Earnings Management and the Contest to the Control: An International Analysis of Family Owned Firms

Abstract

In this paper we focus on the conflict of interests among shareholders as a possible determinant of earnings management. Using a sample of 3,559 listed firms from the United States, Canada, the United Kingdom, France, Spain, and Italy between 2008 and 2013, we analyse how the distribution of power among shareholders affects earnings management in family owned firms. We find that the contest to the dominant family shareholder is relevant: namely, the more challenge to the control of dominant shareholders, the less earnings management in family firms. This contest is more important in civil law countries in which the shareholders rights are less protected. We also find that the nature of the blockholders can be relevant: consistent with the view that nonfamily shareholders are under more public scrutiny and have more difficulty to agree with the largest family shareholder to extract private benefits, our results suggest that a second or third nonfamily shareholder can reduce or alleviate earnings management.

Keywords: corporate control, discretionary accruals, earnings management, family firms

JEL Classification: G32, G34, M41, M43, M47