure to meet important earnings benchmarks that are critical to the survival of their businesses, family firms increase their use of REM more than do nonfamily firms. Finally, family firms strategically use REM to improve their future firm performance. This study challenges the unidirectional relationship between family firms and earnings management that is typically documented in existing studies.