Family Ties: Impact of Socioemotional Wealth and Succession on Real Earnings Management

Private family businesses make up a significant portion of the world economy. While contributing to the larger macro environment, they also contribute critical resources to their communities and family units. Earnings management is a practice that is detrimental to future business viability. The motivation to use earnings management is different in family businesses as they have unique pressures and characteristics. Socioemotional wealth includes non-financial incentives exclusive to family businesses and is predicted to influence earnings management behavior. Succession is an event that is critical to all businesses, however, the pressure for generational transfer in family businesses can be greater due to resource retention that requires familial succession. The motivation to manipulate financial signals is potentially stronger when the company is executing a generational transfer and needs to display financial strength. This study finds that socioemotional wealth and succession impact real earnings management behavior in family firms. When succession is not present, the study finds that companies with high socioemotional wealth are less likely to engage in real earnings management. However, when succession is present, companies with high socioemotional wealth engage in real earnings management at a significantly higher rate than low socioemotional wealth businesses. The study’s experimental design using participants involved in a family business, offers a unique opportunity to better understand this critical portion of the economy and the characteristics and events that potentially impact real earnings management decisions in family businesses