Socioemotional Wealth and Earnings Management in Private Family Firms

http://fbr.sagepub.com/

Family Business Review

http://fbr.sagepub.com/content/23/3/280The online version of this article can be found at:

DOI: 10.1177/0894486510374457

2010 23: 280 originally published online 22 June 2010Family Business ReviewAnnelies Stockmans, Nadine Lybaert and Wim Voordeckers

Socioemotional Wealth and Earnings Management in Private Family Firms

Published by:

http://www.sagepublications.com

On behalf of:

Family Firm Institute

can be found at:Family Business ReviewAdditional services and information for

http://fbr.sagepub.com/cgi/alertsEmail Alerts:

http://fbr.sagepub.com/subscriptionsSubscriptions:

http://www.sagepub.com/journalsReprints.navReprints:

http://www.sagepub.com/journalsPermissions.navPermissions:

http://fbr.sagepub.com/content/23/3/280.refs.htmlCitations:

at FFI-FAMILY FIRM INSTITUTE on August 18, 2010fbr.sagepub.comDownloaded from


http://fbr.sagepub.com/content/23/3/280

http://www.sagepublications.com

http://www.ffi.org/

http://fbr.sagepub.com/cgi/alerts

http://fbr.sagepub.com/subscriptions

http://www.sagepub.com/journalsReprints.nav

http://www.sagepub.com/journalsPermissions.nav

http://fbr.sagepub.com/content/23/3/280.refs.html


Family Business Review23(3) 280 –294© The Author(s) 2010Reprints and permission: http://www. sagepub.com/journalsPermissions.navDOI: 10.1177/0894486510374457http://fbr.sagepub.com

Socioemotional Wealth and Earnings Management in Private Family Firms

Annelies Stockmans1, Nadine Lybaert1,and Wim Voordeckers1

Abstract

Earnings management in firms has several different motivations. This article examines the preserving of socioemotional wealth as a motive for earnings management in specific types of private family firms by looking at the generational stage, the management team, and the CEO position. The authors’ results suggest that socioemotional wealth may play a role as motive for upward earnings management when firm performance is poor. Under this condition, first-generation and founder-led private family firms seem to have greater incentive to engage in upward earnings management because of the preservation of their socioemotional wealth.

Keywords

earnings management, private family firms, socioemotional wealth, generations, management team

Although earnings management is a major research topic in the financial accounting field, this stream of research has directed only limited attention to the antecedents of financial reporting quality in family firms. To date, studies examining the financial reporting quality of family firms have mainly aimed at identifying if, compared to public nonfamily firms, public family firms have better or worse financial reporting quality (e.g., Ali, Chen, & Radhakrishnan, 2007; Jiraporn & Dadalt, 2009; Setia-Atmaja, Tanewski, & Skully, 2009; Wang, 2006). Nevertheless, because private family firms represent the majority of firms world-wide (International Family Enterprise Research Academy [IFERA], 2003) and evidence on a sample of 13 European countries suggested that earnings management is more prominent in private firms than in public firms (Burgstahler, Hail, & Leuz, 2006), the question of why private family firms would engage in earnings management is an impor-tant but still unresolved one. Therefore in this article, we go beyond traditional agency explanations that seem to be less relevant in private family firms (Schulze, Lubatkin, & Dino, 2001, 2003) and build on the socioemotional wealth concept grounded in behavioral theory (Gómez-Mejía, Haynes, Núñez-Nickel, Jacobson, & Moyano-Fuentes, 2007) to develop and field test a novel theoretical

explanation for earnings management in private family firms.

Socioemotional wealth refers to the nonfinancial aspects of the firm that meet the family’s affective needs such as identity, the ability to exercise family influence, and the perpetuation of the family dynasty. Consistent with Gómez-Mejía et al. (2007), we argue that for private family firms the primary reference point is the loss of their socioemotional wealth. And to avoid those losses, family firms are willing to accept a significant risk to their eco-nomic performance. When taking the risk of being con-fronted with reduced economic performance, however, family firms at the same time create agency costs for impor-tant nonfamily stakeholders such as lenders (Steijvers & Voordeckers, 2009; Voordeckers & Steijvers, 2006). To protect their interests, these lenders, for example, impose restrictive debt covenants that may put constraints on the nonfinancial objectives—and as such the socioemotional

1Hasselt University, Diepenbeek, Belgium

Corresponding Author:Wim Voordeckers, Hasselt University, Agoralaan—Building D, B-3590 Diepenbeek, BelgiumEmail: [email protected]



Stockmans et al. 281

wealth of the family—when violated (Gómez-Mejía, et al. 2007; Prencipe, Markarian, & Pozza, 2008). There-fore, when firm performance is poor, private family firms might have an incentive to influence firm performance through upward earnings management to avoid a decline in their socioemotional wealth.

When studying family firms, it is important to take into account the heterogeneity within the group of family firms. Family firms, for example, differ in the importance they attach to their socioemotional wealth (Gómez-Mejía et al., 2007) and thus are also likely to have different earnings management behavior. Therefore, we discuss in this article how the salience of their socioemotional wealth varies depending on the generational stage, the composition of the management team, and the CEO position to provide an explanation for any observed variance in upward earn-ings management behavior when firm performance is poor.

By presenting the socioemotional wealth concept as a novel explanation for upward earnings management behavior in private family firms, our article contributes to both the family business and earnings management literatures in several ways. First, although it is widely acknowledged in the family business field that socioemo-tional wealth and nonfinancial objectives play an impor-tant role in understanding decision-making behavior in family firms (e.g., Basco & Pérez Rodríguez, 2009; Distelberg & Sorenson, 2009; Gómez-Mejía et al., 2007; Sharma, 2004; Westhead & Howorth, 2006), little evi-dence exists about this issue and especially in an account-ing context. In this article, we aim to provide such evidence by studying earnings management behavior. Second, we extend the motives for earnings management traditionally grounded in agency theory and use behavioral theory and the socioemotional wealth concept to explain why certain types of family firms have stronger incentives to engage in earnings management. As such, we contribute not only to the understanding of earnings management motivations but also to the family firm heterogeneity debate. Finally, our results also have important practical implications. Private firms are usually characterized by informational opacity (Berger & Udell, 1998), that is, financial state-ments are often the only public source of information. Several important family firm stakeholders such as bank-ers, suppliers, or external investors use this information source to make a credit or investment decision. A better understanding about the quality of this information for specific types of private family firms could be very helpful in making more accurate credit decisions.

This article proceeds as follows. In the next section, the theoretical arguments are developed and hypotheses are derived. In the subsequent section, the data and the empirical method are discussed. Empirical results are presented in the fourth section. Finally, in the fifth section we end our article by discussing our results and presenting a conclusion.

Earnings Management in Private Family FirmsAgency Problems, Socioemotional Wealth, and Earnings Management

Prior research on financial reporting quality and earnings management behavior in public family firms has focused on the agency problem between controlling and non-controlling shareholders when discussing low financial reporting quality and earnings management (Ali et al., 2007; Jiraporn & Dadalt, 2009; Setia-Atmaja et al., 2009; Wang, 2006). When shifting our focus to private family firms, however, the agency problem between controlling and noncontrolling shareholders is expected to be less dominant. Although high levels of ownership concentra-tion and the lack of market monitoring increase the oppor-tunity of controlling family shareholders to expropriate minorities in private family firms (e.g., Schulze et al., 2001), the close connection between family and firm wealth in private family firms decreases their incentive to do so. After all, because expropriation of minority shareholders reduces firm wealth (Claessens, Djankov, Fan, & Lang, 2002), private family firms will have less incentive to engage in this type of opportunistic behavior as it also reduces family wealth.

