This study contributes to the literature of earnings management, CEO succession and family businesses in several ways. First, the results of prior research regarding family business and earnings management are mixed7. This inconsistency may result from the fact that previous studied mainly focused on whether family firms have the intention to manipulate earnings (Jiraporn and DaDalt, 2009; Prencipe et al., 2008; Jaggi, Leung and
7 The studies based on agency theory suggested that controlling shareholders with significant equity shares have less pressure to satisfy market participants as well as the capabilities and incentives to prevent managers from earning managements (Casson, 1999; Teoh, et al., 1998b). In contrast, some studies argued that a firm attends to manipulate earnings to pursue family objectives (Fan and Wong, 2002; Sanchez-Ballesta and Garcia-Meca, 2007; and Yang, 2010).
28
Gul, 2009). Nevertheless, the contingency that a family firm try to more efficiently transit specific assets of external stakeholders to family heirs may potentially influence the incentive of a family firm to manage earnings. Our study extends the literature of the agency perspective by providing a complementary aspect to understand the relation between family succession and earnings management. The results revealed that firms with family succession CEOs have a significantly positive earning-increasing manipulation approaching succession.
This result is consistent with the findings of Bennedsen, et al. (2007) that firms tended to appoint family CEOs before above average profitability. In addition, this study is also consistent with the research of Morck, et al. (1989) that CEO turnover occurs when preceded by abnormally good performance. Our study implies that when a firm is in a good shape, a family firm may have greater capabilities to appoint a family heir without serious repercussions from stakeholders (Adams, et al, 2009).
However, this analysis is inconsistent with the findings of Chen, Elder and Hung (2010), Jiraporn and DaDalt (2009) as well as Prencipe et al. (2008), which found that family firms are less likely to manage earnings. The inconsistency may result from the fact that the studies focused on the overall effect of a family business on earnings management, but not on how a family CEO succession influences earnings management. The incompatibility may also result from the weak legal systems as well as ineffective governance mechanisms in East Asia, which leads controlling families to have more opportunities to entrench self-interest (Fan and Wong, 2002).
The second contribution is that our study also complements the studies that a family successor underperforms after succession. Consistent with the findings of Bennedsen et al.
(2007), Perez-Gonzalez (2006) and Smith and Amoako-Adu (1999), we found that family succession CEOs are more likely to underperform after succession. Our results are also consistent with the study by Cucculelli and Micucci (2008) that family successors have a
29
negative impact on the firm's performance, and this effect is more profound when pre-succession performance is good. Previous studies have concluded that the poor performance of post succession results from the selection of family successor based on family relationships rather than on the merit or the capabilities of CEO candidates. This may increase the potential risk to appoint an incompetent or untrained family CEO, and may thus result in poor post-succession performance (Smith and Amoako-Adu 1999; Perez-Gonzalez, 2006; Weidenbaum, 1996). Our findings supplement an alternative explanation, which state that in order to smoothly transit specific assets to family successors, a firm that strategically increase earnings before succession may also experience poor post-succession performance.
The third contribution is that based on the principal-principal agency perspective, this study suggests that a voluntary turnover CEO may align himself with the interests of a controlling family, and thus has strong incentive to achieve family objective by holding up the minority (Fan and Wong, 2002). Our results show that for firms with an incoming family succession CEO and a voluntary outgoing CEO, the prior-turnover earnings management increases significantly than it does for those with forced turnover CEOs. This finding complements prior studies of earnings management and CEO turnover, which claim that earnings management before succession may not be undertaken simply to satisfy the whims of an outgoing CEO. In fact, a voluntary turnover CEO might also engage in earnings management to help a controlling family achieve specific objectives.
This study also incorporates the effect of a founder CEO who serves on the board on the degree of increasing earnings management before family heirs succeed to CEO positions.
This contingency helps us to investigate how the emotion-oriented family system, which focuses on non-economic goals, affects the behavior of earnings management. Our findings are consistent with the results of Stockmans et al. (2010) that earnings management is higher in first-generation family firms, as such firms have greater intent to maintain the
30
prospects of the firm by the consideration of transiting family specific assets to the next generations, and thus achieve the objective of sustaining family control.
