Real earnings management and corporate governance in family firms: evidence from an emerging economy

Submission note: A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the Department of Accounting, La Trobe Business School, College of Arts, Social Sciences and Commerce, La Trobe University, Bundoora.

This study examines the relationship between family ownership and real earnings management (REMs) in an emerging economy, Bangladesh. Existing literature has evidence of minority expropriations by controlling shareholders in relatively weak investor protection environments. This thesis hypothesises and provides evidence that family firms in Bangladesh engage more in REMs compared to non-family firms during the period 2006-2011. This study also finds that independent directors are less effective in restraining REMs in family firms compared to non-family firms in Bangladesh. Moreover, the analysis shows that firms likely to engage in REMs in the current period demonstrate poorer future operational performance compared to firms not suspected of engaging in REMs. Concerning the nature of the relationship between family ownership and REMs, the existence of curvilinear relationships between family ownership and REMs is documented. In Bangladesh, family firms manifest higher levels of REMs at a relatively earlier stage of ownership concentration and this pattern reverses once family ownership passes a certain ownership threshold. This indicates higher entrenchment effect at the earlier family ownership threshold. However, the alignment effect grows stronger at relatively higher family ownership concentration, which is demonstrated by a lower magnitude of REMs. An additional examination finds that such a curvilinear relationship varies significantly from strong corporate governance firms to weak corporate governance firms in Bangladesh. This thesis also examines the related party transactions (RPT) and their association with REMs. In an environment with inadequate minority investor protection, controlling viii family owners are likely to employ RPT as a self-serving mechanism. Consistent with this argument, this study finds that RPT are more associated with REMs in family firms compared to non-family firms in Bangladesh. Finally, this study examines whether investors in Bangladesh consider the likelihood of expropriation in the form of RPT in family firms or not. The finding suggests that investors assign a value discount to such transactions in terms of lower future stock returns.