However, the family business has been represented as a combination of two systems that overlap and interact: the emotion-oriented family system that focuses on non-economic goals and the results-oriented business system that focuses on economic goals (Distelberg & Sorenson, 2009; Gersick, Davis, Hampton, & Lansberg, 1997; Stafford, Duncan, Danes, & Winter, 1999). The noneconomic goals, such as maintaining family control, financial independence of the firm, and family harmony, that meet the family’s affective needs are described as the family firm’s socio-emotional wealth (Gómez-Mejía et al., 2007). Especially in private family firms, family wealth is closely linked with the socioemotional wealth the family obtains from controlling the firm (Gómez-Mejía et al., 2007). Owners



282 Family Business Review 23(3)

of private family firms derive utility from these nonpe-cuniary benefits and will avoid or minimize threats to their socioemotional wealth, even if this implies detrimen-tal consequences on firm performance. Preserving the socioemotional wealth of the firm is itself a key goal in many family firms to which the creation of firm wealth may often be sacrificed (Gómez-Mejía et al., 2007). For example, Gómez-Mejía et al. (2007) found evidence that to avoid loss of their socioemotional wealth, family firms are willing to accept an increased risk of poor firm per-formance. This increased risk can be manifested in either a higher probability of firm failure or a higher possibility of below-target performance.

Pursuing utility from nonpecuniary objectives does not by definition lead to economic inefficiency or augmented agency costs (Chrisman, Chua, & Litz, 2004). Only when preserving the family’s socioemotional wealth is at the expense of the interests of other stakeholders of the family firm such as lenders, suppliers, or minority shareholders, agency problems may emerge. To illustrate this, consider the case of family firms in which preserving socioemo-tional wealth is a key goal at the expense of financial goals. Although economic performance may not be the main concern for this type of family firms, it is for their nonfam-ily stakeholders. For example, from the point of view of a lender, operating performance has to keep a sufficiently high level to cover the interest payments and to prevent bankruptcy (Steijvers & Voordeckers, 2009; Steijvers, Voordeckers, & Vanhoof, 2010). Therefore, the reduced economic performance associated with the firm’s focus on family objectives creates an agency cost for nonfamily stakeholders. Consequently, to protect their financial inter-ests, these stakeholders may pressure family firms to add independent directors to the board, try to gain a seat on the board themselves (Chrisman et al., 2004; Fiegener, Brown, Dreux, & Dennis, 2000), or include restrictive covenants in the loan contract (Prencipe et al., 2008). These measures could be a threat to the socioemotional wealth of the family shareholders. Therefore, family firms with a strong focus on family objectives will try to avoid any relinquishing of control to nonfamily stakeholders (Voordeckers, Van Gils, & Van den Heuvel, 2007). One way this can be realized is to cope with the potential poor firm performance effect by managing reported earnings upward. Hence, family firms may engage in upward earn-ings management today (when “real” performance is poor) to protect their socioemotional wealth while expect-ing the “real” performance to improve in the future when

the reversal effect of accruals will show up (Jones, 1991). Thus, we propose that the more importance private family firms attach to nonfinancial objectives, the more incen-tive they have to manage their earnings upward when firm performance is poor to avoid interference by nonfamily stakeholders and as such preserve their socioemotional wealth.

Although family business research typically states that family firms differ from nonfamily firms because of the nonfinancial goals they pursue (e.g., Harris & Ogbonna, 2007; Westhead & Howorth, 2007), scant attention has been dedicated as to how these objectives vary within the family firm population itself. In fact, one of the few vari-ables that has been examined in this context is the degree of importance family firms attach to family goals and socioemotional wealth (Basco & Pérez Rodríguez, 2009; Distelberg & Sorenson, 2009; Gómez-Mejía et al., 2007). Therefore, in the following sections we discuss how socio-emotional wealth and the incentive to protect it will vary within the population of private family firms depending on the generational stage, the composition of the manage-ment team, and the CEO position to provide an explanation for any observed variance in upward earnings manage-ment behavior.

The Generational StageResearch that has examined goal variation in family firms suggests that the importance of nonfinancial goals is closely associated with the generation in charge of the firm. Westhead (2003), for example, finds that first-generation firms are significantly more likely than multi-generational firms to report that family objectives have priority over business objectives. Van Gils, Voordeckers, and Van den Heuvel (2004) find that when the second or third generations take over the management and/or owner-ship of the firm, the independence objectives become less important. Gómez-Mejía et al. (2007) find that the willing-ness to relinquish family control is lowest in earlier gen-erational stages when socioemotional wealth is highest.

These observations suggest that when successive gen-erations enter the firm, the focus shifts from family objec-tives to a combination of family and business objectives. First of all, as more and more generations are involved in the business, family ties become weaker and each fam-ily branch will place the needs of its own nuclear house-hold first (Ensley & Pearson, 2005; Gersick et al., 1997). Furthermore, as the number of generations increases, so




does the risk of intrafamily conflict (Davis & Harveston, 1999; Ensley & Pearson, 2005; Schulze et al., 2003). In sum, each family branch has different needs, agendas, capabilities, and commitments, making it difficult for a family to maintain a shared vision. Consequently, more formal governance mechanisms tend to be necessary to manage the interests of these different family branches (Jaffe & Lane, 2004). For example, the inclusion of inde-pendent directors that can act as arbitrators in family conflicts might be necessary (Voordeckers et al., 2007). And if independent boards are installed, then both family and business interests are protected. Hence, the likelihood that family firms focus mainly on family objectives reduces. Finally, in multigenerational firms, ownership is likely to be dispersed, including a growing amount of passive fam-ily members (Jaffe & Lane, 2004). These passive family members tend to be less overinvested in the family firm so that their risk preferences are similar to those of outside investors in public firms (Schulze et al., 2003). Hence, these family members are expected to behave more as diversified investors and will therefore dedicate more attention to business objectives.

All these arguments suggest that the attachment of the family to the organization and the family’s social capital tend to weaken across subsequent generations (Arregle, Hitt, Sirmon, & Very, 2007; Gómez-Mejía et al., 2007). As such, socioemotional wealth is expected to be strongest in the founding-family-controlled stage and lower in later generational stages. Consequently, private family firms in later generational stages attach less weight to preserving socioemotional wealth and thus have less incentive to engage in upward earnings management when confronted with poor firm performance than firms in the controlling owner stage. Therefore, we postulate,

Hypothesis 1: Upward earnings management will be greater in first-generation family firms than in second-, third-, or subsequent-generation family firms, conditional on poor firm performance.

The Management Team and Its CEOThe CEO position in a family firm has received consider-able attention in family business research, especially in the context of firm performance (e.g., Anderson & Reeb, 2003; Villalonga & Amit, 2006). In this article, we argue that earnings management in private family firms can also be related to the position and attributes of the CEO.

