The link between earnings management and corporate performance: evidence from family firms

The aim of this research is to analyse the financial consequences of earnings management (EM) practices for corporate performance, focusing on family firms. These businesses are led and controlled by family members whose main interest is the firm's long–run survival through succession. Using a sample composed of 1,275 international listed companies for the period 2002–2010, our empirical evidence shows that in the short–term, those companies that implement EM practices enjoy higher market valuation because the market, investors and other stakeholders do not detect and cannot penalise such practices. Family firms have a long–term focus and more incentives for controlling and monitoring managerial decisions, avoiding information symmetries and therefore EM practices. Thus, the positive effect of EM on market value is lower in highly concentrated ownership structures as result of the negative link between family control, EM and performance.