Does Founder Domination Influence Earnings Management Decisions in Family Businesses?

Abstract

Manuscript type: Research paper
Research aims: This study examines the influence of founder Domination
on Real Earnings Management (REM) in Indonesian family firms, with
a particular focus on the moderating effect of firm-level hazard on this
relationship.
Design/Methodology/Approach: The sample comprises family businesses
in Indonesia’s manufacturing sector from 2022 to 2024. Moderated
Regression Analysis (MRA) tests the hypotheses.
Research findings: The results indicate that founder-led family firms,
or those with founders serving as CEOs, exhibit higher Real Earnings
Management (REM) levels. High business risk increases REM in family
firms. Family firms in Indonesia’s manufacturing sector tend to employ
Accrual Earnings Management (AEM) and REM as substitutes.
Theoretical contribution/Originality: This study frames the Socioemotional
Wealth (SEW) trade-off within the Indonesian cultural context
of paternalistic leadership and concentrated ownership. It provides
empirical evidence that the “Founder Domination” is not static but is
contingent upon the firm’s business risk.
Practitioner/Policy implications: It is suggested that the regulators and
auditors should increase scrutiny of operational activities (REM) during
stable periods, as founders may use these as “substitutes” for more
detectable accrual-based management. For investors, the results highlight
that a founder’s commitment to longevity acts as a natural constraint on
opportunistic earnings management during financial crises.