The conditional nature of board characteristics in constraining earnings management in private family firms

Abstract

The goal of this article is to examine the influence of the board of directors in constraining earnings management in private family firms. We build further on the premise that corporate governance is conditional in nature. Specifically, we propose that the effect of the proportion of outside directors and CEO duality on earnings management is stronger when the family firm faces significant agency problems. Our results find support for the fact that, conditional on the presence of agency conflicts between controlling and noncontrolling shareholders, a higher proportion of outside directors and CEO nonduality may have a constraining effect on earnings management. This is in support of our argument that the relationship between board characteristics and earnings management is moderated by the potential presence of agency conflicts.