Abstract

Since prior research found inconsistent conclusions for family firms under different family firm definitions, we incorporate three distinctive elements of family firms (ownership, management, and control) to begin our study with the question whether the earnings quality of family firms is different with that of nonfamily firms. The extant literature shows that there are two types of agency problem either arising from the classic owner-manager conflict or the conflict between family and nonfamily shareholders. In this paper, we further investigate the relative effects of these two agency problems on earnings quality. We find that family firms have more current accruals relative to nonfamily firms. Furthermore, the findings suggests that the earnings quality is lower when firms face the latter agency problem, either alone or joint with the former agency problem. Inconsistent with our prediction, our results show that the earnings quality would not be improved when family members serve as managers. However, our results hold only for more restrictive definitions of family firms.