Family Ownership Control and Earnings Management: Evidence from Hong Kong Firms

Abstract

This study examines the impact of family ownership control on earnings management for firms operating in Hong Kong. We find evidence that family-controlled firms are less likely to engage in earnings management activities in the earnings management settings to avoid reporting an earnings decline and to avoid reporting a loss than non-family-controlled firms. Additionally, we observe that deferred tax expense is useful in detecting earnings management in the earnings management settings to avoid reporting an earnings decline, to avoid reporting a loss, and to avoid failing to meet or beat the consensus analysts’ earnings forecast. Moreover, we find that the positive association between deferred tax expense and earnings management is weakened significantly by family ownership control. Overall, the empirical evidence indicates that lower earnings management is more prevalent in family-controlled firms compared to non-family-controlled firms. This finding is consistent with a greater alignment of interest between controlling and outside owners, rather than the expropriation by the controlling families which can be achieved by managing reported earnings.