Earnings management in family firms: The role of inside directors

Abstract

This paper investigates earnings management in family firms and further examines the moderating effects of inside directors. The empirical results show that family firms are more likely to engage in accruals management than in real earnings management. The compensation to inside directors for their director role is far less than that for their manager role, and thus the incentive for inside directors to share private information individually is not strong. However, increasing the proportion of inside directors and bringing together all private information is one workable way for family firms to reduce the possibility of engaging in accruals management.