Succession and real earnings management in family businesses: is socioemotional wealth a predictor for <i>Cooking the Books</i>?

Purpose Earnings management is a practice that is detrimental to future business viability. For family businesses, viability in the form of succession, continues to be difficult. The motivation to use earnings management is different in family businesses as they have unique pressures and characteristics. The purpose of this paper is to identify if the level of socioemotional wealth in a family business impacts real earnings management behavior during succession. The goal is to better understand what impacts the use of real earnings management for family businesses so that it can be curtailed, enhancing future business viability and successful generational transfer. Design/methodology/approach A sample of 200 small and medium size business owners participated in an experiment. Binary logistic regression was used to identify any relationship between SEW, succession and REM. Findings This study finds that socioemotional wealth and succession impact real earnings management behavior in family firms. When succession is not present, the study finds that companies with high socioemotional wealth are less likely to engage in real earnings management than low socioemotional wealth companies. However, when succession is present, the engagement in REM for companies with low socioemotional wealth drops significantly while the behavior of those with high socioemotional does not materially change. Practical implications Understanding how to position a family business for succession realization is important. We do not know exactly what factors impact the failure rate but identifying how facets of the businesses (SEW and succession) might impact REM and ultimately financial performance will be important to small and medium-sized family business owners in the US as they begin their succession journey. Originality/value The study’s experimental design using participants in a US family business, offers an opportunity to better understand this critical portion of the economy and the variables that potentially impact real earnings management decisions. It contributes to the literature by offering potential reasons behind the conflicting findings on REM in family businesses and the impact of SEW on earnings management. It offers a unique view of behavior within different family businesses as opposed to a comparison often found in the literature between family and non-family firms. It also contributes to a gap in literature for US small to medium family businesses.