Second‐Generation Involvement and Earnings Management in Family Firms

ABSTRACT Intergenerational succession is an important issue in family firm research. Utilising data from Chinese family firms, we examine the impact of second‐generation involvement (i.e., involving second‐generation family members as directors or top executives) on earnings management. Our results indicate that second‐generation involvement can decrease earnings management, particularly regarding real earnings management. This suggests that second‐generation managers have incentives to protect the family's reputation and prioritise long‐term benefits, thus avoiding the negative consequences of real earnings management on socioemotional wealth. The heterogeneity analysis shows that the curbing effect on real earnings management is stronger when second‐generation members have longer tenure, higher education levels, overseas backgrounds, and are female, older, or in key positions. Additionally, the effect is more pronounced in firms with greater institutional ownership and analyst coverage. This study provides valuable insights into the relationship between second‐generation involvement and earnings management in family firms.