Socioemotional Wealth and Earnings Management in Private Family Firms

Abstract

Earnings management in firms has several different motivations. This article examines the preserving of socioemotional wealth as a motive for earnings management in specific types of private family firms by looking at the generational stage, the management team, and the CEO position. The authors’ results suggest that socioemotional wealth may play a role as motive for upward earnings management when firm performance is poor. Under this condition, first-generation and founder-led private family firms seem to have greater incentive to engage in upward earnings management because of the preservation of their socioemotional wealth.

A socioemotional wealth perspective on innovativeness and performance of family businesses.

“…Generational involvement is expected to weaken the relationship of both family continuity and family enrichment with innovativeness because later-generation family firms, compared with first-generation ones, are more innovative (Beck et al, 2011;Cruz and Nordqvist, 2012) and base their decision making more on financial than SEW considerations (Stockmans et al, 2010). Neither of these two hypotheses is supported, indicating that generational involvement does not interact with internal SEW in affecting innovativeness.…”

“…In particular, first-generation family firms tend to consider the preservation of SEW as a more important goal than do later-generation family firms because of the founders' attachment to their start-up efforts. This consideration of first-generation family firms has been linked to several firm behaviors including more upward earnings management by the family firm (Stockmans et al, 2010) and less innovativeness (Beck, Janssens, Debruyne, and Lommelen, 2011;Cruz and Nordqvist, 2012;Kellermanns and Eddleston, 2006).…”

“…Research drawing on a generational perspective in family firms suggests that as family firms bring in more generations over time, innovativeness increases because the decision-making process of later generations tends to be based more on financial considerations rather than non-financial considerations including aspects of SEW (Gomez-Mejia et al, 2011;Stockmans, Lybaert, and Voordeckers, 2010). In particular, first-generation family firms tend to consider the preservation of SEW as a more important goal than do later-generation family firms because of the founders' attachment to their start-up efforts.…”

“…(Stockmans et al, 2010) Family-Brand Identity Promotion A family firm's ability to communicate its family status (brand) to stakeholders in order to inspire trust and obtain a competitive advantage. (Craig et al, 2008) Innovativeness A firm's willingness to support creativity and experimentation in introducing new products/services, novelty, technological leadership and research and development in developing new processes.…”

“…The first way was categorical with 1 or 0 for the cases where the top management team of the family firm had or did not have non-family (external) members (Stockmans et al, 2010).…”