The Effects of Creative Culture on Real Earnings Management

Abstract

Chief Executive Officers identify creativity as one of the most desired business leadership competencies. Accordingly, managers are increasingly looking to build creative and innovative cultures within their organizations. However, research in psychology suggests that these attempts may have unintended negative consequences. In this study, I predict and find that an innovative company culture leads to higher levels of real earnings management (REM). To reduce REM in innovative cultures, I design and test interventions based on lower-level and higher-level construals. As I predict, an intervention based on lower-level construal reduces REM, but a higher-level construal intervention reduces REM to a greater extent. I also provide evidence that these interventions reduce the desirability of self-interested behavior that is a consequence of innovation-focused culture. My findings contribute to the emerging accounting literature regarding REM. In addition, I extend the psychology literature investigating the link between self-interested behavior and creativity, as well as expand research on the effects of mental construal on decision making.