Earnings Management and Cultural Values

Abstract

Using theory and empirical data from social psychology to measure for cultural differences between countries, this research studies the effect of individualism, defined as the degree to which individuals are integrated into groups (Hofstede 1980), and egalitarianism, defined as a society's cultural orientation with respect to intolerance for abuses of market and political power (Schwartz 1994, 2004) on earnings management. This research finds a significant cultural influence on earnings management. Specifically, the results show that countries scoring high on individualism tend to have lower levels of earnings management. Using the Schwartz (1994, 2004) framework, this study finds that egalitarianism is negatively related to earnings management. The analysis shows that, besides the formal investor protection, it is relevant to consider cultural differences to explain earnings management. This analysis also supports the idea that culture may be an important element in the discussion of global convergence towards a single corporate governance model, or the implementation of corporate governance codes inspired by codes from societies with different cultural values.