In addition, our results show that the higher the percentage of family ownership, the greater incentive a controlling family has to increase earnings. This evidence also implies that when there is a high attachment between family wealth and firm value, and in order to avoid the dilution of specific assets provided by various stakeholders that are tied to family wealth, a controlling family is more likely to manipulate earnings prior to succession. Our study is consistent with the research of Fan and Wong (2002), Sanchez-Ballesta and Garcia-Meca, (2007), and Yang (2010) that controlling shareholders reported accounting information for self-interested purposes.
5.2 Conclusions
The earnings management of CEO turnover has been analyzed extensively in previous studies. However, the empirical literature is filled with studies that focus on the impact of family succession on the extent of post-turnover earnings management. The purpose of this study is to examine the role of family succession in determining the extent of earnings management before CEO turnover.
Thus, this study investigates a sample of firms that announced CEO turnover from 1997 to 2009. Moreover, consistent with previous studies, this study also shows that CEO turnover firms are, on average, associated with significantly negative earnings management after CEO turnover announcements. However, the earnings management before CEO turnover is not significant. The sample is further divided into family succession firms and non-family succession firms. The findings of this study show that family succession firms have a significantly positive earning-increasing manipulation; yet non-family succession firms have an insignificant degree of earnings management. In cross-sectional regression analyses of CEO turnover firms, it is also evident that the prior-turnover earnings
31
management measures are significantly and positively related to the family succession dummy. Furthermore, while the post-turnover operating performance of a firm is found to be negatively influenced by the interactive effect of earnings management, this appears to be only true for firms with a family succession CEO.
The moderating effect of turnover category on the association between family succession and prior-turnover earnings management is also examined. Thus, it is evident that for the family succession group, the prior-turnover earnings management of voluntary turnover firms is more positive than it is for forced turnover firms. Again, the earnings management of non-family succession firms is insignificant, regardless of turnover category.
The sample for this study is also divided as to whether the founder was still serving on the board at the time of CEO succession. The findings show that if the founder was still serving on the board, the earnings management of family succession firms is higher than those of the non-family succession firms. Finally, the impact of family ownership on the relationship between family succession and earnings management is also discussed. Again, the sample is divided based on the percentage of family ownership. For the higher family ownership group, family succession firms have high income-increasing management before CEO turnover. However, for the lower family ownership group, the family succession dummy doesn’t influence the prior-turnover earnings management.
The overall evidence in this study suggests that the extent of earnings management in regard to previous CEO turnover depends on the family succession CEO, which is moderated by turnover category and family control. Therefore, this investigation enhances the understanding of how family succession affects the motivation for earnings management.
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Table1 Descriptive Statistics
This table presents descriptive statistics for the CEO turnover sample. All variables are reported for the year preceding CEO turnover. Current accrual is the change in short-term accruals divided by the lagged assets. DCA is the discretionary current accruals, calculated by using the Modifies-Jones model (Dechow et al., 1995). ADCA is performance-matched discretionary current accruals, following the methodology of Kothari et al. (2005).
Differences in mean and median are assessed using a t-test and a Wilcoxon rank-sum test.
