Dual dynamics of ownership: family vs external shareholders’ impact on real earnings management

Srikanth Potharla

Asian Journal of Accounting Research, 2025, vol. 11, issue 1, 61-77

Abstract: PurposeThis study aims to analyse the dual dynamics of ownership in Indian family-owned businesses and their impact on real earnings management (REM). Utilizing the Family Ownership to External Ownership Ratio (FEOR), this study explores how family and external shareholders interact and influence REM, addressing a significant gap in the literature on corporate governance in Indian family firms.Design/methodology/approachThis methodology involves a comprehensive analysis of 2,188 Indian family firms (representing 12,290 firm-year data) from 2010 to 2021. The FEOR metric is a proxy for ownership structure and REM is measured using abnormal production costs, discretionary spending and operating cash flows. The study also considers control variables, such as leverage, market-to-book value and audit committee characteristics, to assess the impact on REM.FindingsThis study reveals a significant negative relationship between FEOR and REM, suggesting that increased family ownership is associated with reduced earnings management. However, substantial external blockholder investments tend to pressurize inflated earnings. These results align with international studies, but offer unique insights into the Indian corporate context.Research limitations/implicationsThis study contributes to the understanding of governance dynamics in family-owned firms, particularly in India. It extends the current knowledge by illustrating the complex interplay between family ownership, external blockholder and REM.Practical implicationsThis study underscores the importance of governance structures tailored to the unique challenges of family ownership for family businesses and regulators. These findings suggest that increased family ownership can enhance financial reporting quality and offer guidance for governance improvements.Social implicationsThis study highlights the role of family-owned businesses in maintaining high standards of financial integrity, which is crucial for investor trust and market stability. This underscores the need for governance policies that consider the socioeconomic context of family ownership in emerging economies such as India.Originality/valueThis study introduces the FEOR variable to analyse the impact of ownership structure on REM in family-owned firms. It provides a unique perspective on governance challenges in Indian family businesses, contributing original insights into the intersection of family ownership, external stakeholders and financial reporting practices.

Keywords: Corporate governance; Financial reporting quality; Real earnings management; Family-owned firms; Family ownership to external ownership ratio (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajarpp:ajar-12-2023-0430

DOI: 10.1108/AJAR-12-2023-0430

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