Do family-controlled and financially healthy firms manage their reported earnings? Evidence from Indonesia
-
DOIhttp://dx.doi.org/10.21511/imfi.19(4).2022.17
-
Article InfoVolume 19 2022, Issue #4, pp. 207-217
- Cited by
- 326 Views
-
75 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This paper examines whether family-controlled and financially healthy firms practice earnings management. The data collection focuses on non-financial firms listed on the Indonesia Stock Exchange for the fiscal year 2017–2019. Family and financially healthy firms are key predictor variables for predicting earnings management behavior. Jones’s (1991) modified cross-sectional model measures discretionary accruals (the earnings management indicator). This study reveals a negative relationship between family entities and earnings management practices, suggesting that family-controlled firms are more likely to report a higher quality of earnings. This study also documents that family entities with financial difficulties have more incentive to practice earnings management. Additionally, the study indicates that the involvement of a family member in executive positions leads to lower financial reporting quality. Finally, this study reports a nonlinearity association between family share ownership and the magnitude of earnings management. The study’s findings may assist policymakers in considering the costs and benefits associated with various levels of ownership concentration, especially in the hands of family members.
- Keywords
-
JEL Classification (Paper profile tab)M40, M41, M48
-
References45
-
Tables7
-
Figures0
-
- Table 1. Sample by the IDX industry sector and financially healthy versus distressed firms
- Table 2. Descriptive statistics of sample firms
- Table 3. Pearson correlation matrix
- Table 4. Regression results
- Table 5. Fixed effect regression results
- Table 6. Active family control and earnings management
- Table 7. Nonlinearities between family ownership and earnings management
-
- Ali, Chen, T. Y., & Radhakrishnan, S. (2007). Corporate disclosures by family firms. Journal of Accounting and Economics, 44, 238-286.
- Al-Shaer, H., & Salama, A. (2015). Audit committee and financial reporting quality: Evidence from UK environmental accounting disclosures. Journal of Applied Accounting Research, 18(1), 2-21.
- Altman, E. I. (1993). Corporate financial distress and bankruptcy (2nd ed.). New York: John Wiley & Sons.
- Anderson, R. C., & Reeb, D. M. (2003). Founding family ownership and firm performance: Evidence from the S&P 500. The Journal of Finance, 61(3), 1301-1328.
- Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2003). Founding family ownership and the agency cost of debt. Journal of Financial Economics, 68, 263-285.
- Andres, C. (2008). Large shareholders and firm performance-An empirical examination of founding-family ownership. Journal of Corporate Finance, 14(4), 431-445.
- Arora, P., & Dharwadkar, R. (2011). Corporate governance and corporate social responsibility (CSR): The moderating roles of attainment discrepancy and organization slack. Corporate Governance, 19(2), 136-152.
- Atik, A. (2009). Detecting income-smoothing behaviors of Turkish listed companies through empirical tests using discretionary accounting changes. Critical Perspectives on Accounting, 20, 591-613.
- Campa, D., & Camacho-Minano, M. (2015). The impact of SME’s pre-bankruptcy financial distress on earnings management tools. International Review of Financial Analysis, 42, 222-234.
- Carcello, J. V., & Neal, T. L. (2000). Audit committee composition and auditor reporting. The Accounting Review, 75(4), 453-467.
- Casillas, J. C., Moreno-Menendez, A. M., Barbero, J. L., & Clinton, E. (2019). Retrenchment strategies and family involvement: The role of survival risk. Family Business Review, 32(1), 58-75.
- Chaney, P. K., Faccio, M., & Parsley, D. (2011). The quality of accounting information in politically connected firms. Journal of Accounting and Economics, 51, 58-76.
- Chi, C. W., Hung, K., Cheng, H. W., & Lieu, P. T. (2015). Family firms and earnings management in Taiwan: Influence of corporate governance. International Review of Economics and Finance, 36, 88-98.
- Claessens, S., Fan, J. P. H., & Lang, L. H. P. (2006). The benefits and costs of group affiliation: Evidence from East Asia. Emerging Markets Review, 7(1), 1-26.
- Cooper, D. R., & Schindler, P. S. (2003). Business research methods (8th ed.). Boston, U.S.: McGraw-Hill, Irwin.
- Craig, R., & Diga, J. G. (1998). Corporate accounting disclosure in ASEAN. Journal of International Financial Management and Accounting 9(3), 246-274.
