Do family-controlled and financially healthy firms manage their reported earnings? Evidence from Indonesia

Abstract

This paper examines whether family-controlled and financially healthy firms practice earnings management. The data collection focuses on non-financial firms listed on the Indonesia Stock Exchange for the fiscal year 2017–2019. Family and financially healthy firms are key predictor variables for predicting earnings management behavior. Jones’s (1991) modified cross-sectional model measures discretionary accruals (the earnings management indicator). This study reveals a negative relationship between family entities and earnings management practices, suggesting that family-controlled firms are more likely to report a higher quality of earnings. This study also documents that family entities with financial difficulties have more incentive to practice earnings management. Additionally, the study indicates that the involvement of a family member in executive positions leads to lower financial reporting quality. Finally, this study reports a nonlinearity association between family share ownership and the magnitude of earnings management. The study’s findings may assist policymakers in considering the costs and benefits associated with various levels of ownership concentration, especially in the hands of family members.

Keywords

• earnings management
• earnings quality
• family-controlled firms
• financially healthy firms
• Indonesia