***, **, and * indicate significant at the 1%, 5%, and 10% levels. Panel A: Discretionary Current Accruals
Current Accrual
0.011 0.004 0.033 0.012 0.006 0.001 0.027 (2.70)***
Panel B: Family Control Characteristics Founder in
Board
0.563 1.000 0.600 1.000 0.555 1.000 0.045 (0.89)
23.723 20.780 30.252 26.350 22.448 19.140 7.804 (4.60)***
20.724 6.421 11.648 5.607 22.496 6.586 -10.848 (-3.80)***
-0.979 (0.21) Return on
Assets (%)
5.393 4.475 5.565 4.580 5.359 4.420 0.206 (0.19)
18.874 5.240 6.351 2.210 21.320 5.770 -14.969 (-1.96)**
-3.560 (0.13) Market to
Book Ratio
1.557 1.169 1.407 1.020 1.587 1.192 -0.180 (-1.49)
-0.172 (0.19) Firm Age
(year)
26.433 26.000 30.252 29.000 25.688 25.000 4.565 (3.37)***
4.000 (0.00)***
Big N 0.828 1.000 0.757 1.000 0.842 1.000 -0.086 0.000
(-1.99)** (0.03)**
33
Table 2 Time-series of Discretionary Current Accruals and Operating Performance This table presents the time-series profile of discretionary accruals and operating performance of CEO turnover firms from three years before turnover to three years after turnover. Two measures of discretionary current accruals are based on the modified-Jones model and the performance-matched modified-Jones model. Operating performance is measured by return on assets. The t-tests and Wilcoxon signed-rank tests are used to test the hypotheses that the means and medians are equal to zero. The t-values are reported in parentheses. ***, **, * indicate significant at the 1%, 5%, and 10% levels.
Relative
Year -3 -2 -1 0 1 2 3
Obs. 649 653 704 651 638 632 562 Panel A: Discretionary Current Accruals
Mean (%) 0.059 -0.198 0.141 -1.513 0.256 -0.137 0.094 t-statistic (0.15) (-0.50) (0.31) (-4.26)*** (0.78) (-0.36) (0.24)
Median
(%) -0.008 -0.566 -0.028 -1.511 0.104 -0.062 -0.006
p-value 0.85 0.12 0.80 0.00 0.58 0.91 0.78
Panel B: Performance-matched Discretionary Current Accruals
Mean (%) 0.357 0.694 0.633 -1.939 0.709 0.441 0.658 t-statistic (0.70) (1.32) (1.11) (-4.05)*** (1.44) (0.82) (1.18)
Median
(%) 0.169 0.292 0.022 -0.513 0.014 0.455 0.421
p-value 0.65 0.30 0.62 0.04 0.24 0.30 0.17
Panel C: Operating Performance
Mean (%) 7.544 6.684 5.393 5.411 5.731 5.580 5.498
t-statistic (15.72)*** (14.69)*** (10.42)*** (11.32)*** (12.61)*** (11.79)*** (6.84)***
Median
(%) 5.930 5.650 4.475 4.020 4.260 4.480 4.455
p-value 0.00 0.00 0.00 0.00 0.00 0.00 0.00
34
Table 3 Time-series of Earnings Management Stratified by Succession Type
This table presents the time-series profile of earnings management stratified by the family/non-family succession from three years before to three years after the change of CEO.
Two measures of earnings management are based on the modified-Jones model and the performance-matched modified-Jones model. The t-tests and Wilcoxon signed-rank tests are used to test the hypotheses that the means and medians are equal to zero. The t-values are reported in parentheses. ***, **, * indicate significant at the 1%, 5%, and 10% levels.
Relative Year -3 -2 -1 0 1 2 3
Panel A: Discretionary Current Accruals A.1 Family Succession
Obs. 108 109 115 114 105 102 96 Mean (%) 0.096 1.950 2.320 -0.463 0.321 -0.847 -0.941
t-statistic (0.10) (1.88)* (3.49)*** (-0.91) (0.32) (-0.85) (-1.04) Median (%) 0.156 0.769 1.742 -1.965 0.194 0.231 -0.701
p-value 0.86 0.10 0.00 0.04 0.74 0.81 0.36
A.2 Non-Family Succession
Obs. 541 544 589 537 533 530 466
Mean (%) 0.051 -0.628 -0.284 -1.736 0.243 -0.001 0.307 t-statistic (0.12) (-1.47) (-0.55) (-4.17)*** (0.72) (0.00) (0.71) Median (%) -0.008 -0.973 -0.462 -1.075 0.022 -0.112 0.018
p-value 0.91 0.02 0.36 0.01 0.44 0.98 0.47
Panel B: Performance-matched Discretionary Current Accruals B.1 Family Succession
Mean (%) 0.165 2.900 3.952 -1.303 0.354 -0.669 -0.917 t-statistic (0.12) (2.29)** (3.63)*** (-1.09) (0.26) (-0.50) (-0.73) Median (%) 0.486 1.402 4.420 -1.666 -1.245 -0.828 -0.664
p-value 0.81 0.05 0.00 0.23 0.99 0.62 0.76
B.2 Non-Family Succession
Mean (%) 0.395 0.252 -0.015 -2.073 0.779 0.655 0.983 t-statistic (0.73) (0.44) (-0.02) (-3.97)*** (1.48) (1.11) (1.59) Median (%) 0.090 -0.038 -0.734 -0.115 0.159 0.864 0.478
p-value 0.54 0.78 0.35 0.08 0.19 0.19 0.11
35
Table 4 Regression of Earnings Management on Family Succession
This table presents cross-sectional regression analyses of earnings management in year -1 for firms that switch CEO against family succession and control variables. The two earnings management measures are based on the modified-Jones model (DCA) and the performance-matched modified-Jones model (ADCA). The t-values are reported in parentheses. ***, **, and * indicate significant at the 1%, 5%, and 10% levels.
