In Taiwan, most firms are family-controlled businesses. The unique characteristics of family-controlled firms may cause its corporate governance environment to be different from non-family-controlled firms. Thus, this study mainly targets family-controlled firms, exploring in depth how family-controlled firm characteristics affect corporate earnings quality. This study further examines whether nonlinear relations exist between family ownership equity and earnings quality. Empirical results indicate that the ratio of board members to supervisors in a family-controlled firm is positively correlated to earnings quality. Furthermore, such measure variables as family equity control, the extent to deviation between owner's control and cash flow control, the number of overseas members, the founder serving as a CEO or president-these variables all have a significant negative correlation to earnings quality. In other words, empirical results are consistent with the entrenchment effect argument, although the study finds no evidence of nonlinear relations between family ownership equity and earnings quality.
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