Title: The link between earnings management and corporate performance: evidence from family firms

Authors: Manuel Bermejo-Sánchez; Lázaro Rodríguez-Ariza; Jennifer Martínez-Ferrero

Addresses: IE Business School, Madrid, Spain ' Facultad de Ciencias Económicas y Empresariales, Departamento de economía financiera y contabilidad, Universidad de Granada, Spain ' Facultad de Economía y Empresa, Departamento de Administración y Economía de la Empresa, Universidad de Salamanca, Spain

Abstract: The aim of this research is to analyse the financial consequences of earnings management (EM) practices for corporate performance, focusing on family firms. These businesses are led and controlled by family members whose main interest is the firm's long-run survival through succession. Using a sample composed of 1,275 international listed companies for the period 2002-2010, our empirical evidence shows that in the short-term, those companies that implement EM practices enjoy higher market valuation because the market, investors and other stakeholders do not detect and cannot penalise such practices. Family firms have a long-term focus and more incentives for controlling and monitoring managerial decisions, avoiding information symmetries and therefore EM practices. Thus, the positive effect of EM on market value is lower in highly concentrated ownership structures as result of the negative link between family control, EM and performance.

Keywords: earnings management; financial performance; family firms; empirical research; firm performance; corporate performance; family businesses; market value; family control.

DOI: 10.1504/IJESB.2015.068781

International Journal of Entrepreneurship and Small Business, 2015 Vol.25 No.1, pp.106 - 124

Received: 27 Sep 2014
Accepted: 22 Oct 2014

Published online: 10 Apr 2015 *

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