When discussing a family firm’s CEO, three distinctions can be made: a founder CEO, a descendant CEO, and an external CEO (Villalonga & Amit, 2006). Empirical results show that in family firms, the founder and the founder’s legacy are central to the strategy setting and decision making. Hence, founder CEOs have a profound influence on the firm’s culture, strategic vision, values, and goals (Athanassiou, Crittenden, Kelley, & Marquez, 2002; Kelly, Athanassiou, & Crittenden, 2000; Schein, 1983; Tagiuri & Davis, 1992). A possible explanation for this concept of “founder centrality” is that, when a founder serves as CEO, ownership and control are usually vested in his or her hands. Because of this concentration of power, founder CEOs have greater discretion in their actions and have the ability to pursue goals different from those of a profit-maximizing firm (Chrisman et al., 2004; Gedajlovic, Lubatkin, & Schulze, 2004). And because founder CEOs tend to focus on family goals at the expense of other goals, they are likely to be confronted with reduced economic performance, thereby creating agency costs for their important nonfamily stakeholders. In addi-tion, the emotional attachment to the firm, the self-identification with the firm, and the utility generated by the ability to exercise authority are strongest in the stage when the founding family controls and manages the firm (Gómez-Mejía et al., 2007; Schulze et al., 2003). As such, founder CEOs will be strongly driven to protect the socio-emotional wealth of the firm. Therefore, to avoid a decline in socioemotional wealth caused by potential agency problems with nonfamily stakeholders, a founder CEO might have the incentive and the power to influence firm performance through earnings management.

When the CEO position is occupied by a descendant, on the other hand, the risk of loss of socioemotional wealth is less likely to provide the CEO with incentive to manage earnings. Although in founder-led firms the level of altru-ism is strong, resulting in strong family ties and strong family cohesion, in descendant-led family firms the nature of altruism changes and family ties and cohesiveness among family members get weaker (Lubatkin, Schulze, Ling, & Dino, 2005). Therefore, although in founder-led family firms a shared vision increases the willingness of family members to subordinate their individual goals to collective goals (Mustakallio, Autio, & Zahra, 2002), in descendant-led family firms each family member starts to place the needs and immediate demands of his or her own nuclear family first (Lubatkin et al., 2005). Because of the lower attachment to the organization in later generations




(Gómez-Mejía et al., 2007) and the difficulty of reaching a shared vision about the preservation of the socioemo-tional wealth in descendant-led firms (Schulze et al., 2003), descendant CEOs are expected to have less incen-tive to preserve socioemotional wealth and to engage in upward earnings management.

Finally, the CEO position can also be occupied by an external CEO. Reasons for family members to hire an external manager to occupy the CEO position can be divergent. An external CEO can be chosen because there is no (qualified) successor available within the family or as interim solution to prepare the next generation of family members (Chua, Chrisman, & Sharma, 2003; Le Breton-Miller, Miller, & Steier, 2004; Poza, Alfred, & Maheshwari, 1997). Including external managers, irrespective of whether they occupy the CEO position or another top management team position, can have many advantages. For instance, external managers can assist the family by helping the business through a crisis, mentoring the next generation, or acting as a mediator in family conflict (S. B. Klein & Bell, 2007). In addition, they add knowledge, increase professionalism, enable the family business to grow, and bring in ideas to help the firm stay innovative and competi-tive (Gedajlovic et al., 2004; Pérez-González, 2006). Although external managers are often burdened with other roles (S. B. Klein, 2000), they are ultimately brought in to provide objectivity and more rationality and to generate superior business performance (Blummentritt, Keyt, & Astrachan, 2007; Gersick et al., 1997). Therefore, when an external manager is included in the top management team or a nonfamily member serves as CEO, decisions will be based less on socioemotional wealth considerations but more on financial considerations. Following this line of reasoning, family firms are expected to engage less in upward earnings management when firm performance is poor if external managers are present in the top manage-ment team or a nonfamily member serves as CEO.

Nevertheless, external managers and external CEOs may have other motivations than preserving the socio-emotional wealth of the family to engage in upward earn-ings management. The agency problem that arises between family owners and external managers can give these man-agers incentive to manage earnings upward to maximize their own private benefits or compensation. However, we do not believe that these motivations have significant value in the context of private family firms because of two rea-sons. First, the ability and discretion to maximize private benefits is most prevalent when ownership is very diffuse.

This situation is less common in private family firms as ownership is characterized by one main block holder (the family) holding the majority of shares. Stronger ownership concentration mitigates the conflict of interest between owners and managers because a large shareholder has stronger incentives to monitor the CEO and management (Villalonga & Amit, 2006). Second, nonfamily execu-tives usually are not only motivated by financial rewards but also by nonpecuniary benefits such as the promise of lifetime job security and an informal work environment (Lubatkin, Ling, & Schulze, 2007). In addition, family business owners are found to nurture community steward-ship, fostering high levels of trust, loyalty, and commitment, which will lead to the cultivation of nonfamily managers as part of a quasi-family (Karra, Tracey, & Phillips, 2006; Miller, Le Breton-Miller, & Scholnick, 2008), minimizing traditional owner–external manager agency conflicts. In sum, external managers and external CEOs in private fam-ily firms have generally less incentive and less discretion to engage in upward earnings management. Based on the arguments above, we postulate,

Hypothesis 2a: Upward earnings management will be greater in founder-led family firms than in descendant-led family firms or firms led by an external CEO, conditional on poor firm performance.

Hypothesis 2b: Family firms with nonfamily manag-ers in their top management team will engage less in upward earnings management, conditional on poor firm performance.

MethodData Set

The empirical data on the family firm characteristics used to test the hypotheses presented are derived from a wider survey exploring the general characteristics as well as the ownership structure, management issues, growth, and strategic issues of Flemish businesses. This survey was mailed to the president, the CEO, or the financial director of 8,367 companies in the manufacturing, trade, and ser-vices industry. The time frame of the data collection was 2001. A total of 896 filled-out questionnaires were received, of which 57 were anonymous. Financial data on these firms were retrieved from BEL-FIRST, a financial database supplied by Bureau Van Dijk. From the surveyed




firms, we selected the private family firms, that is, firms (a) that are not quoted on the stock exchange, (b) that are perceived as family firms by the CEO, (c) where one fam-ily owns 50% or more of all shares, (d) where the number of employees in full-time equivalents is 250 or fewer, and (e) where the annual turnover is €50 million or less or where the annual balance sheet total is €43 million or less. After reducing our sample by (a) selecting only those firms that engage in upward earnings management, (b) eliminat-ing missing values, and (c) trimming outliers at a 1% level, a sample of 132 cases remained.

VariablesDependent variable. We use the amount of discretionary

(abnormal) accruals as a proxy for the extent of (upward) earnings management. Consistent with prior research (e.g., Defond & Park, 1997; Kothari, Leone, & Wasley, 2005; Subramanyam, 1996), we compute the amount of discre-tionary accruals (DAs) by estimating the modified Jones model cross-sectionally (per two-digit SIC group) for the year 2000. Because of our relatively limited sample size, an out-of-sample estimation approach is used to estimate parameter estimates.

Following Teoh, Welch, and Wong (1998) and Beneish (1998), we focus on current accruals instead of on total accruals because the long-term component incorporated in total accruals provides limited potential as a tool for systematic earnings management. In addition, following Kothari et al. (2005), we include a constant in our model because this has many advantages; for example, it provides an additional control for heteroscedasticity not alleviated by using assets as the deflator and mitigates problems stemming from an omitted size variable. Hence, in our study DAs are defined as follows,

DA

A

CA

A A

REV REC

At

t

t

t t

t t

t− −

∧ ∧

−

∧

−

= − +

+−

1 1

0 11

21

1β β β

∆ ∆

where CAt is current accruals in year t defined as the change in current assets during period t minus the change in current liabilities during period t minus the change in cash and cash equivalents during period t plus the current maturities of long-term debt and other short-term debt included in current liabilities during period t, At-1 is total assets at the end of year t-1, DREVt is revenues in year t less revenues in year t-1, and DRECt is receivables in year t less receivables in year t-1.

