Earnings Management Priorities of Private Family Firms

Abstract

We compare earnings management priorities of private family and private non-family firms. Our study is made possible by the availability of a new and unique database on family relationships between CEOs, board members and owners of private Norwegian firms. We hypothesize and find that compared with private non-family firms, private family firms are likely to manage earnings downward. However, we also find that highly leveraged private family firms make more income increasing accounting choices than highly leveraged private non-family firms. Finally, we document that CEOs representing controlling families promote earnings management, and independent board members somewhat mitigate it. We note that research on the relationship between financial reporting quality and family governance is quite limited. We contribute to this emerging literature.