Dep. Var. DCA ADCA
Model 1 Model 2
Intercept 0.1546 0.0995
(1.88)* (0.93)
Family Succession 0.0176 0.0382
(1.94)* (2.81)***
Firm Size -0.0087 -0.0095
(-2.00)** (-1.70)*
Return on Assets 0.0017 0.0004
(3.68)*** (0.58)
Debt Ratio -0.0004 -0.0003
(-1.62) (-0.85)
Sales Growth 0.0002 0.0002
(1.86)* (2.04)**
Market to Book Ratio -0.0055 -0.0036
(-1.40) (-0.73)
Firm Age 0.0142 0.0223
(1.29) (1.69)*
Big N -0.0220 -0.0133
(-1.75)* (-0.79)
Industry Yes Yes
Year Yes Yes
Adjusted R2 0.087 0.056
F-value 2.49*** 1.93***
Obs. 704 704
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Table 5 Regression of Operating Performance on Earnings Management and Family Succession
This table presents cross-sectional regression analyses of the post-change CEO operating performance for a three year period for firms that switch CEO against earnings management in year -1, family succession and control variables. The dependent variable is operating performance, which is measured by sum of change in return on total assets during year 1 to 3.
Return on assets is operating income scaled by total assets. The two earnings management measures (EM) are based on the modified-Jones model (DCA) and the performance-matched modified-Jones model (ADCA). The t-values are reported in parentheses. ***, **, and * indicate significant at the 1%, 5%, and 10% levels.
Model 1 DCA ADCA Model 2
Intercept 8.5848 7.2513
(1.49) (1.25)
EM 1.0171 5.0877
(0.24) (1.49)
Family Succession *EM -20.7032 -13.6095
(-2.38)** (-2.28)**
Firm Size -0.6511 -0.6047
(-1.96)** (-1.85)*
Debt Ratio 0.0139 0.0181
(0.57) (0.75)
Market to Book Ratio -1.2610 -1.2684
(-2.98)*** (-3.02)***
Industry Yes Yes
Year Yes Yes
Adjusted R2 0.137 0.140
F-value 3.65*** 3.72***
Obs. 704 704
37
Table 6 Time-series of Earnings Management Stratified by Turnover Category
This table presents the time-series profile of earnings management stratified by the turnover category from three years before to three years after CEO change. Two measures of earnings management are based on the modified-Jones model and the performance-matched modified-Jones model. The t-tests and Wilcoxon signed-rank tests are used to test the hypotheses that the means and medians are equal to zero. The t-values are reported in parentheses. ***, **, * indicate significant at the 1%, 5%, and 10% levels.
