Impact of financial crisis and family control on earning management of Portuguese listed firms

Authors

  • Inês Lisboa School of Technology and Management, Management for Sustainability Research Centre, Polytechnic Institute of Leiria, Morro do Lena – Alto Vieiro, P.O. Box 4163, 2411-901 Leiria, Portugal Portugal

DOI:

https://doi.org/10.24310/ejfbejfb.v6i2.5024

Keywords:

Earnings management, Family firms, Accruals, Real activities, Financial crisis

Abstract

Accounting information is used to evaluate the firm's financial performance. Although, firms may have incentives to engage in earnings management, misleading all stakeholders. This study aims to analyse earnings management behaviours of Portuguese listed firms. Both accrual-based and real activities of earnings management are analysed to draw an overall picture of earnings management’ strategies. Most studies focused only in discretionary accruals as a proxy for earnings management, since cash flow-based earnings management is more difficult to detect. Although both strategies can be complementary instead of substituting. Moreover, the impact of financial crisis, family control, and firm characteristics is taken into account. Previous literature found that 2008 crisis had impact on earnings management as firms want to meet debt covenants and investors’ expectations. Moreover, family firms also impact the magnitude of earnings management. While some researchers found a negative relationship since managers are highly controlled, others found the opposite relationship because the family may want to maximize their own wealth. Analysing 51 listed firms, from 2003 till 2015, results show that firms engage more in earnings management during crisis, when the firm's financial situation is less stable. In addition, accrual-based earnings management is higher in family firms than in non-family ones, suggesting less quality of information in the first group. Due to less control of family firms, the family may expropriate minority investors’ wealth to increase personal benefits. Finally, the impact of firms’ characteristics on earnings management depends on the proxy of earning management analysed, suggesting that firms use accrual or real-activities earnings management depending on its purposes.

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Published

2017-06-21

How to Cite

Lisboa, I. (2017). Impact of financial crisis and family control on earning management of Portuguese listed firms. European Journal of Family Business, 6(2). https://doi.org/10.24310/ejfbejfb.v6i2.5024

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Research article