Corporate governance and earnings management in family-controlled companies

Annalisa Prencipe*, Sasson Bar-Yosef

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

131 Scopus citations

Abstract

The corporate governance literature advances the idea that certain aspects of a board of directors' structure improve the monitoring of managerial decisions. Among these decisions are a manager's policies about managing earnings. Prior studies have shown that earnings management in widely held public companies is less prevalent when there is a high level of board independence. However, there is less evidence regarding the effectiveness of board independence on earnings management in family-controlled companies. This issue is particularly interesting as such companies are susceptible to various types of agency concerns. It is the purpose of this study to shed light on the earnings management issue in family-controlled companies characterized by potentially lower board independence and a higher risk of collusion. In this study, board independence is estimated by two parameters: (1) proportion of independent directors on the board; and (2) lack of chief executive officer (CEO)-board chairman duality function. Our empirical results provide evidence that the impact of board independence on earnings management is indeed weaker in familycontrolled companies. The same result also holds for the lack of CEO- board chairman duality function. Such effects become stronger in cases in which the CEO is a member of the controlling family.

Original languageEnglish
Pages (from-to)199-227
Number of pages29
JournalJournal of Accounting, Auditing and Finance
Volume26
Issue number2
DOIs
StatePublished - Apr 2011
Externally publishedYes

Keywords

  • Board Independence
  • CEO Duality
  • Earnings Management
  • Family-Controlled Companies
  • Independent Directors
  • Italian Companies

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