Relative Year -3 -2 -1 0 1 2 3
Panel A: Discretionary Current Accruals A.1 Voluntary Turnover
Obs. 269 275 286 271 262 270 247
Mean (%) 0.097 -0.604 0.406 -1.003 0.089 0.145 0.290 t-statistic (0.17) (-1.04) (0.61) (-1.95)* (0.16) (0.28) (0.55) Median (%) 0.275 -0.298 -0.043 -1.362 -0.013 0.599 0.031
p-value 0.90 0.26 0.52 0.16 0.80 0.35 0.71
A.2 Forced Turnover
Obs. 380 378 418 380 376 362 315
Mean (%) 0.032 0.098 -0.040 -1.877 0.372 -0.348 -0.060 t-statistic (0.06) (0.18) (-0.07) (-3.87)*** (0.93) (-0.65) (-0.10) Median (%) -0.019 -0.594 -0.014 -1.527 0.297 -0.370 -0.162
p-value 0.71 0.28 0.88 0.01 0.33 0.53 0.98
Panel B: Performance-matched Discretionary Current Accruals B.1 Voluntary Turnover
Mean (%) 0.694 -0.104 0.924 -1.208 1.166 0.628 1.001 t-statistic (0.87) (-0.13) (1.05) (-1.66)* (1.47) (0.74) (1.25) Median (%) 0.234 -1.042 0.409 0.948 0.514 -0.355 0.745
p-value 0.38 0.72 0.48 0.69 0.18 0.40 0.19
B.2 Forced Turnover
Mean (%) 0.118 1.275 0.433 -2.459 0.391 0.302 0.389 t-statistic (0.18) (1.85) (0.58) (-3.88)*** (0.62) (0.43) (0.50) Median (%) -0.055 1.208 -0.401 -1.120 -0.165 1.008 -0.252
p-value 0.90 0.08 0.97 0.01 0.70 0.58 0.48
38
Table 7 Time-series of Earnings Management Stratified by Succession Type and Turnover Category
This table presents the time-series profile of earnings management stratified by the succession type and turnover category from three years before to three years after CEO change. Two measures of earnings management are based on the modified-Jones model and the performance-matched modified-Jones model. The t-tests and Wilcoxon signed-rank tests are used to test the hypotheses that the means and medians are equal to zero. The t-values are reported in parentheses. ***, **, * indicate significant at the 1%, 5%, and 10% levels.
Relative Year -3 -2 -1 0 1 2 3
Panel A: Discretionary Current Accruals A.1 Family Succession and Voluntary Turnover
Obs. 46 46 49 48 43 44 40
Mean (%) 1.469 1.256 3.072 -0.786 0.863 -1.181 0.548 t-statistic (0.98) (0.88) (3.12)*** (-1.02) (0.45) (-0.78) (0.46) Median (%) 0.190 1.118 2.455 -2.089 0.194 0.231 0.808
p-value 0.41 0.30 0.00 0.03 0.72 0.81 0.73
A.2 Family Succession and Forced Turnover
Obs. 62 63 66 66 62 58 56
Mean (%) -0.922 2.457 1.762 -0.228 -0.055 -0.593 -2.005 t-statistic (-0.69) (1.68)* (1.97)* (-0.34) (-0.05) (-0.45) (-1.55) Median (%) -0.007 0.431 0.974 -1.954 0.267 0.083 -1.119
p-value 0.31 0.22 0.14 0.37 0.89 0.90 0.13
A.3 Non-Family Succession and Voluntary Turnover
Obs. 223 229 237 223 219 226 207
Mean (%) -0.185 -0.978 -0.145 -1.050 -0.063 0.403 0.240 t-statistic (-0.30) (-1.54) (-0.19) (-1.74)* (-0.12) (0.75) (0.41) Median (%) 0.275 -0.684 -0.630 -0.835 -0.150 0.724 0.012
p-value 0.78 0.09 0.60 0.36 0.91 0.37 0.82
A.4 Non-Family Succession and Forced Turnover
Obs. 318 315 352 314 314 304 259
Mean (%) 0.218 -0.374 -0.378 -2.224 0.456 -0.301 0.361 t-statistic (0.38) (-0.65) (-0.55) (-3.92)*** (1.06) (-0.51) (0.57) Median (%) -0.019 -1.146 -0.243 -1.488 0.297 -0.384 0.022
p-value 0.97 0.10 0.48 0.01 0.26 0.44 0.46
Panel B: Performance-matched Discretionary Current Accruals B.1 Family Succession and Voluntary Turnover
