The purpose of this paper is to investigate the effect of family control on the association between related party transactions (RPTs) and different forms of accrual based (AEM) and real earnings management (REM), analyzing the effect of board characteristics on the possible association. This paper studies a sample of Italian non-financial listed firms over the 2014–2019 period, by GLS regression models, controlling for the fixed effects of the company's sector of operation and the year Results indicate a different association between related party transactions and earnings management in family and non-family firms. They point out that family firms use RPTs in association with downward AEM and REM perpetrated by abnormal discretionary expenses as well as a substitute of REM via abnormal production costs. For non-family firms, findings indicate only a substitution effect between RPTs and accrual based earnings management. Furthermore, CEO duality, board gender diversity and the presence of the family on the board positively moderate the association between RPTs and, respectively, REM implemented through sales manipulations, downward AEM, and upward AEM. This study suggests that the socioemotional wealth differently affects the relationship between RPTs and earnings management (EM), according to the form of the latter. It also points out family firms’ heterogeneity in earnings manipulations, by providing evidence of the moderating role of board characteristics on the association between RPTs and the various forms of EM
Related party transactions and earnings management in family firms. The moderating role of board characteristics
Gavana Giovanna;
2024-01-01
Abstract
The purpose of this paper is to investigate the effect of family control on the association between related party transactions (RPTs) and different forms of accrual based (AEM) and real earnings management (REM), analyzing the effect of board characteristics on the possible association. This paper studies a sample of Italian non-financial listed firms over the 2014–2019 period, by GLS regression models, controlling for the fixed effects of the company's sector of operation and the year Results indicate a different association between related party transactions and earnings management in family and non-family firms. They point out that family firms use RPTs in association with downward AEM and REM perpetrated by abnormal discretionary expenses as well as a substitute of REM via abnormal production costs. For non-family firms, findings indicate only a substitution effect between RPTs and accrual based earnings management. Furthermore, CEO duality, board gender diversity and the presence of the family on the board positively moderate the association between RPTs and, respectively, REM implemented through sales manipulations, downward AEM, and upward AEM. This study suggests that the socioemotional wealth differently affects the relationship between RPTs and earnings management (EM), according to the form of the latter. It also points out family firms’ heterogeneity in earnings manipulations, by providing evidence of the moderating role of board characteristics on the association between RPTs and the various forms of EM
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