Our study investigates the earnings management in publicly listed family firms. We also examine whether the incentives of earnings management are likely to be different in large family firms, small family firms, highlighting the differences from nonfamily firms. This study relies on United Kingdom firms on the London Stock Exchange and on their level of discretional accruals. Our findings demonstrate that large family firms have lower earnings management, whereas small family firms have higher earnings management as both compared to nonfamily firms. They confirm broad findings from US literature which indicate that large family firms face less severe type II agency problems than nonfamily firms, as well as findings in European literature which suggest that small family firms face more severe type II agency problems than nonfamily firms. This study fills a gap in the literature, suggesting that not only the level of family ownership, but also the family firm size should be considered when addressing the incentives for earnings management.

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Family firms,Earnings management,Agency Theory