The The impact of board independence on earnings management
Evidence from Indian family firms
Abstract
The study aims at investigating the association between family firms and earnings management through an advanced panel data regression model-Hybrid model that control for unobserved cross-sectional heterogeneity across firms and time, while estimating the coefficient of dichotomous variable - family firms. Further, the statutory backup of board independence in India provides unique setting to investigate the moderating role of board independence on the association between family firms and earnings management. Based on a sample of 2074 Bombay Stock Exchange (BSE) listed firms, spanning over 13 years from 2005 to 2017, the empirical results show that family firms are less likely to be engaged in earnings management in comparison to their non-family counterparts. Besides, results show that that board independence has constraining (liberating) effect on earnings management practices of non-family (family) firms, implying that a common board independence regulation does not strengthen the mechanism of internal corporate governance for all categories of firms. Hence, separate statutory provisions should be made for family and non-family firms to curb this corporate misfeasance. These results are robust to the alternative specification of earnings management.
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References
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Allison, P. D. (2009). Fixed effects regression models (Vol. 160). SAGE publications.
AlNajjar, F., & Riahi‐Belkaoui, A. (2001). Growth opportunities and earnings management. Managerial Finance.
Anderson, R. C., & Reeb, D. M. (2003). Founding‐family ownership and firm performance: evidence from the S&P 500. The journal of finance, 58(3), 1301-1328.
Ashbaugh, H., LaFond, R., & Mayhew, B. W. (2003). Do nonaudit services compromise auditor independence? Further evidence. The accounting review, 78(3), 611-639.
Astrachan, J. H., & Jaskiewicz, P. (2008). Emotional returns and emotional costs in privately held family businesses: Advancing traditional business valuation. Family Business Review, 21(2), 139-149.
Baatour, K., Othman, H. B., & Hussainey, K. (2017). The effect of multiple directorships on real and accrual-based earnings management. Accounting Research Journal
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of management, 17(1), 99-120.
Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary accounting research, 15(1), 1-24.
Boyd, B. K., Gove, S., & Hitt, M. A. (2005). Construct measurement in strategic management research: Illusion or reality?. Strategic Management Journal, 26(3), 239-257.
Chaney, P. K., Faccio, M., & Parsley, D. (2011). The quality of accounting information in politically connected firms. Journal of accounting and Economics, 51(1-2), 58-76.
Choi, T. H., & Pae, J. (2011). Business ethics and financial reporting quality: Evidence from Korea. Journal of Business Ethics, 103(3), 403-427.
Chrisman, J. J., Chua, J. H., & Sharma, P. (2005). Trends and directions in the development of a strategic management theory of the family firm. Entrepreneurship theory and practice, 29(5), 555-575.
Claessens, S., & Fan, J. P. (2002). Corporate governance in Asia: A survey. International Review of finance, 3(2), 71-103.
Claessens, S., Djankov, S., & Lang, L. H. (2000). The separation of ownership and control in East Asian corporations. Journal of financial Economics, 58(1-2), 81-112
Davidson III, W. N., Worrell, D. L., & Nemec, C. (1998). CEO duality, succession‐planning and agency theory: research agenda. Strategic Management Journal, 19(9), 905-908.
de Vries, M. F. K. (1993). The dynamics of family controlled firms: The good and the bad news. Organizational dynamics, 21(3), 59-71.
DeAngelo, H., DeAngelo, L., & Skinner, D. J. (1994). Accounting choice in troubled companies.
Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012). Detecting earnings management: A new approach. Journal of accounting research, 50(2), 275-334.
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting review, 193-225.
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary accounting research, 13(1), 1-36.
Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of management, 16(1), 49-64.
Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. The journal of law and Economics, 26(2), 327-349.
Gómez-Mejía, L. R., Haynes, K. T., Núñez-Nickel, M., Jacobson, K. J., & Moyano-Fuentes, J. (2007). Socioemotional wealth and business risks in family-controlled firms: Evidence from Spanish olive oil mills. Administrative science quarterly, 52(1), 106-137.
Gopalan, R., & Jayaraman, S. (2012). Private control benefits and earnings management: Evidence from insider controlled firms. Journal of Accounting Research, 50(1), 117-157.
