Corporate life cycle, family firms, and earnings management: Evidence from Taiwan

Abstract

Is the corporate life cycle an important factor in management's decisions about real activities management (RAM)? In this study, we empirically investigate firms' RAM activities across the corporate life cycle, given the various costs and constraints associated with the alternative earnings management mechanisms across the life cycle stages. We examine both an aggregate RAM proxy and individual RAM proxies including operating and investing RAM such as sales, expenses, and production cost management, and sales of long-term assets. Employing the Dickinson (2011) proxy of corporate life cycle and Taiwanese data, we document that at the aggregate level, firms in the decline stage are more likely than mature firms to manage earnings upward with RAM. Using the individual RAM proxies, we find that firms in the early life cycle stages prefer sales management to the other RAM mechanisms, especially expenses management. Decline firms employ more sales and production cost management and investing RAM but a similar level of expenses management relative to mature firms. We further find that family firms in the introduction and decline stages engage in more RAM than mature family firms while nonfamily firms do not. Overall, our results indicate that firms prefer different RAM mechanisms across the life cycle stages, that these preferences differ between family and non-family firms, and that these preferences are stronger in family firms. The results are robust after using alternative proxies of operating RAM and additional control variables of corporate governance. Our findings are of interest to investors, auditors, regulators, and academics concerning financial reporting quality and financial statement analysis.