Mean (%) 2.762 1.333 4.431 -1.281 1.947 -3.425 1.722 t-statistic (1.42) (0.75) (3.40)*** (-0.68) (0.90) (-1.71)* (0.91) Median (%) 3.530 1.271 5.741 -1.234 -0.061 -2.256 2.766
p-value 0.12 0.43 0.00 0.43 0.55 0.11 0.16
B.2 Family Succession and Forced Turnover
Mean (%) -1.762 4.044 3.596 -1.319 -0.751 1.422 -2.801 t-statistic (-0.89) (2.28)** (2.20)** (-0.84) (-0.44) (0.82) (-1.68)*
Median (%) -1.185 1.402 1.800 -2.073 -1.561 0.712 -2.737
p-value 0.12 0.07 0.03 0.37 0.65 0.47 0.14
B.3 Non-Family Succession and Voluntary Turnover
Mean (%) 0.268 -0.393 0.199 -1.193 1.012 1.417 0.862 t-statistic (0.30) (-0.43) (0.20) (-1.51) (1.19) (1.54) (0.98) Median (%) -0.030 -1.446 -0.831 1.492 0.712 0.580 0.421
p-value 0.80 0.46 0.69 0.89 0.23 0.11 0.43
B.4 Non-Family Succession and Forced Turnover
Mean (%) 0.484 0.721 -0.160 -2.699 0.616 0.088 1.079 t-statistic (0.70) (0.97) (-0.19) (-3.89)*** (0.92) (0.11) (1.25) Median (%) 0.242 1.130 -0.654 -0.843 0.090 1.179 0.729
p-value 0.54 0.31 0.38 0.02 0.50 0.80 0.15
39
Table 8 Regression of Earnings Management on Turnover Category and Succession Type
This table presents cross-sectional regression analyses of earnings management in year -1 for firms that change CEOs against family succession and control variables. We classify the sample firms by the CEO turnover category. The two earnings management measures are based on the modified-Jones model (DCA) and the performance-matched modified-Jones model (ADCA). The t-values are reported in parentheses. ***, **, and * indicate significant at the 1%, 5%, and 10% levels.
Voluntary Turnover Forced Turnover
Dep. Var. DCA ADCA DCA ADCA
Model 1 Model 2 Model 3 Model 4
Intercept 0.1734 0.2282 0.2172 0.0275
(1.35) (1.33) (2.04)** (0.19)
Family Succession 0.0327 0.0459 0.0062 0.0353
(2.31)** (2.39)** (0.51) (1.60)
Firm Size -0.0054 -0.0109 -0.0127 -0.0099
(-0.84) (-1.22) (-2.11)** (-1.31)
Return on Assets 0.0020 0.0005 0.0018 0.0005
(1.93)* (0.37) (3.39)*** (0.54)
Debt Ratio -0.0006 -0.0003 -0.0004 -0.0004
(-1.28) (-0.44) (-1.27) (-0.90)
Sales Growth 0.0004 0.0004 0.0001 0.0002
(6.95)*** (5.51)*** (1.54) (1.80)*
Market to Book Ratio -0.0071 -0.0107 -0.0058 -0.0025 (-0.78) (-0.87) (-1.27) (-0.45)
Firm Age -0.0047 0.0080 0.0202 0.0266
(-0.27) (0.36) (1.39) (1.62)
Big N 0.0122 0.0139 -0.0422 -0.0270
(0.60) (0.50) (-2.55)*** (-1.18)
Industry Yes Yes Yes Yes
Year Yes Yes Yes Yes
Adjusted R2 0.098 0.025 0.083 0.048
F-value 1.68*** 1.16 1.88*** 1.49**
Obs. 286 286 418 418
40
Table 9 Regression of Earnings Management on Family Succession CEO Stratified by Founder CEO
This table presents cross-sectional regression analyses of earnings management in year -1 for firms that change CEOs against family succession and control variables. We classify the sample firms by existence of a founder CEO on the board. The t-values are reported in parentheses. The two earnings management measures are based on the modified-Jones model (DCA) and the performance-matched modified-Jones model (ADCA). ***, **, and * indicate significant at the 1%, 5%, and 10% levels.