Habbershon, T. G., & Williams, M. L. (1999). A resource-based framework for assessing the strategic advantages of family firms. Family business review, 12(1), 1-25.
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of accounting and economics, 31(1-3), 405-440.
Hribar, P., & Collins, D. W. (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting research, 40(1), 105-134.
Jaggi, B., & Leung, S. (2007). Impact of family dominance on monitoring of earnings management by audit committees: Evidence from Hong Kong. Journal of international accounting, auditing and taxation, 16(1), 27-50.
Jiraporn, P., & DaDalt, P. J. (2009). Does founding family control affect earnings management?. Applied Economics Letters, 16(2), 113-119.
Kashmiri, S., & Mahajan, V. (2010). What's in a name?: An analysis of the strategic behavior of family firms. International Journal of Research in Marketing, 27(3), 271-280.
Kraft, A. G., Vashishtha, R., & Venkatachalam, M. (2018). Frequent financial reporting and managerial myopia. The Accounting Review, 93(2), 249-275.
Krause, R., & Semadeni, M. (2013). Apprentice, departure, and demotion: An examination of the three types of CEO–board chair separation. Academy of Management Journal, 56(3), 805-826.
Latif, R. A., & Al-Dhamari, R. A. (2020). CEO discretion, political connection and real earnings management in Nigeria. Management Research Review.
Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: an international comparison. Journal of financial economics, 69(3), 505-527.
Memili, E., Chrisman, J. J., Chua, J. H., Chang, E. P., & Kellermanns, F. W. (2011). The determinants of family firms’ subcontracting: A transaction cost perspective. Journal of Family Business Strategy, 2(1), 26-33.
Mundlak, Y. (1978). On the pooling of time series and cross section data. Econometrica: journal of the Econometric Society, 69-85.
Narayanaswamy, R., Raghunandan, K., & Rama, D. V. (2012). Corporate governance in the Indian context. Accounting Horizons, 26(3), 583-599.
Prencipe, A., & Bar-Yosef, S. (2011). Corporate governance and earnings management in family-controlled companies. Journal of Accounting, Auditing & Finance, 26(2), 199-227.
Prencipe, A., Markarian, G., & Pozza, L. (2008). Earnings management in family firms: Evidence from R&D cost capitalization in Italy. Family Business Review, 21(1), 71-88.
Ramadani, V., & Hoy, F. (2015). Context and uniqueness of family businesses. In Family businesses in transition economies (pp. 9-37). Springer, Cham.
Ramdani, D., & Witteloostuijn, A. V. (2010). The impact of board independence and CEO duality on firm performance: A quantile regression analysis for Indonesia, Malaysia, South Korea and Thailand. British Journal of Management, 21(3), 607-627.
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of accounting and economics, 42(3), 335-370.
Roychowdhury, S., & Watts, R. L. (2006). Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting.
Salvato, C., & Moores, K. (2010). Research on accounting in family firms: Past accomplishments and future challenges.
Shahzad, F., Rauf, S. A., Saeed, A., & Al Barghouthi, S. (2017). EARNING MANAGEMENT STRATEGIES OF LEVERAGED FAMILY AND NON-FAMILY CONTROLLED FIRMS: AN EMPIRICAL EVIDENCE. International Journal of Business & Society, 18.
Sharma, P., Melin, L., & Nordqvist, M. (2014). Introduction: Scope, evolution and future of family business studies.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The journal of finance, 52(2), 737-783.
Tessema, A., Kim, M. S., & Dandu, J. (2018). The impact of ownership structure on earnings quality: the case of South Korea. International Journal of Disclosure and Governance, 15(3), 129-141.
Velte, P., & Stiglbauer, M. (2012). Audit market concentration and its influence on audit quality. International Business Research, 5(11), 146.
Villalonga, B., & Amit, R. (2006). How do family ownership, control and management affect firm value?. Journal of financial Economics, 80(2), 385-417.
Wang, D. (2006). Founding family ownership and earnings quality. Journal of accounting research, 44(3), 619-656.
Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory.
Xie, B., Davidson III, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of corporate finance, 9(3), 295-316.
Zellweger, T. M., & Astrachan, J. H. (2008). On the emotional value of owning a firm. Family Business Review, 21(4), 347-363.
