A Study on the Impacts of Family Members’ Empowerment on Earnings Management and Tax Avoidance in Family Business

[Purpose] This paper investigates the impact of family firms on earnings management and tax avoidance by studying the variation in book and taxable income differences (BTD). Our analysis also investigates whether the influence of active family control has a different impact on BTD. [Methodology] Using Desai and Dharmapala’s (2006) methodology, we analyze these factors simultaneously by studying the variation in BTD. [Findings] Using a Korean sample listed in Korean KOSPI stock market from 2000 through 2009, we find evidence that family firms are more inclined to reduce earnings management and to avoid aggressive tax policies. Further tests reveal that the negative association in family firms stems from those firms in which family members serve as directors or as the CEO. [Implications] Overall, our evidence suggests that the family firms’ combining of ownership and management mitigates managerial expropriation.