Earnings Management Priorities of Private Family Firms

Abstract

We use a unique database on family relationships between CEOs, board members and owners of private Norwegian firms to examine earnings management priorities of private family firms. Consistent with agency theory we find that private family firms generally manage earnings downward compared with non-family firms. However, tendencies to inflate earnings increase with leverage, and among highly leveraged private firms we find that those that are family controlled manage earnings upward more extensively than others. This result suggests that preservation of control may be more important for family shareholders than for other owners. Having a CEO who is a member of the controlling family amplifies both the general tendency of shrinking earnings and the conditional tendency of inflating them. Conversely, having an independent board member moderates both tendencies. The distinct earnings management tendencies of private family firms tend to weaken as the firm grows older. This result is consistent with the generational effects on family firm characteristics that have been reported in prior family business research.

Keywords: Earnings management, private firms, family firms, corporate governance

JEL Classification: J33, G32