Zellweger, T. M., Kellermanns, F. W., Chrisman, J. J., & Chua, J. H. (2012). Family control and family firm valuation by family CEOs: The importance of intentions for transgenerational control. Organization Science, 23(3), 851-868.
Allison, P. D. (2009). Fixed effects regression models (Vol. 160). SAGE publications.
AlNajjar, F., & Riahi‐Belkaoui, A. (2001). Growth opportunities and earnings management. Managerial Finance.
Anderson, R. C., & Reeb, D. M. (2003). Founding‐family ownership and firm performance: evidence from the S&P 500. The journal of finance, 58(3), 1301-1328.
Ashbaugh, H., LaFond, R., & Mayhew, B. W. (2003). Do nonaudit services compromise auditor independence? Further evidence. The accounting review, 78(3), 611-639.
Astrachan, J. H., & Jaskiewicz, P. (2008). Emotional returns and emotional costs in privately held family businesses: Advancing traditional business valuation. Family Business Review, 21(2), 139-149.
Baatour, K., Othman, H. B., & Hussainey, K. (2017). The effect of multiple directorships on real and accrual-based earnings management. Accounting Research Journal
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of management, 17(1), 99-120.
Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary accounting research, 15(1), 1-24.
Boyd, B. K., Gove, S., & Hitt, M. A. (2005). Construct measurement in strategic management research: Illusion or reality?. Strategic Management Journal, 26(3), 239-257.
Chaney, P. K., Faccio, M., & Parsley, D. (2011). The quality of accounting information in politically connected firms. Journal of accounting and Economics, 51(1-2), 58-76.
Choi, T. H., & Pae, J. (2011). Business ethics and financial reporting quality: Evidence from Korea. Journal of Business Ethics, 103(3), 403-427.
Chrisman, J. J., Chua, J. H., & Sharma, P. (2005). Trends and directions in the development of a strategic management theory of the family firm. Entrepreneurship theory and practice, 29(5), 555-575.
Claessens, S., & Fan, J. P. (2002). Corporate governance in Asia: A survey. International Review of finance, 3(2), 71-103.
Claessens, S., Djankov, S., & Lang, L. H. (2000). The separation of ownership and control in East Asian corporations. Journal of financial Economics, 58(1-2), 81-112
Davidson III, W. N., Worrell, D. L., & Nemec, C. (1998). CEO duality, succession‐planning and agency theory: research agenda. Strategic Management Journal, 19(9), 905-908.
de Vries, M. F. K. (1993). The dynamics of family controlled firms: The good and the bad news. Organizational dynamics, 21(3), 59-71.
DeAngelo, H., DeAngelo, L., & Skinner, D. J. (1994). Accounting choice in troubled companies.
Dechow, P. M., Hutton, A. P., Kim, J. H., & Sloan, R. G. (2012). Detecting earnings management: A new approach. Journal of accounting research, 50(2), 275-334.
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting review, 193-225.
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1996). Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC. Contemporary accounting research, 13(1), 1-36.
Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of management, 16(1), 49-64.
Fama, E. F., & Jensen, M. C. (1983). Agency problems and residual claims. The journal of law and Economics, 26(2), 327-349.
Gómez-Mejía, L. R., Haynes, K. T., Núñez-Nickel, M., Jacobson, K. J., & Moyano-Fuentes, J. (2007). Socioemotional wealth and business risks in family-controlled firms: Evidence from Spanish olive oil mills. Administrative science quarterly, 52(1), 106-137.
Gopalan, R., & Jayaraman, S. (2012). Private control benefits and earnings management: Evidence from insider controlled firms. Journal of Accounting Research, 50(1), 117-157.
Habbershon, T. G., & Williams, M. L. (1999). A resource-based framework for assessing the strategic advantages of family firms. Family business review, 12(1), 1-25.
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of accounting and economics, 31(1-3), 405-440.
Hribar, P., & Collins, D. W. (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting research, 40(1), 105-134.
Jaggi, B., & Leung, S. (2007). Impact of family dominance on monitoring of earnings management by audit committees: Evidence from Hong Kong. Journal of international accounting, auditing and taxation, 16(1), 27-50.
Jiraporn, P., & DaDalt, P. J. (2009). Does founding family control affect earnings management?. Applied Economics Letters, 16(2), 113-119.
