The influence of family board involvement on earnings management

Abstract

This study explores the influence of family ownership and family board involvement on earnings management in German-listed firms. We extend existing research by applying a more precise measurement of family involvement that offers new insights into a family’s effect on earnings management behaviour. Our models suggest that the degree of management involvement of families is a significant driver of earnings management, a factor disregarded so far in the literature. Furthermore, the distinction between founding family and family ownership should be carefully considered. Employing a sample of 278 firms from 2000-2013, we find that greater family management presence on the executive board is associated with more earnings-decreasing accrual-based earnings management practices and more real earnings management activities via discretionary expenses. This is viewed as less value-destroying REM activity to meet earning targets. Overall, German family firms seem to use their powerful positions as shareholders and executive board members to expropriate shareholders and manage earnings to meet targets while maintaining family wealth