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Owner Managers, Family Business, and Earnings Management Preceding Management Buyouts

This study investigates earnings management prior to management buyouts in a sample of 269 UK private family and non-family firms. It hypothesizes that concentrated ownership in private non-family firms provides sufficient wealth incentives and power to owner/managers to manage earnings upwards before the acquisition, while family owners use management buyouts as a succession tool in the absence of a suitable family successor out of concern for the future of family business. The results are consistent with this prediction. Owner/managers in non-family firms tend to overstate earnings preceding the buyout while family ownership is negatively associated with discretionary accruals one year before the buyout transaction.