Kashmiri, S., & Mahajan, V. (2010). What's in a name?: An analysis of the strategic behavior of family firms. International Journal of Research in Marketing, 27(3), 271-280.
Kraft, A. G., Vashishtha, R., & Venkatachalam, M. (2018). Frequent financial reporting and managerial myopia. The Accounting Review, 93(2), 249-275.
Krause, R., & Semadeni, M. (2013). Apprentice, departure, and demotion: An examination of the three types of CEO–board chair separation. Academy of Management Journal, 56(3), 805-826.
Latif, R. A., & Al-Dhamari, R. A. (2020). CEO discretion, political connection and real earnings management in Nigeria. Management Research Review.
Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: an international comparison. Journal of financial economics, 69(3), 505-527.
Memili, E., Chrisman, J. J., Chua, J. H., Chang, E. P., & Kellermanns, F. W. (2011). The determinants of family firms’ subcontracting: A transaction cost perspective. Journal of Family Business Strategy, 2(1), 26-33.
Mundlak, Y. (1978). On the pooling of time series and cross section data. Econometrica: journal of the Econometric Society, 69-85.
Narayanaswamy, R., Raghunandan, K., & Rama, D. V. (2012). Corporate governance in the Indian context. Accounting Horizons, 26(3), 583-599.
Prencipe, A., & Bar-Yosef, S. (2011). Corporate governance and earnings management in family-controlled companies. Journal of Accounting, Auditing & Finance, 26(2), 199-227.
Prencipe, A., Markarian, G., & Pozza, L. (2008). Earnings management in family firms: Evidence from R&D cost capitalization in Italy. Family Business Review, 21(1), 71-88.
Ramadani, V., & Hoy, F. (2015). Context and uniqueness of family businesses. In Family businesses in transition economies (pp. 9-37). Springer, Cham.
Ramdani, D., & Witteloostuijn, A. V. (2010). The impact of board independence and CEO duality on firm performance: A quantile regression analysis for Indonesia, Malaysia, South Korea and Thailand. British Journal of Management, 21(3), 607-627.
Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of accounting and economics, 42(3), 335-370.
Roychowdhury, S., & Watts, R. L. (2006). Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting.
Salvato, C., & Moores, K. (2010). Research on accounting in family firms: Past accomplishments and future challenges.
Shahzad, F., Rauf, S. A., Saeed, A., & Al Barghouthi, S. (2017). EARNING MANAGEMENT STRATEGIES OF LEVERAGED FAMILY AND NON-FAMILY CONTROLLED FIRMS: AN EMPIRICAL EVIDENCE. International Journal of Business & Society, 18.
Sharma, P., Melin, L., & Nordqvist, M. (2014). Introduction: Scope, evolution and future of family business studies.
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The journal of finance, 52(2), 737-783.
Tessema, A., Kim, M. S., & Dandu, J. (2018). The impact of ownership structure on earnings quality: the case of South Korea. International Journal of Disclosure and Governance, 15(3), 129-141.
Velte, P., & Stiglbauer, M. (2012). Audit market concentration and its influence on audit quality. International Business Research, 5(11), 146.
Villalonga, B., & Amit, R. (2006). How do family ownership, control and management affect firm value?. Journal of financial Economics, 80(2), 385-417.
Wang, D. (2006). Founding family ownership and earnings quality. Journal of accounting research, 44(3), 619-656.
Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory.
Xie, B., Davidson III, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of corporate finance, 9(3), 295-316.
Zellweger, T. M., & Astrachan, J. H. (2008). On the emotional value of owning a firm. Family Business Review, 21(4), 347-363.
Zellweger, T. M., Kellermanns, F. W., Chrisman, J. J., & Chua, J. H. (2012). Family control and family firm valuation by family CEOs: The importance of intentions for transgenerational control. Organization Science, 23(3), 851-868.
Published
2022-11-27
How to Cite
BANSAL, Manish.
The The impact of board independence on earnings management.
Journal of Accounting, Business and Management (JABM), [S.l.], v. 29, n. 2, p. 1-21, nov. 2022.
ISSN 2622-2167.
Available at: <https://journal.stie-mce.ac.id/index.php/jabminternational/article/view/586>. Date accessed: 16 nov. 2024.
doi: https://doi.org/10.31966/jabminternational.v29i2.586.
Section
Articles