Independent and control variables. To determine the generational phase of the family firm, the survey included a question in which respondents were asked to indicate the generation actively involved in the policy of the firm. This revealed the most dominant generation involved in the family firm’s decision-making processes. We recoded this variable in three binary dummy variables: first generation, second generation, and third and later generations. Like-wise, the CEO position is measured by three binary dummy variables: founder CEO, descendant CEO, and external CEO. The presence of external managers is measured by a binary variable with a value of 1 if external managers are present in the top management team and 0 otherwise. Gómez-Mejía et al. (2007) propose that performance hazard can be manifested in two ways: (a) the probability of orga-nizational failure (which is usually the result of continuing losses) and (b) the possibility of below-target performance. Therefore, we measure negative performance consequences by two dummy variables. The first dummy variable has a value of 1 if premanaged earnings are negative and a value of 0 otherwise. The second dummy variable has a value of 1 if premanaged earnings fall below last year’s reported earnings (below-target performance) and 0 otherwise. Both dummy variables are interacted with the generational phase of the firm, the CEO position, and the presence of external managers to make a distinction, for each family characteristic, between firms experiencing negative per-formance consequences and those not.

In our regression we also include proxies for other factors that might affect the level of earnings manage-ment. Leverage (total debt divided by total assets) is included to control for two contrasting effects: (a) the debt covenant hypothesis (Smith, 1993) and (b) the fact that more equity financing (and hence less debt) will also cause more upward earnings management to avoid the empowerment of the board, the inclusion of external directors, and more monitoring. Furthermore, firm size (log of total assets), firm age (log of firm age in years), and sales growth (revenues at the end of year t less revenues at the beginning of year t scaled by revenues at the beginning of year t) are included as variables to control for the political cost hypothesis. The political cost hypothesis states that the greater the political costs for the firm (e.g., taxes or costs incurred by governmen-tal or industry regulations), the more incentive managers have to make income-decreasing accounting choices to reduce the size or the likelihood of politically imposed wealth transfers (e.g., Adhikari, Derashid, & Zhang, 2005; Watts & Zimmerman, 1978).




Moreover, net return on assets of year t-1 and the abso-lute value of net return on assets of year t-1 are included to control for the association between DAs and perfor-mance (Dechow, Sloan, & Sweeney, 1995; Kim & Yi, 2006; A. Klein, 2002; McNichols, 2000). In addition, other frequently used control variables such as a dummy variable indicating the presence of a loss in the prior accounting period and cash flow from operations are included in the model (Callaway, Lulseged, & Nowlin, 2006).

Finally, because firms using an abbreviated and a com-plete scheme for their annual account are included in the sample, we put a dummy variable into our regression to avoid any potential bias from the scheme choice.

Descriptive StatisticsTable 1 presents descriptive statistics on the variables included in our study. The mean family firm performing upward earnings management reports positive DAs that are 6.7% of lagged total assets. The mean family firm is 31.5 years old, has €7,706,500 in total assets, and has a yearly sales growth of 8.5%. Table 1 also shows that the mean family firm has a net return on assets of 3.4%, a leverage ratio of 59.6%, and cash flow from operations that is 11.9% of lagged total assets. In addition, most family firms in our sample are in the second generation (44.70% of the firms), whereas 33.33% of the firms are in the first generation and 21.97% of the firms are in the third or later generations. Almost half of the firms (46.21%) in our sample include external managers in their management team. Only 10.61% of the firms have an external CEO. Most firms in our sample thus have a family CEO: Of the firms, 31.81% are founder led and 57.58% are descendant led.

The correlation matrix shows that first-generation firms are significantly positively correlated with positive DAs. This already gives us an indication that first-generation firms perform more upward earnings management as stated in Hypothesis 1. Furthermore, Table 1 shows that, consistent with Hypothesis 2a, founder–led firms are posi-tively and descendant-led firms are negatively correlated with positive DAs.

ResultsTables 2, 3 and 4 report the results of the ordinary least squares regressions. The White test indicates no presence of heteroscedasticity problems, and because the highest variance inflation factor value is 3.49, multicollinearity is not a problem (Kennedy, 2008).

Table 2 shows that second-generation family firms and third- and later-generation family firms report positive DAs that are on average 2% (p < .10) and 3.7% (p < .05) of total assets lower, respectively, than those reported by first-generation family firms when confronted with nega-tive premanaged earnings. When premanaged earnings fall below last year’s reported earnings, second-generation family firms and third- and later-generation family firms report positive DAs that are on average 2.5% (p < .05) and 3.5% (p < .05) of total assets lower, respectively, than those reported by first-generation family firms. Hence, results show that both second- and third- and later-generation family firms perform less upward earnings management than do first-generation family firms when confronted with both negative premanaged earnings and earnings that fall below last year’s reported earnings. These findings support Hypothesis 1. Furthermore, Table 2 shows that first-, second-, and third- and later-generation family firms that do not experience negative performance report significantly lower positive DAs than first-generation firms with poor economic performance. These results are also in line with our reasoning. After all, when firm perfor-mance is good, nonfamily stakeholders who are focused on economic performance will have no incentive to demand interference. Therefore, family firms do not have to fear a loss in their socioemotional wealth and thus have less incentive to manage earnings upward to preserve their socioemotional wealth.

Table 3 shows the results of the influence of the CEO position on earnings management. As hypothesized (Hypothesis 2a), descendant-led firms with both negative premanaged earnings and earnings that fall below last year’s reported earnings have significantly (p < .05, p < .01, respectively) lower positive DAs (2.5% and 3.0% of total assets lower, respectively) than founder-led firms with poor economic performance. However, the difference in positive DAs (in Regressions 3a and 3b) between family firms with an external CEO and founder-led family firms is not significant. Consistent with results reported in Table 2, founder-led, descendant-led, and externally led family firms that do not have negative premanaged earn-ings or that do not have premanaged earnings that fall below last year’s reported earnings have significantly lower positive DAs than founder-led firms experiencing these negative performance consequences.

Regression 4a in Table 4 shows that, for firms with negative premanaged earnings, positive DAs are weakly significantly (p < .10) lower (1.9% of total assets) for firms incorporating external managers in their top management



287

Tab

le 1

. Des

crip

tive

Stat

istic

s

Var

iabl

eM

SDn

%1

23

45

67

89

1011

1213

1415

1617

1.

Posi

tive

disc

retio

nary

ac

crua

ls

0.07

0.06

1.0

2.

Firs

t ge

nera

tion

(1/0

)44

33.3

3.1

9**

1.0

3.

Seco

nd

gene

ratio

n(1

/0)

5944

.70

-.13

-.64

****

1.0

4.

Thi

rd a

nd

late

r ge

nera

tions

(1/0

)29

21.9

7-.

06-.

38**

**-.

48**

**1.

0

5.

Exte

rnal

m

anag

ers

(1/0

)61

46.2

1.0

2-.

14-.

