Board independence and earnings management: influence of family business generation

Abstract

Purpose – This study aims at investigating the moderating role of family business generation on the association between board independence and earnings management practices of Indian family firms. Design/methodology/approach – This study uses panel data regression models to analyze the data. Board independence is operationalized via the proportion of independent directors on board and the dual role of chief executive officer. Earnings management is operationalized through discretionary accruals, which are estimated by the performance-adjusted modified Jones model (Kothari et al., 2005). Family business generation is based on the firm’s age, where each generation is equated to a period of 25 years. The parameters of interest are estimated through the hybrid model (Allison, 2009) which controls for the unobserved cross-sectional heterogeneity across firms while estimating the coefficients for time-invariant variables. Findings – Based on a sample of 26,962 Bombay Stock Exchange–listed firm-years, spanning over 13 years from the year ending March 2007 to March 2019, the results exhibit that Indian family firms are less likely to be engaged in earnings management; board independence is ineffective in controlling the earnings management practices of firms, and this relation is found to be more pronounced among family firms; first-generation family firms are more likely to be engaged in earnings management than second- or third-generation firms; and board independence has a weaker role in curbing the earnings management practices of first-generation family firms. Overall, the results exhibit that generational involvement significantly influences the association between family firms and earnings management and moderates the relationship between board independence and earnings management. These results are robust to sensitivity measures. Originality/value – This is the first study that examines the moderating impact of family business generation on the association between board independence and earnings management according to the author’s knowledge. Besides, this is among the earlier attempts to investigate the earnings management practices of Indian family firms.