‘All in the Family’: Earnings Management Through Non-Listed Subsidiaries

May 13, 2013 Leave a comment

‘All in the Family’: Earnings Management Through Non-Listed Subsidiaries

Massimiliano Bonacchi University of Naples “Parthenope”; New York University (NYU) – Leonard N. Stern School of Business; City University of New York, CUNY Baruch College, Zicklin School of Business

Fabrizio Cipollini Universita di Firenze, Dipartimento di Statistica

Paul Zarowin New York University (NYU) – Department of Accounting, Taxation & Business Law

May 7, 2013

Abstract: 
We find evidence consistent with the hypothesis that non-listed subsidiaries engage in accrual and real earnings management when their listed parent is reporting small annual profits. Our evidence is important, because it shows that business groups manage earnings differently from single firms. In particular, to avoid reporting annual losses, the parent company drives earnings management of the subsidiary. Cross-sectional analysis reveals that Big4 auditors mitigate accrual earnings management at the subsidiary level, and that family-owned firms are more likely to use earning management through non-listed subsidiaries to avoid losses.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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