Founder in Board Founder isn’t in Board
Dep. Var. DCA ADCA DCA ADCA
Model 1 Model 2 Model 3 Model 4
Intercept 0.1752 0.1585 0.0946 -0.1311
(1.58) (1.06) (0.68) (-0.72)
Family Succession 0.0260 0.0372 0.0056 0.0179
(2.14)** (1.98)** (0.35) (0.86)
Firm Size -0.0089 -0.0156 -0.0061 0.0024
(-1.61) (-2.24)** (-0.84) (0.26)
Return on Assets 0.0023 0.0015 -0.0001 -0.0021
(5.44)*** (2.49)** (-0.19) (-1.96)*
Debt Ratio -0.0004 0.0001 -0.0010 -0.0013
(-1.00) (0.12) (-2.07)** (-2.23)***
Sales Growth -0.00001 -0.0002 0.0002 0.0002
(-0.03) (-0.84) (3.22)*** (3.46)***
Market to Book Ratio -0.0038 -0.0058 -0.0133 -0.0006 (-0.69) (-0.85) (-2.49)** (-0.07)
Firm Age -0.0120 -0.0028 0.0342 0.0541
(-0.83) (-0.17) (1.63) (2.08)**
Big N -0.0126 0.0079 -0.0194 -0.0146
(-0.69) (0.32) (-1.25) (-0.68)
Industry Yes Yes Yes Yes
Year Yes Yes Yes Yes
Adjusted R2 0.130 0.066 0.100 0.097
F-value 2.43*** 1.68*** 1.83*** 1.81***
Obs. 396 396 308 308
41
Table 10 Regression of Earnings Management on Family Succession CEO Stratified by Family Ownership
This table presents cross-sectional regression analyses of earnings management in year -1 for firms that change CEOs against family succession and control variables. We classify the sample firms by family ownership. The t-values are reported in parentheses. The two earnings management measures are based on the modified-Jones model (DCA) and the performance-matched modified-Jones model (ADCA). ***, **, and * indicate significant at the 1%, 5%, and 10% levels.
High Family Ownership Low Family Ownership
Dep. Var. DCA ADCA DCA ADCA
Model 1 Model 2 Model 3 Model 4
Intercept 0.2873 0.1755 0.0548 0.0774
(2.66)*** (1.27) (0.45) (0.48)
Family Succession 0.0334 0.0406 -0.0072 0.0279
(2.75)*** (2.17)** (-0.51) (1.54)
Firm Size -0.0072 -0.0059 -0.0101 -0.0155
(-1.25) (-0.86) (-1.58) (-1.84)*
Return on Assets 0.0006 -0.0012 0.0024 0.0013
(0.83) (-1.40) (3.81)*** (1.38)
Debt Ratio -0.0006 -0.0003 -0.0004 -0.0006
(-1.41) (-0.71) (-1.01) (-1.08)
Sales Growth 0.0003 0.0003 0.0001 0.0001
(6.04)*** (5.93)*** (0.69) (0.89) Market to Book Ratio -0.0075 -0.0023 -0.0007 0.0015
(0.28) (-0.26) (-0.14) (0.25)
Firm Age -0.0057 -0.0001 0.0338 0.0537
(-0.40) (-0.01) (1.99)** (2.71)***
Big N -0.0168 -0.0139 -0.0317 -0.0343
(-1.09) (-0.71) (-1.65)* (-1.18)
Industry Yes Yes Yes Yes
Year Yes Yes Yes Yes
Adjusted R2 0.112 0.088 0.140 0.063
F-value 2.06*** 1.81*** 2.33*** 1.55**
Obs. 352 352 352 352
42
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