Earnings Management and Corporate Governance in Family-Controlled Companies

39 Pages Posted: 25 Mar 2009

See all articles by Sasson Bar-Yosef

Sasson Bar-Yosef

Hebrew University of Jerusalem - School of Business Administration

Annalisa Prencipe

Bocconi University - Department of Accounting

Date Written: March 24, 2009

Abstract

Corporate governance literature advances the idea that certain aspects of board of directors' structure improve monitoring of managerial decisions. Among these is the managers' decision to manage earnings. Prior studies have shown that earnings management, in widely-held public companies, is less prevalent when there is a high level of board independence. However, there is less evidence on the effectiveness of board independence on earnings management in family-controlled companies. This issue is interesting in particular as such companies are susceptible to various types of agency concerns. It is the purpose of this study to shed light on the earnings management issue in family-controlled companies, characterized by a potentially low board independence environment. In this study, board independence is estimated by two parameters (i) proportion of independent directors on board, and (ii) lack of CEO/Board Chairman duality function, with special attention paid to the case where the CEO is a member of the controlling-family. Our empirical results provide evidence that, indeed, the impact of board independence on earnings management is weaker in family-controlled companies. The same effects are also found for the cases where the CEO is a member of the controlling-family, even though she is not also the Board Chairman.

Keywords: board independence, CEO duality, earnings management, family-controlled companies, independent directors, Italian companies

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

Suggested Citation

Bar-Yosef, Sasson and Prencipe, Annalisa, Earnings Management and Corporate Governance in Family-Controlled Companies (March 24, 2009). Available at SSRN: https://ssrn.com/abstract=1367543 or http://dx.doi.org/10.2139/ssrn.1367543

Sasson Bar-Yosef

Hebrew University of Jerusalem - School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

Annalisa Prencipe (Contact Author)

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

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