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Accrual-Based and Real Activities Based Earnings Management Behavior of Family Firms in Japan

Author

Listed:
  • Tai-Yuan Chen

    (Department of Accounting, HKUST Business School, Hong Kong University of Science and Technology, CHINA)

  • Zhaoyang Gu

    (School of Accountancy, CUHK Business School, Chinese University Of Hong Kong, CHINA)

  • Keiichi Kubota

    (Graduate School of Strategic Management, Chuo University, JAPAN)

  • Hitoshi Takehara

    (Graduate School of Finance, Accounting and Law, Waseda University, JAPAN)

Abstract

We have explored the extent of accrual-based and real activities-based earnings management using data from family and non-family firms in Japan. Family firms are expected to have lower agency costs because family shareholders and management are more congruent in their pursuit of mutual firm goals and seek lower levels of earnings management. However, this collusion may lead to entrenchment and higher levels of earnings management, which becomes opaque to outside shareholders. A founding family is concerned with the reputation of their firm for sustained socioemotional wealth and family firms may conduct cosmetic earnings management to conceal bad news. We empirically assess the levels of earnings management and investigate whether the level will be lower or higher for family or non-family firms, and identify which method is more costly. The level of accruals and cost may vary among the family firm types; that is, whether or not shareholdings are large or the CEO is from the founding family. We find that the level of both accrual-based and real activity measures is lower for family firms. With cross-section regressions, we find that family shareholding increase the level of abnormal accruals management, whereas the family CEO decreases the level of abnormal accruals, but in both cases the amounts were not significant. We also find that family-related variables decrease the levels of real-activities earnings management. When we introduce economic measures related to the costs of earnings management, we find that Japanese family firms utilize accrual-based earnings management more often than real activities-based earnings management.

Suggested Citation

  • Tai-Yuan Chen & Zhaoyang Gu & Keiichi Kubota & Hitoshi Takehara, 2015. "Accrual-Based and Real Activities Based Earnings Management Behavior of Family Firms in Japan," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 5, pages 21-47, December.
    • Handle: RePEc:kob:tjrevi:dec2015:v:5:p:21-47
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    References listed on IDEAS

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    Cited by:

    1. Golrida Karyawati Purba, 2023. "Is the Earnings Quality of Family Businesses Better Than Non-family Businesses? ," GATR Journals afr226, Global Academy of Training and Research (GATR) Enterprise.
    2. Bilal Kimouche, 2022. "Accrual-based and cash-based earnings management in Algeria: substitution or complementary," Croatian Review of Economic, Business and Social Statistics, Sciendo, vol. 8(1), pages 1-17, June.

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    More about this item

    Keywords

    Earnings Quality; Founding Family; CEO; Abnormal Accruals; Overproduction;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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