Family firms’ tax behavior: The role of real earnings management

Resumo

This research investigates how family ownership shapes corporate income tax (CIT) minimization in Brazil and assesses the role of real earnings management (REM) in influencing these tax strategies. The paper addresses a neglected gap by linking REM to corporate tax minimization in family firms. Drawing on Brazil’s complex tax environment, it extends socioemotional wealth (SEW) theory by explaining how family priorities shape real activity manipulation and tax strategies. Understanding how SEW orientations shape family firms’ tax behavior is relevant in emerging markets where reputational enforcement is weak. Furthermore, the research clarifies how REM interacts with family ownership to influence CIT minimization, emphasizing the need to analyze family and nonfamily firms comparatively to capture their distinct behavioral patterns. The study advances theory by demonstrating how restricted SEW orientations foster short-term, tax-minimizing behavior in family firms and by revealing how family priorities shape tax decisions in complex, high-tax-burden contexts such as Brazil. Using 710 firm-year observations from 142 nonfinancial companies listed on the Brazilian stock exchange (2018-2022), this study estimates the impact of family ownership on CIT minimization. To assess the effect of REM on this relationship, additional analyses focus exclusively on the subset of family firms. Building on SEW, this study indicates that Brazilian family firms adopt more aggressive tax strategies compared to their nonfamily counterparts. Additionally, in family firms, abnormal operating cash flows negatively influence the effective tax rate, suggesting that sales-driven strategies like rebates and credit flexibility encourage tax minimization strategies. However, abnormal sales and general expenses and abnormal production costs show no significant impact. These results extend prior evidence by incorporating REM into the analysis, thereby revealing an additional mechanism influencing family firms’ tax decisions.