Abstract:
This study examines, firstly, the association between family ownership structure and real earnings management and, secondly, investigates whether different degrees of cash flow-control rights divergence of family ownership affects real earnings management. Three types of real operating manipulation are considered: sales manipulation, production manipulation, and discretionary expense manipulation. Family ownership is defined based on the ultimate control rights. The unique data set covers 577 firm-years observation based on Thai listed company data from the Stock Exchange of Thailand (SET) over the period 2008-2010. Given the inconclusive extant studies based on two competing notions: the alignment effect and the entrenchment effect, the directional relationship between family ownership structure and real earnings management is predicted with no direction. In contrast, the high degree of divergence allows family shareholders to have relatively low committed cash flow compared to their control right, thus inducing entrenched motivation for family owners. This study hypothesizes that the degree of cash flow-control rights divergence of family firms is positively associated with the level of real earnings management. Consistent with the hypotheses this study, firstly, finds that firms with (without) ultimate family shareholders are more (less) likely to engage in real earnings management. This association is found only in sales manipulation activity and the manipulation is an upward direction. Secondly, this study finds that family firms with a higher (lower) degree of cash flow-control rights divergence are more (less) likely to engage in real earnings management. The real earnings manipulation is employed through sales manipulation in an “upward” direction and discretionary expense activities in both upward and downward directions. Overall, family firms with different degrees of cash flow-control rights divergence perceive costs associated with each manipulation activity differently.
