Family business groups and earnings manipulation: An emerging economy perspective

Abstract

This paper examines the influence of family business groups' affiliated and non-affiliated firms on earnings manipulation on a sample of Pakistani listed firms for the period of 2014 to 2019. The sample of this paper consists of 323 listed firms from the Pakistan Stock Exchange. Data were manually collected from the annual reports of the companies and State Bank of Pakistan sources. OLS and The Panel data models are used to validate the hypotheses of the study. Two proxies of earnings management have been used: one is discretionary accruals and the other is real activity manipulation. The study findings show a negative relationship of family business groups' affiliated firms with accrual-based earnings manipulation. Additionally, the magnitude of earnings manipulation is more in non-affiliated firms as compared to family business group affiliated firms. This study provides rare and initial evidence of family business groups’ relationship with earnings manipulation in Pakistan; moreover, this study extends the literature on scarce literature related to Family business groups and earnings manipulation.

Keywords:

• Earnings manipulation
• family business groups
• corporate governance
• Pakistan Stock Exchange

PUBLIC INTEREST STATEMENT

Family business groups are a common phenomenon in South Asia (Bangladesh, India and Pakistan) and it is considered one of the most well-known features of the Asian stock markets. These family business groups play an important role in the development of emerging economies such as Pakistan. Business Groups may be defined as the aggregate of different companies financial and non-financial, private and public in different sectors more often controlled by a specific family through different proportions of ownership. In Pakistan, it is famously known as “Twenty-Two Families”. In this research paper, we have utilized Pakistani family business groups dominated corporate landscape to investigate the earnings manipulation practices in family business groups' affiliated firms. The study findings show that family business groups' affiliated firms are not engaged in manipulating accrual-based Earnings Management. Additionally, the magnitude of earnings management is more in non-affiliated or stand-alone firms as compared to family business group-affiliated firms.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Business Groups and Family Business Groups are used interchangeably.

2. Earnings Manipulation is Interchangeably used with Earnings Management.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Sattar Khan

Sattar Khan holds MS in Business and Administration and he is currently enrolled in Ph.D. Management in the Institute of Management Sciences, Peshawar, Pakistan. His area of research interest includes Financial Accounting, Audit Quality, Family Businesses, Earnings Manipulation and Corporate Governance. This Research Paper is a part of his Ph.D. Thesis.

Yasir Kamal received his Ph.D. in Finance from Shaheed Zulfikar Ali Bhutto Institute of Science and Technology (SZABIST), Islamabad. He has 18 years of teaching/research experience in various institutes/universities. His research interest includes Behavioral Finance, International Trade, Corporate Governance and Financial Econometrics. He is currently working as an Associate Professor at the Institute of Management Sciences, Peshawar, Pakistan. He has published various research papers in reputed Journals such as Global Business Review, Business & Economic Review, Asian Journal of Management Sciences and South African Journal of Business and Management.