0 Accrual-Based and Real Activities Based Earnings Management Behavior of Family Firms in Japan

We explore the degree of accrual-based earnings management and real activities based earnings management, using data of all family and non-family firms listed on the Tokyo Stock Exchange from 2004 through 2011. A priori family firms are expected to have lower agency cost because family shareholders and management will be more congruent in pursuing mutual firm goals. A founding family will also pay attention to the reputation of their firm and family in order to sustain socioemotional wealth. We empirically assess the level of earnings management and investigate whether the amount will be lower for family than non-family firms, and also identify which method is more costly. The level of accruals and cost may vary among the type of the family firms; that is, whether or not shareholdings are large and if the CEO is from the founding family. With univariate analysis we find that the level of accrual-based earnings management measures is higher for family versus non-family firms for some selected measures, while real activities measures are lower for family firms. With cross section regressions, we find that shares owned by a founding family increase the level of accrual-based earnings management, while the CEO dummy variable decreases it. For the level of real activities earnings management, we find that family related variables decrease it. When we introduce economic measures related to costs of earnings management: i.e., the choice of an auditor, the number of following analysts, the length of operating cycles, market share, estimated distance to default, and effective tax rates, we find that Japanese family firms utilize accrual-based earnings management more often than real activities based earnings management