This paper aims to verify whether listed family firms engage in earnings management (EM) to avoid reporting a loss more or less than non-family firms. Furthermore, I investigate if the corporate governance choices of family firms, such as being managed by a family CEO, affect the EM activity around the profit-loss threshold. Seminal studies show that there is a discontinuity at zero in the earnings distribution (Burgstahler and Dichev, 1997; Degeroge et al., 1999) and explain this discontinuity saying that firms manage earnings to avoid losses. More recently, this explanation has been partially challenged by Dechow et al. (2003) and Beaver et al. (2007) who provide evidence that (1) small profit firms seem to boost their earnings as much as small profit firms, and (2) the EM activity is not the only cause of the discontinuity in the distribution, because the asymmetric effect of the income taxes and the extraordinary items shifts respectively profit firms to the intervals just above zero and loss firms away from zero. On the other hand, several papers document a relation between EM and ownership structure (Wang, 2005). Based on a final sample of 542 firm-year observations, referring to 179 specific Italian listed companies, the findings suggest that, when a member of the family serves as CEO, family firms seem to manage earnings upwards more often than other companies, whereas the family control itself does not appear to be a relevant variable. However, small profit firms do not have higher abnormal accruals than the average, while small loss firms seem to boost their earnings. On the whole, the results suggest that the incentive not to report a loss differs among family firms, even if the effect of ownership structure and corporate governance choices on the EM activity only partly provides an explanation for the discontinuity in the earnings distribution. Finally, Italian listed companies appear to consider this earnings target less important than overseas publicly traded corporations. Although the results are not entirely compelling, the paper contributes to the family business research showing that EM activity aimed at avoiding losses is driven more by corporate governance structures than by the family control itself.

M. M. Mattei (2012). Family CEO firms and earnings management to avoid losses: Evidence from Italy. ROMA : ARACNE.

Family CEO firms and earnings management to avoid losses: Evidence from Italy

MATTEI, MARCO MARIA
2012

Abstract

This paper aims to verify whether listed family firms engage in earnings management (EM) to avoid reporting a loss more or less than non-family firms. Furthermore, I investigate if the corporate governance choices of family firms, such as being managed by a family CEO, affect the EM activity around the profit-loss threshold. Seminal studies show that there is a discontinuity at zero in the earnings distribution (Burgstahler and Dichev, 1997; Degeroge et al., 1999) and explain this discontinuity saying that firms manage earnings to avoid losses. More recently, this explanation has been partially challenged by Dechow et al. (2003) and Beaver et al. (2007) who provide evidence that (1) small profit firms seem to boost their earnings as much as small profit firms, and (2) the EM activity is not the only cause of the discontinuity in the distribution, because the asymmetric effect of the income taxes and the extraordinary items shifts respectively profit firms to the intervals just above zero and loss firms away from zero. On the other hand, several papers document a relation between EM and ownership structure (Wang, 2005). Based on a final sample of 542 firm-year observations, referring to 179 specific Italian listed companies, the findings suggest that, when a member of the family serves as CEO, family firms seem to manage earnings upwards more often than other companies, whereas the family control itself does not appear to be a relevant variable. However, small profit firms do not have higher abnormal accruals than the average, while small loss firms seem to boost their earnings. On the whole, the results suggest that the incentive not to report a loss differs among family firms, even if the effect of ownership structure and corporate governance choices on the EM activity only partly provides an explanation for the discontinuity in the earnings distribution. Finally, Italian listed companies appear to consider this earnings target less important than overseas publicly traded corporations. Although the results are not entirely compelling, the paper contributes to the family business research showing that EM activity aimed at avoiding losses is driven more by corporate governance structures than by the family control itself.
2012
Corporate Governance
11
40
M. M. Mattei (2012). Family CEO firms and earnings management to avoid losses: Evidence from Italy. ROMA : ARACNE.
M. M. Mattei
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/130690
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