Social Desirability Bias and Earnings Management Around the World

Abstract

In this paper we test whether between-country variation in individuals’ tendency to conform, as measured by a social desirability scale used in the Eysenck Personality Questionnaire, can explain differences in the propensity to employ earnings management in corporations around the world. Such a link is feasible, given that executives seem to feel that they will become penalized for not meeting an earnings target, for reporting a loss, or for providing weaker earnings, and thus engage in the manipulation of earnings. Results demonstrate the existence of a positive relationship between the prevalence of earnings management in a given country and the mean score of individuals from that country on the Eysenck Lie scale, which gives further support that pressure from the capital market is a significant determinant of earnings management.