01.1

7*1.

0

6.

Foun

der

CEO

(1/0

)42

31.8

1.1

8**

.97*

***

-.61

****

-.36

****

-.18

**1.

0

7.

Des

cend

ant

CEO

(1/0

)76

57.5

8-.

22**

-.82

****

.56*

***

.27*

**-.

07-.

80**

**1.

0

8.

Exte

rnal

C

EO(1

/0)

1410

.61

.08

-.14

.04

.11

.37*

***

-.24

***

-.40

****

1.0

9.

Net

ret

urn

on a

sset

s3.

396.

75-.

06.0

3.0

3-.

08.0

2.0

3-.

03-.

001.

0

10.

|Net

ret

urn

on a

sset

s |5.

714.

93.0

9-.

06.0

9-.

04.0

4-.

05.0

2.0

4.6

4***

*1.

0

11.

Leve

rage

0.60

0.23

.03

.20*

*-.

02-.

22**

.19*

*.2

1**

-.24

***

.06

-.32

****

-.22

**1.

0

12.

Firm

siz

e7.

710.

99.0

9-.

15*

-.03

.22*

**.4

4***

*-.

16*

.01

.24*

**.1

1-.

02.2

0**

1.0

13.

Firm

age

31.6

21.1

.07

-.27

***

-.10

.43*

***

.00

-.23

***

.27*

**-.

08-.

08-.

07-.

21.3

0***

*1.

0

14.

Sale

s gr

owth

0.09

0.22

-.06

-.02

-.00

.02

-.08

.00

.03

-.06

-.18

**-.

06.1

8.1

0.0

21.

0

15.

Cas

h fr

om

oper

atio

ns0.

120.

14.0

0-.

02-.

08.1

1.1

6*-.

03.0

0.0

5.1

4-.

8.1

0-.

00-.

01-.

001.

0

16.

Loss

(1/0

).0

5-.

07.0

4.0

3.0

6-.

05.0

5-.

01-.

60**

**-.

16*

.25*

**-.

05-.

03.2

3***

–.09

1.0

17.

Abb

revi

ated

sc

hem

e(1

/0)

-.08

.23*

**-.

08-.

17*

-.42

****

.20*

*-.

07-.

20**

-.05

-.07

-.13

-.65

****

-.15

*.0

1-.

06–.

061.

0

N =

132

.*p

< .1

0. *

*p <

.05.

***

p <

.01.

***

*p <

.001

.




team than for firms with only family managers. Regression 4b in Table 4, on the other hand, shows that for firms with below-target performance positive DAs are not signifi-cantly different for firms with or without external managers in their top management team. Hence, Hypothesis 2b is only partially supported. Taken together, the effects con-cerning the external CEO (Table 3) and external manager (Table 4) are correctly signed, although only one coeffi-cient (Regression 4a) is weak statistically significant. Probably the relatively small sample size does not allow us to detect a stronger relationship. Another explanation for these weak results may be that external managers or CEOs in private family firms do not have sufficient power to ensure that decisions will be based less on socioemo-tional wealth considerations.

Discussion and Conclusion

Although private family firms represent the majority of firms worldwide (IFERA, 2003) and earnings management is found to be more prominent in private firms than in public firms (Burgstahler et al., 2006), the question of why private family firms would engage in earnings manage-ment is an important but still unresolved one. In this article, we build on the socioemotional wealth concept (Gómez-Mejía et al., 2007) grounded in behavioral theory to develop and test a novel theoretical explanation for earnings man-agement in private family firms. We infer, consistent with Gómez-Mejía et al., (2007), that the preservation of the family’s socioemotional wealth is a key goal in itself for private family firms. Hence, these firms perceive a decline

Table 2. Results of Ordinary Least Squares Regressions for the Generational Phase

Positive discretionary accruals

Variable (1) (2a)a (2b)b

Control variablesNet return on assets year t-1 -.002* (.001) -.002** (.001) -.003** (.001)Absolute value of net return on assets year t-1 .003** (.001) .004*** (.001) .004*** (.001)Leverage .007 (.026) -.035 (.022) -.018 (.025)Firm size .007 (.008) .004 (.006) .008 (.007)Sales growth -.026 (.024) .014 (.020) -.015 (.022)Cash from operations -.015 (.037) .009 (.030) -.017 (.035)Loss -.006 (.016) -.010 (.013) -.001 (.015)Abbreviated scheme .002 (.014) -.008 (.011) -.000 (.013)Firm age .003 (.008) .001 (.007) .004 (.008)

Family characteristicsFirst-generation firms × no negative premanaged earnings -.080*** (.017)First-generation firms × no below-target performance -.070** (.032)Second-generation firms × negative premanaged earnings -.020* (.012)Second-generation firms × below-target performance -.025** (.011)Second-generation firms × no negative premanaged earnings -.091*** (.013)Second-generation firms × no below-target performance -.078*** (.019)Third and later generation firms × negative premanaged earnings -.037** (.015)Third and later generation firms × below-target performance -.035** (.015)Third and later generation firms × no negative premanaged earnings -.096*** (.020)Third and later generation firms × no below-target performance -.082*** (.031)

R2a .000 .417 .131

F statistic 0.84 5.99*** 2.41***

N = 132. Standard errors are reported in parentheses; intercept not reported.a. First-generation firms with negative premanaged earnings suppressed comparison category.b. First-generation firms with below-target performance suppressed comparison category.*p < .10. **p < .05. ***p < .01.




in their socioemotional wealth as a major loss for which they are prepared to accept a higher performance hazard. However, when actual financial performance indeed becomes poor, private family firms with a strong focus on family objectives will engage in upward earnings manage-ment to avoid protective measures taken by nonfamily stakeholders (e.g., restrictive debt covenants, the risk of losing personal collateral, requirement of independent directors) that would otherwise result in a loss of family control. Our empirical tests indeed yielded evidence in support of socioemotional wealth preservation as an explanation for upward earnings management in private family firms conditional on poor firm performance.

As such, our article contributes to the theoretical debate on the motives for upward earnings management in the context of private family firms. Prior earnings management

studies reported several incentives for earnings manage-ment such as capital market (signaling) incentives, com-pensation incentives, and income smoothing incentives (for an overview, see Healy & Wahlen, 1999). We add the preservation of socioemotional wealth as an earnings man-agement motive to this list which is an idiosyncratic motive for (private) family firms grounded in the emotion-oriented family subsystem. More broadly speaking, our empirical evidence complements the scant evidence on the salience of socioemotional wealth and nonfinancial objectives as drivers of decision-making behavior in family firms. Understanding decision making in family firms involves the investigation of the drivers related to the business sys-tem as well as the drivers related to the family system and their interactions (Distelberg & Sorenson, 2009). There-fore, future research should devote more attention to the

Table 3. Results of Ordinary Least Squares Regressions for the CEO Position


Variable (3a)a (3b)b

Control variablesNet return on assets year t-1 -.002** (.001) -.003** (.001)Absolute value of net return on assets year t-1 .004*** (.001) .004*** (.001)Leverage -.032 (.022) -.017 (.024)Firm size .002 (.006) .007 (.007)Sales growth .015 (.020) -.014 (.022)Cash from operations .000 (.030) -.021 (.034)Loss -.010 (.013) -.001 (.015)Abbreviated scheme -.007 (.011) .001 (.013)Firm age -.000 (.007) .003 (.008)

Family characteristicsFounder CEO × no negative premanaged earnings -.078*** (.017)Founder CEO × no below-target performance -.072** (.032)Descendant CEO × negative premanaged earnings -.025** (.011)Descendant CEO × below-target performance -.030*** (.011)Descendant CEO × no negative premanaged earnings -.090*** (.012)Descendant CEO × no below-target performance -.080*** (.017)External CEO × negative premanaged earnings -.009 (.018)External CEO × below-target performance -.016 (.018)External CEO × no negative premanaged earnings -.086*** (.026)External CEO × no below-target performance -.063 (.057)

R2a .337 .132

F statistic 5.75*** 2.43***

N = 132. Standard errors are reported in parentheses; intercept not reported.a. Founder-led firms with negative premanaged earnings suppressed comparison category.b. Founder-led firms with below-target performance suppressed comparison category.*p < .10. **p < .05. ***p < .01.




investigation of nonpecuniary decision-making drivers in family firms from the family subsystem such as socio-emotional wealth.

