A cross-country study on the effects of national
culture on earnings management
Abstract
This study hypothesizes and tests whether the degree to which managers
exercise earnings discretion relates to their value system (i.e., culture) as well as
the institutional features (i.e., legal environment) of their country. We find that
uncertainty avoidance and individualism dimensions of national culture explain
managers’ earnings discretion across countries, and that this association varies
with the strength of investor protection. This study extends prior literature by
documenting that both national culture and institutional structure are
important factors that explain corporate managers’ earnings discretion
practices around the world, and that the influences of these factors on
earnings discretion are conditional on each other.
Journal of International Business Studies (2010) 41, 123–141.
doi:10.1057/jibs.2008.78
Keywords: cross-cultural management; cultural frameworks; international financial
reporting; earnings management; national culture; investor protection; disclosure
INTRODUCTION
As accounting and finance research attempts to come to grips with
the influence of the softer dimension of human values (psycho-
logy, sociology, and possibly anthropology) on capital markets,
there has been increasing interest in how cross-national differences
in societal values (culture) affects capital markets (Chui, Lloyd, &
Kwok, 2002; Doupnik & Tsakumis, 2004; Gray, 1988; Hope, 2003;
Kwok & Tadesse, 2006; Radebaugh, Gray, & Black, 2006; Salter &
Niswander, 1995; Zarzeski, 1996). However, previous culture/value
research has been limited primarily to explaining the effect of
culture/value on the broad systemic or structural differences across
countries. This study attempts to build up the link between
culture/value and cross-country variances, not in the broad
accounting or financial systems, but in the actions of actors as
one portion of the capital markets community.
Specifically, as its first objective, this paper uses differences in
culture across countries to explain the magnitude of discretion that
managers exercise in measuring accounting earnings, a process
referred to as earnings management. Earnings management is a
significant concern to regulators, and a source of much interest
both in the United States and in the rest of the world (see, for
summary, Healy & Wahlen, 1999; Leuz, Nanda, & Wysocki, 2003;
Lopez & Rees, 2002). Previous studies that examine determinants
of earnings management internationally have focused on legal
institutions, but the cultural dimension has received less attention.
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