National culture and earnings management in developed and emerging countries

Dante Baiardo Cavalcante Viana Jr,Gerlando Augusto S F De Lima,Marília Ohlson,Isabel Maria Estima Costa Lourenço

doi:10.1108/jaee-12-2020-0323

Dante Baiardo Cavalcante Viana Jr, Gerlando Augusto S F De Lima + Show 2 more

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https://doi.org/10.1108/jaee-12-2020-0323

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PurposeThis study investigates how the association between national culture and earnings management compares between developed and emerging countries.Design/methodology/approachThe empirical analysis relies on a sample of 6,313 firm-year observations from 11 emerging markets and 27,605 firm-year observations from 22 developed countries. The authors use ordinary least squares regression methods to test the hypotheses of the study.FindingsBased on Hofstede's (2011) cultural dimensions, the authors find that firms from countries with a higher level of uncertainty avoidance and individualism are less likely to engage in earnings management, but the effect of uncertainty avoidance (individualism) is more (less) pronounced in the emerging countries. Moreover, the authors demonstrate that firms from emerging (developed) countries with higher levels of power distance and masculinity are less (more) likely to engage in earnings management. Finally, the authors find evidence of a trade-off between accruals-based and real earnings management in firms from countries with greater long-term orientation and an indulgence cultural dimension.Originality/valueThis paper adds to the literature by theoretically discussing and empirically analysing the role that developed and emerging countries' development plays on the effect of national culture on earnings management.

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This study investigates how the association between national culture and earnings management compares between developed and emerging countries
We investigate whether Hofstede’s (2011) cultural dimensions are associated with the degree of firm-level earnings management, and whether this association differs between firms from developed and emerging countries
Regarding the group of emerging countries, we find that Russia and Ukraine present the highest scores for Uncertainty Avoidance (UNCER = 0.93 and 0.92, respectively), for Masculinity (MASC = 0.95 for both countries), and for Long-Term Orientation (LONG = 0.81 and 0.86, respectively), while Poland presents the highest scores for Individualism (INDIV = 0.60) and Mexico presents the highest scores for Power Distance and Indulgence

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Introduction

This study investigates how the association between national culture and earnings management compares between developed and emerging countries. We investigate whether Hofstede’s (2011) cultural dimensions (uncertainty avoidance, individualism, power distance, masculinity, long-term orientation, and indulgence) are associated with the degree of firm-level earnings management, and whether this association differs between firms from developed and emerging countries. Empirical research provides evidence on the association between national cultural factors and the extent of earnings management at the firm level (Paredes and Wheatley, 2017; Gray et al, 2015; Kanagaretnam et al, 2011; Callen et al, 2011; Guan and Pourjalali, 2010; Han et al, 2010). Local regulatory bodies continually strive to avoid the abusive practice of earnings management by firms’ managers, but some accounting scandals and even corporate failings have eroded the public trust on accounting and reporting practices and, in the effectiveness of these regulatory bodies

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