Our study also contributes to the debate of family firm heterogeneity. Although recent studies have acknowledged that family firms are a heterogeneous group (Corbetta & Salvato, 2004; Dyer, 2006; Sharma, 2004; Westhead & Howorth, 2007), up until now research on earnings man-agement in public family firms has mainly considered family firms to be a homogeneous group. In line with prior research, our results show that family firms are not a homo-geneous group. In particular, we find that the generational stage and the CEO position have a significant influence on the level of earnings management.

Furthermore, our findings also fuel the debate on risk behavior in family firms. Although family firms are usually considered to be more risk averse than nonfamily firms (Chandler, 1990), Gómez-Mejía et al. (2007) argue that family firms are risk willing and risk averse at the same time when it comes to making business decisions. In family

firms, a decision is classified as risky when it has the possibility of damaging the socioemotional wealth of the family. Consistent with Gómez-Mejía et al. (2007), our results suggest that family firms are simultaneously risk averse and willing to take risks. When family firms are confronted with reduced economic performance because of their focus on family objectives, agency costs with nonfamily stakeholders occur. As previously explained, these nonfamily stakeholders may protect their interests by requiring adding independent directors to the board, trying to gain a seat on the board themselves (Chrisman et al., 2004; Fiegener et al., 2000), or including restrictive covenants in the loan contract (Prencipe et al., 2008). These measures could be a threat for the socioemotional wealth of the family shareholders. Therefore, these family firms manage their earnings to give an impression of better current performance to avoid a loss of their socioemotional wealth. Hence, because they do not want to take the risk of a loss in their socioemotional wealth, this indicates that they are risk averse. However, the income-increasing

Table 4. Results of Ordinary Least Squares Regressions for the Presence of External Managers


Variable (4a)a (4b)b

Control variablesNet return on assets year t-1 -.002** (.001) -.003** (.001)Absolute value of net return on assets year t-1 .004*** (.001) .004*** (.001)Leverage -.021 (.021) -.001 (.024)Firm size .005 (.006) .008 (.007)Sales growth .008 (.020) -.017 (.023)Cash from operations .005 (.030) -.019 (.035)Loss -.013 (.013) -.003 (.015)Abbreviated scheme -.007 (.011) .004 (.013)Firm age -.006 (.007) -.001 (.007)

Family characteristicsExternal manager(s) × negative premanaged earnings -.019* (.011)External manager(s) × below-target performance -.008 (.011)External manager(s) × no negative premanaged earnings -.083*** (.014)External manager(s) × no below-target performance -.060*** (.023)No external manager(s) × no negative premanaged earnings -.082*** (.012)No external manager(s) × no below-target performance -.064*** (.018)

R2a .335 .101

F statistic 6.50*** 2.23**

N = 132. Standard errors are reported in parentheses; intercept not reported.a. Family firms with no external manager(s) in their management team and with negative premanaged earnings suppressed comparison category.b. Family firms with no external manager(s) in their management team and with below-target performance suppressed comparison category.*p < .10. **p < .05. ***p < .01.




effects of earnings management are only temporary and will be reversed later (Jones, 1991). Family entrepreneurs usually are overly optimistic (Hmieleski & Baron, 2009) and do not seem to take this effect into account as they expect that future performance will improve when the reversal effect of earnings will show up. However, these family firms are at the same time risk taking because when firm performance does not improve when the reversal effect shows up, they risk much stronger detrimental effects on their performance in the future. The family firms literature often portrays family firms as having a long-term vision or patient capital (James, 1999; Sirmon & Hitt, 2003). However, our results suggest that family firms seem to take a rather short-term stance concerning nonfinancial objec-tives such as the preservation of their socioemotional wealth. It is a challenge for future research to scrutinize this seeming contradiction.

Our results also have implications for the broader population of small and medium enterprises (SMEs). Although the concept of socioemotional wealth is typical of family firms, nonfinancial objectives can also be an important factor in understanding decision making and earnings management in nonfamily SMEs. Several studies have documented that the small firm financial objective function contains pecuniary as well as nonpecuniary benefits (e.g., LeCornu, McMahon, Forsaith, & Stanger, 1996; McMahon & Stanger, 1995). Therefore, future research with both family and nonfamily firms should dedicate more attention to nonfinancial objectives as driv-ers of economic behavior and earnings management.

Finally, our results also have important practical impli-cations. Because earnings management is one dimension of financial reporting quality, understanding why private family firms engage in earnings management is a step toward understanding why some family firms supply lower financial reporting quality than other family firms. In pri-vate firms, financial statements are usually the only public source of information. Therefore, a better understanding of the quality of these financial statements and the drivers behind it could help nonfamily stakeholders in making more accurate credit decisions.

Our study also has some limitations that provide chal-lenges for future research. First, although our database contains important family firm characteristics such as the generational stage, the management team, and the CEO position, it does not contain information on other family firm characteristics that could be important when study-ing earnings management behavior. Our database, for

example, lacks information on ownership dispersion, which is one of the most researched variables in the family firm field, usually linked to performance measures. The availability of measures for ownership structure such as the number of shareholders and the percentage shares in hands of each shareholder would allow us to investigate the important question of whether the distribution of own-ership has an influence on earnings management in private family firms. Moreover, detailed information on the pro-portion or position of external managers in the manage-ment team would make it possible to get better insight into the influence of external managers on the preserva-tion of socioemotional wealth. In addition, more detailed information on the functioning and the composition of the board of directors would also make it possible to examine the influence of the board of directors on earn-ings management in family firms. Small and medium-sized private family firms often have only a rubber-stamp board. When there are active boards, independent directors are mainly hired for their advice task (Van den Heuvel, Van Gils, & Voordeckers, 2006). Moreover, in private family firms, ownership is usually entirely in the hands of the CEO and/or his or her family. Therefore, the con-trolling family has the power to stimulate the functioning of the board of directors and the board of directors is therefore not effective in controlling earnings manage-ment (Bar-Yosef & Prencipe, in press). However, because of the increasing focus on corporate governance and grow-ing institutional pressure (Melin & Nordqvist, 2007), the board of directors in small and medium-sized private fam-ily firms may grow into a more independent and efficient governance mechanism in which both the control and the advice task are combined. It would therefore be interesting for future research to examine the role of the board of directors in controlling earnings management.

