Determinants of Earnings Management: Evidence from Around the World

Abstract

The study seeks to investigate the determinants of firm level earnings management (EM) within the context of 44 countries around the world. A sample of 29 430 non-financial companies over the period 1996-2012 were analysed using a series of models that link firm-, industry-, and country-specific characteristics, on the one hand, and EM, on the other. We develop composite measures of accrual (A_EM) and real earnings management (R_EM) using principal component analysis (PCA). To estimate the model parameters we utilise three-stage least square (3SLS) procedures with seemingly unrelated regression (SUR). The study triangulates multiple theories to gain a deeper understanding of firm level EM behaviour and draw policy implications. We find that the nature of the nexus between firm-, industry-, and country-characteristics, on the one hand, EM activity, on the other, is a function of the measure of the EM construct and the reporting environment considered in the analysis. The findings signify that monitoring and reputational concerns, regulatory and market pressures, and information asymmetry issues are drivers behind firm level EM activity around the world.