Research On The Relationship Between Family Control And Earning Management

In the past twenty years, with the development of China's capital market, the number of family controlled companies is increasing, and the role they play in the securities market is becoming more and more important. Based on the present research achievements, this paper depicts the development and the current situation of family controlled companies, and analyzes the characteristics of family control in these companies and their earnings management motivation. Having selected 798 companies and 138 family cotrolled companies listed before the beginning of 2004 on Shanghai and Shenzhen Stock Exchange as research samples, the thesis made empirical testing to explore the relationship between family control and earnings management.Through the status discussion and theoretical analysis, the paper finds that the performance of family controlled companies in China is better than that of nonfamily controlled company, but the financing capability is weaker. While the family obtains the control rights of listed company with less shareholding, they are more restricted by other major shareholders. Under the pyramid ownership structure, the family may manage earnings in order to hide "tunnel", get more dividends or raise external funds.Empirical results show that, compared with nonfamily controlled companies, the earnings management level in family controlled companies is much higher, and with the increase of listing age, the level of their earnings management increases faster. The control rights and cash flow rights owned by the family have significant positive correlation with earnings management, while the seperation of control rights and cash flow rights is negatively related to earnings management, which proves that earnings management activities that aim at hiding "tunnel" and getting more "bonus" in family controlled companies do exist, and the latter motivation is much more strong. The higher separating degree may not lead to higher eaning management level. The size of the board has negative correlation with earnings management, but is not significant, and independent directors do not play an effective role in management supervision. A family member being Chairman of the board or CEO could inhibit earnings management in certain extent.Finally, on the basis of the conclusion obtained from the anlysis above, this paper puts forward some corresponding countermeasures and suggestions.