All in the family Earnings Management through non-listed ：所有的家人中盈余管理通过非上市.docx

“All in the family”:Earnings Management through non-listed subsidiariesMASSIMILIANO BONACCHI, University of Naples “Parthenope”FABRIZIO CIPOLLINI, University of Florence PAUL ZAROWIN, New York University - Stern School of Business AbstractWe 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. Keywords: Earnings management; Private subsidiaries; Consolidation process; Accounting Accruals; Real activities.Corresponding author: Paul Zarowin, Stern School of Business, 44 West Fourth Street, 10-74 New York, NY 10012 Phone: (212) 998-0015 Email: pzarowin@stern.nyu.eduAcknowledgements: We thank Antonio Marra, KalinKolev, Joshua Ronen, Stephen Ryan, and seminar participants at NYU accounting workshop, Syracuse University and Bocconi University forthe insightful comments and discussions.IntroductionWe examine earnings management practices in business groups to shed light on the link between the parent public company consolidated financial statements and the private subsidiaries’ financial statements. We hypothesize and show that when parents report small profits (defined as parent-consolidated earnings before extraordinary items, scaled by total assets, in the range 0, 0.01), theirsubsidiaries have abnormally high discretionary accruals and/or unusually low cash flow from operations. This is consistent with parents using their subsidiaries to manage their own (i.e., parents’) earnings to beat the z