- Davids, J. H., Schoorman, F. D., & Donaldson, L. (1997). Toward a stewardship theory of management Academy of Management Review, 22, 20-47.
- Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93, 1155-1177.
- Dichev, I. D., & Skinner, D. J. (2002). Large sample evidence on the debt covenant hypothesis. Journal of Accounting Research, 40(4), 1091-1123.
- Faccio, M., Lang, L. H. P., & Young, L. (2001). Dividends and expropriation. American Economic Review, 91, 54-78.
- Filip, A., & Raffournier, B. (2014). Financial crisis and earnings management: The European evidence. The International Journal of Accounting, 49, 455-478.
- Francis, B., Hasan, I., & Li, L. (2016). A cross-countries study of legal-system strength and real earnings management. Journal of Accounting and Public Policy, 35, 417-512.
- Frankel, R. M., Johnson, M. F., & Nelson, M. W. (2002). The relation between auditors’ fees for non-audit services and earnings management. The Accounting Review, 77(Supplement), 71-105.
- Franz, D. R., HassabElnaby, H. R., & Lobo, G. J. (2014). Impact of proximity to debt covenant violation on earnings management. Review of Accounting Studies, 19, 473-505.
- GlobeAsia. (2019). Family businesses: Maintaining relevance in the modern era (July ed.). Jakarta.
- Gul, F. A., Fung, S. Y. K., & Jaggi, B. (2009). Earnings quality: Some evidence on the role of auditor tenure and auditors’ industry expertise. Journal of Accounting and Economics, 47(3), 265-287.
- Iatridis, G. E., & Kadorinis, G. (2009). Earnings management and firm financial motives: A financial investigation of UK listed firms. International Review of Financial Analysis, 18(4), 164-173.
- Jackson, S. B., & Pitman, M. K. (2001). Auditors and earnings management. The CPA Journal, 71(7), 38-44.
- Jaggi, B., & Tsui, J. S. L. (1999). Determinants of audit report lag: Further evidence from Hong Kong. Accounting and Business Research, 30(1), 17-28.
- Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 305-360.
- Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193-228.
- Joni, J., Ahmed, K., & Hamilton, J. (2020a). Politically connected boards, family and business group affiliations, and cost of capital: Evidence from Indonesia. The British Accounting Review, 52(3), 100878.
- Joni, J., Ahmed, K., & Hamilton, J. (2020b). Politically connected boards, family business groups and firm performance: Evidence from Indonesia. Journal of Accounting & Organizational Change, 16(1), 93-121.
- Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance-matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163-197.
- Martinez-Ferrero, J., Lozano, M. B., & Vivas, M. (2020). The impact of board cultural diversity on a firm’s commitment toward the sustainability issues of emerging countries: The mediating effect of a CSR committee. Corporate Social Responsibility and Environmental Management, 28(2), 675-685.
- Mousavi, M. M., Quenniche, J., & Xu, B. (2015). Performance evaluation of bankruptcy prediction models: An orientation-free super-efficiency Dea-based framework. International Review of Financial Analysis, 42, 64-75.
- Moyer, S. E. (1990). Capital adequacy ratio regulations and accounting choices in commercial banks. Journal of Accounting and Economics, 13(2), 123-154.
- Mselmi, N., Lahiani, A., & Hamza, T. (2017). Financial distress prediction: The case of French small and medium-size firms. International Review of Financial Analysis, 50, 67-80.
- Prencipe, A., & Bar-Yosef. (2011). Corporate governance and earning management in family-controlled companies Journal of Accounting, Auditing and Finance, 26, 119-227.
- PriceWaterhouseCoopers. (2018). Family business survey 2018: Indonesia report.
- Salehi, M., Hoshmand, M., & Ranjbar, R. H. (2019). The effect of earnings management on the reputation of family and non-family firms. Journal of Family Business Management, 10(2), 128-143.
- Salvato, C., & Moores, K. (2010). Research on accounting in family firms: Past accomplishments and future challenges. Family Business Review, 23(3), 193-215.
- Tinoco, M. H., & Wilson, N. (2013). Financial distress and bankruptcy prediction among listed companies using accounting, market and macroeconomic variables. International Review of Financial Analysis, 30, 394-419.
- Wang, D. (2006). Founding family ownership and earnings quality. Journal of Accounting Research, 44(3), 619-656.
- Zmijewski, M. E. (1984). Methodological issues related to the estimation of financial distress prediction models. Journal of Accounting Research, 22 (Supplement), 59-82.