Second, lone founder firms and true family firms are different with regard to priorities and risk taking (Miller, Le Breton-Miller, & Lester, 2010; Miller, Le Breton-Miller, Lester, & Cannella, 2007). Because in lone founder firms no family of the founder is involved in the business, nonfinancial objectives such as providing employment for family members, family harmony, and the preservation of the firm for future generations will be less important. Unfortunately, because of a lack of data, it is not possible to explicitly differentiate between lone founder firms and true family firms in our sample. However, because one of our criteria for defining a family firm refers to the family component (the CEO perceives the firm as a family




firm), the likelihood that these firms are included in the sample is expected to be negligible. For future research purposes, however, it would be interesting to examine the difference between lone founder and true family firms with regard to their earnings management behavior.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interests with respect to the authorship and/or publication of this article.

Financial Disclosure/Funding

The author(s) received no financial support for the research and/or authorship of this article.

References

Adhikari, A., Derashid, C., & Zhang, H. (2005). Earnings management to influence tax policy: Evidence from large Malaysian firms. Journal of International Financial Man-agement and Accounting, 16, 142-163.

Ali, A., Chen, T.-Y., & Radhakrishnan, S. (2007). Corporate disclosures by family firms. Journal of Accounting and Economics, 44, 238-286.

Anderson, R., & Reeb, D. (2003). Founding-family ownership and firm performance: Evidence from the S&P 500. Journal of Finance, 58, 1301-1328.

Arregle, J.-L., Hitt, M., Sirmon, D., & Very, P. (2007). The development of organizational social capital: Attributes of family firms. Journal of Management Studies, 44, 73-95.

Athanassiou, N., Crittenden, W., Kelley, L., & Marquez, P. (2002). Founder centrality effects on the Mexican family firm’s top management group: Firm culture, strategic vision and goals, and firm performance. Journal of World Business, 37, 139-150.

Bar-Yosef, S., & Prencipe, A. (in press). Corporate governance and earnings management in family-controlled companies. Journal of Accounting, Auditing and Finance.

Basco, R., & Pérez Rodríguez, M. J. P. (2009). Studying the family enterprise holistically: Evidence for integrated family and business systems. Family Business Review, 22, 82-95.

Beneish, M. (1998). Discussion of “Are accruals during ini-tial public offerings opportunistic?” Review of Accounting Studies, 3, 209-221.

Berger, A., & Udell, G. (1998). The economics of small busi-ness finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking and Finance, 22, 613-673.

Blummentritt, T. P., Keyt, A. D., & Astrachan, J. H. (2007). Creating an environment for successful nonfamily CEOs:

An exploratory study of good principles. Family Business Review, 20, 321-335.

Burgstahler, D., Hail, L., & Leuz, C. (2006). The importance of reporting incentives: Earnings management in European private and public firms. Accounting Review, 81, 983-1016.

Callaway, C. D., Lulseged, A., & Nowlin, T. S. (2006). Prominent audit clients and the relation between discretionary accruals and non-audit fees. Advances in Accounting, 22, 123-148.

Chandler, A. D., Jr. (1990). Scale and scope: The dynamics of industrial capitalism. Cambridge, MA: Belknap.

Chrisman, J. J., Chua, J. H., & Litz, R. A. (2004). Comparing the agency costs of family and non-family firms: Conceptual issues and exploratory evidence. Entrepreneurship Theory and Practice, 28, 335-354.

Chua, J. H., Chrisman, J. J., & Sharma, P. (2003). Succession and nonsuccession concerns of family firms and agency relationship with nonfamily managers. Family Business Review, 16, 89-107.

Claessens, S., Djankov, S., Fan, J. P. H., & Lang, L. H. P. (2002). Disentangling the incentive and entrenchment effect of large shareholdings. Journal of Finance, 57, 2741-2771.

Corbetta, G., & Salvato, C. (2004). Self-serving or self-actualizing? Models of man and agency costs in different types of family firms: A commentary on “Comparing the agency costs of family and non-family firms: Conceptual issues and exploratory evidence.” Entrepreneurship Theory and Practice, 28, 355-362.

Davis, P. S., & Harveston, P. D. (1999). In the founder’s shadow: Conflict in the family firm. Family Business Review, 12, 311-323.

Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detect-ing earnings management. Accounting Review, 70, 193-225.

Defond, M. L., & Park, C. W. (2001). The reversal of abnor-mal accruals and the market valuation of earnings surprises. Accounting Review, 76, 375-404.

Distelberg, B., & Sorenson, R. L. (2009). Updating system concepts in family businesses: A focus on values, resource flows, and adaptability. Family Business Review, 22, 65-81.

Dyer, W. G., Jr. (2006). Examining the “family effect” on firm performance. Family Business Review, 19, 253-273.

Ensley, M., & Pearson, A. (2005). An exploratory comparison of the behavioral dynamics of top management teams in family and non-family new ventures: Cohesion, conflict, potency, and consensus. Entrepreneurship Theory and Practice, 29, 267-284.

Fiegener, M. K., Brown, B. M., Dreux, D. R., & Dennis, W. J. (2000). CEO stakes and board composition in small private firms. Entrepreneurship Theory and Practice, 24, 5-24.




Gedajlovic, E., Lubatkin, M. H., & Schulze, W. S. (2004). Crossing the threshold from founder management to pro-fessional management: A governance perspective. Journal of Management Studies, 41, 899-912.

Gersick, K. E., Davis, J. A., Hampton, M. M., & Lansberg, I. (1997). Generation to generation. Life cycles of family busi-nesses. Boston, MA: Harvard Business School Press.

Gómez-Mejía, L., Haynes, K., Núñez-Nickel, M., Jacobson, K., & Moyano-Fuentes, J. (2007). Socioemotional wealth and business risks in family-controlled firms: Evidence from Spanish olive oil mills. Administrative Science Quarterly, 52, 106-137.

Harris, L., & Ogbonna, E. (2007). Ownership and control in closely-held family-owned firms: An exploration of strategic and operational control. British Journal of Management, 18, 5-26.

Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13, 365-383.

Hmieleski, K., & Baron, R. (2009). Entrepreneurs’ optimism and new venture performance: A social cognitive perspective. Academy of Management Journal, 52, 473-488.

International Family Enterprise Research Academy. (2003). Family businesses dominate. Family Business Review, 16, 235-240.

Jaffe, D., & Lane, S. (2004). Sustaining a family dynasty: Key issues facing complex multigenerational business- and investment-owning families. Family Business Review, 17, 81-98.

James, H. S., Jr. (1999). Owner as manager, extended horizons and the family firm. International Journal of the Economics of Business, 6, 41-55.

Jiraporn, P., & Dadalt, P. J. (2009). Does founding family control affect earnings management? Applied Economics Letters, 16, 113-119.

Jones, J. J. (1991). Earnings management during impact relief investigations. Journal of Accounting Research, 29, 193-228.

Karra, N., Tracey, P., & Phillips, N. (2006). Altruism and agency in the family firm: Exploring the role of family, kin-ship, and ethnicity. Entrepreneurship Theory and Practice, 30, 861-877.

Kelly, L. M., Athanassiou, N., & Crittenden, W. F. (2000). Founder centrality and strategic behaviour in the family-owned firm. Entrepreneurship Theory and Practice, 25, 27-42.

Kennedy, P. (2008). A guide to econometrics. Cambridge, MA: Blackwell.

Kim, J.-B., & Yi, C. H. (2006). Ownership structure, business group affiliation, listing status, and earnings management:

Evidence from Korea. Contemporary Accounting Research, 23, 427-464.

