Earnings management

The latest financial crisis has resulted in a widespread concern about the quality of firms financial information and the need to improve the mechanisms of corporate governance. We analyze the link between accounting and corporate governance by studying the impact of family ownership and the board of directors on earnings management in a sample of 590 firms from USA, Canada, UK, France, Spain and Italy. We provide several methods to estimate earnings management and we test the specification and power of our measures of earnings management. We show that the possible conflict of interests between large dominant shareholders and minority shareholders is relevant on earnings management in family owned firms. This result depends on the legal protection of shareholders rights, being lower in common law countries. We also find that the distribution of corporate control among several large shareholders and the contest to the power of the largest shareholder play a key role to improve accounting quality. Additionally, we provide some evidence about the influence of the board of directors, i.e., how the size and the independence of boards of directors can have a moderating effect.