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This research investigates the relationship between corporate governance and preference of earnings management selected by Indonesian banking controlling shareholders. This study uses all banks listed on Indonesian Stock Exchange from 2006 until 2011 as samples. The result shows higher real earning managements and lower accruals discretionary in familycontrolled banks and private institution compared to government-controlled banks. Governmentcontrolled banks prefer accrual-based earnings management and real activity-based earnings management through operating cash flow. In the other hand, family-controlled banks and private institutions prefer real earnings management through interest expense and discretionary expenses. Foreign-controlledbanks choose earnings management through discretionary expenses. The implementation of corporate governance in Indonesia banking is high and giving negative impacts both to accrual and real-based earnings management. Concentrated ownership gives positive influences toward the accrual earning management and real earning management through discretionary expenses. The bank size has a positive and significant influence on accrual earnings management, yet its effect is negative and significant on real earning management through interest expenses. The findings contribute to the development of financial accounting literatures because there are small numbers of previous research on accrual discretionary on family-owned companies. Company does not indicate the increase of earnings quality, but it is indeed indicating that controlling family pays more attention on choosing the real activity-based earnings management to cover the expropriation. Accrual discretionary-based earnings management is intra-period reversely thus it cannot cover the permanent expropriation of controlling owners. The research also contributes to the studies of realbased earnings management measurement in banking system which has not been become a concern of research on previous studies.

The effect of the type of controlling shareholders and corporate governance on real and accruals earnings management