Klein, A. (2002). Audit committee, board of director character-istics, and earnings management. Journal of Accounting and Economics, 33, 375-400.

Klein, S. B. (2000). Family business in Germany: Significance and structure. Family Business Review, 13, 157-181.

Klein, S. B., & Bell, F.-A. (2007). Non-family executives in family businesses: A literature review. Electronic Journal of Family Business Studies, 1, 19-37.

Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Perfor-mance matched discretionary accrual measures. Journal of Accounting and Economics, 39, 163-197.

Le Breton-Miller, I., Miller, D., & Steier, L. P. (2004). Toward an integrative model of effective FOB succession. Entrepre-neurship Theory and Practice, 28, 305-328.

LeCornu, M. R., McMahon, R. G. P., Forsaith, D. M., & Stanger, A. M. J. (1996). The small enterprise financial objective function. Journal of Small Business Management, 34(3), 1-14.

Lubatkin, M., Ling, Y., & Schulze, W. (2007). An organizational justice-based view of self-control and agency costs in family firms. Journal of Management Studies, 44, 955-971.

Lubatkin, M., Schulze, W., Ling, Y., & Dino, R. (2005). The effects of parental altruism on the governance of family-managed firms. Journal of Organizational Behavior, 26, 313-330.

McMahon, R. G. P., & Stanger, A. M. J. (1995). Understanding the small enterprise financial objective function. Entrepre-neurship Theory and Practice, 19, 21-39.

McNichols, M. F. (2000). Research design issues in earnings management studies. Journal of Accounting and Public Policy, 19, 313-345.

Melin, L., & Nordqvist, M. (2007). The reflexive dynamics of institutionalization: The case of the family business. Strategic Organization, 5, 321-333.

Miller, D., Le Breton-Miller, I., & Lester, R. H. (2010). Family ownership and acquisition behavior in publicly traded com-panies. Strategic Management Journal, 31, 201-223.

Miller, D., Le Breton-Miller, I., Lester, R. H., & Cannella, A. A., Jr. (2007). Are family firms really superior performers? Journal of Corporate Finance, 13, 829-858.

Miller, D., Le Breton-Miller, I., & Scholnick, B. (2008). Stew-ardship vs. stagnation: An empirical comparison of small family and non-family businesses. Journal of Management Studies, 45, 51-78.

Mustakallio, M., Autio, E., & Zahra, S. A. (2002). Relational and contractual governance in family firms: Effects on strategic decision making. Family Business Review, 15, 205-222.




Pérez-González, F. (2006). Inherited control and firm perfor-mance. American Economic Review, 96, 1559-1588.

Poza, E. J., Alfred, T., & Maheshwari, A. (1997). Stakeholder perceptions of culture and management practices in family and family firms—A preliminary report. Family Business Review, 10, 135-155.

Prencipe, A., Markarian, G., & Pozza, L. (2008). Earnings management in family firms: Evidence from R&D cost capitalization in Italy. Family Business Review, 21, 71-88.

Schein, E. H. (1983). The role of the founder in creating orga-nizational culture. Organizational Dynamics, 12, 13-28.

Schulze, W. S., Lubatkin, M. H., & Dino, R. N. (2001). Agency relationships in family firms: Theory and evidence. Organi-zation Science, 12, 99-116.

Schulze, W. S., Lubatkin, M. H., & Dino, R. N. (2003). Explor-ing the agency consequences of ownership dispersion among the directors of private family firms. Academy of Management Journal, 48, 179-194.

Setia-Atmaja, L., Tanewski, G. A. & Skully, M. (2009). The role of dividends, debt and board structure in the gov-ernance of family controlled firms. Journal of Business Finance and Accounting, 36, 863-898.

Sharma, P. (2004). An overview of the field of family business studies: Current status and directions for future research. Family Business Review, 17, 1-36.

Sirmon, D. G., & Hitt, M. A. (2003). Managing resources: Linking unique resources, management, and wealth creation in family firms. Entrepreneurship Theory and Practice, 27, 339-358.

Smith, C. W., Jr. (1993). A perspective on accounting-based debt covenant violations. Accounting Review, 68, 289-303.

Stafford, K., Duncan, K. A., Danes, S. M., & Winter, M. (1999). A research model of sustainable family business. Family Business Review, 12, 197-208.

Steijvers, T., & Voordeckers, W. (2009). Private family owner-ship and the agency cost of debt. Family Business Review, 22, 333-346.

Steijvers, T., Voordeckers, W., & Vanhoof, K. (2010). Collat-eral, relationship lending and family firms. Small Business Economics, 34, 243-259.

Subramanyam, K. R. (1996). The pricing of discretionary accru-als. Journal of Accounting and Economics, 22, 249-281.

Tagiuri, R., & Davis, J. (1992). On the goals of successful family companies. Family Business Review, 5, 43-62.

Teoh, S. H., Welch, I., & Wong, T. J. (1998). Earnings manage-ment and the underperformance of seasoned equity offerings. Journal of Financial Economics, 50, 63-99.

Van den Heuvel, J., Van Gils, A., & Voordeckers, W. (2006). Board roles in small- and medium-sized family businesses:

Performance and importance. Corporate Governance: An International Review, 14, 467-485.

Van Gils, A., Voordeckers, W., & Van den Heuvel, J. (2004). Environmental uncertainty and strategic behavior in Belgian family firms. European Management Journal, 22, 588-595.

Villalonga, B., & Amit, R. (2006). How do family owner-ship, control and management affect firm value. Journal of Financial Economics, 80, 388-417.

Voordeckers, W., & Steijvers, T. (2006). Business collateral and personal commitments in SME lending. Journal of Banking and Finance, 30, 3067-3086.

Voordeckers, W., Van Gils, A., & Van den Heuvel, J. (2007). Board composition in small and medium-sized family firms. Journal of Small Business Management, 45(1), 137-156.

Wang, D. (2006). Founding family ownership and earnings quality. Journal of Accounting Research, 44, 619-656.

Watts, R. L., & Zimmerman, J. L. (1978). Towards a positive theory: The determination of accounting standards. Accounting Review, 53, 112-134.

Westhead, P. (2003). Company performance and objectives reported by first and multi-generation family companies: A research note. Journal of Small Business and Enterprise Development, 10, 93-105.

Westhead, P., & Howorth, C. (2006). Ownership and manage-ment issues associated with family firm performance and company objectives. Family Business Review, 19, 301-316.

Westhead, P., & Howorth, C. (2007). “Types” of private family firms: An exploratory conceptual and empirical analysis. Entrepreneurship & Regional Development, 19, 405-431.

Bios

Annelies Stockmans is a PhD student in accounting and family firms at the Center of Entrepreneurship and Innovation, Hasselt University. The topic of her dissertation is financial reporting quality in private family firms.

Nadine Lybaert is an associate professor of financial account-ing at Hasselt University. As member of the Center of Entre-preneurship and Innovation, her primary research interests are within the domain of accounting and governance in (private) family firms.

Wim Voordeckers is an associate professor of entrepreneurial finance and governance and academic director of the Center of Entrepreneurship and Innovation at Hasselt University. His pri-mary research interests include financing constraints, collateral and relationship lending, agency issues, and board behavior in family firms.



Socioemotional Wealth and Earnings Management in Private Family Firms

Documents