Real earnings management and accrual-based earnings management in family firms

We examine the effects of family firms on real earnings management (REM) and accrual-based earnings management (ABEM). Using socioemotional wealth as a theoretical framework and considering the differentimplications ofREMandABEMon family firms’ transgenerational sustainability,we hypothesise and find for a sample of 402German listed family firmsduring 1998–2008 that family firms engage less inREMand exhibitmore earnings-decreasingABEMpolicies as compared to a sample of 436 non-family firms.Wefurther provide evidence that family firms as compared to non-family firms treat REMand ABEM as substitute rather than complementary tools for earnings management. Overall, our findings suggest that family firms use earnings management activities strategically, avoiding those that inhibit the firm’s long-term value (i.e. REM) and engaging in those that help families retain transgenerational control (i.e. ABEM). Paper accepted by Guest Editors of the Special Issue on Accounting and Reporting in Family Firms.