The influence of national culture on the relationship between corporate governance and earnings management,

Caroline Keidann Soschinski,Danrlei Anderson Peyerl,Roberto Carlos Klann,Darclê Costa Silva Haussmann

doi:10.1590/1808-057x202110510

Caroline Keidann Soschinski, Danrlei Anderson Peyerl + Show 2 more

Open Access

https://doi.org/10.1590/1808-057x202110510

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Abstract

ABSTRACT The aim of the study was to analyze the influence of the dimensions of national culture on the relationship between corporate governance (CG) and earnings management (EM). There is evidence that in certain cultural contexts CG mechanisms appear to be ineffective in minimizing EM. Studies on governance and its influence on accounting information quality can help market participants make better decisions. It is important to include the cultural context in this relationship as it sheds light on an aspect that has hardly been explored in the research, which can improve the informational environment of organizations. In practical terms, the results may contribute to organizations paying more attention to the cultural influence of countries when implementing or improving their governance mechanisms, with the aim of making them more effective in aligning interests and monitoring behaviors in organizations. Moreover, market participants may require alterations in these mechanisms in more individualistic and indulgent cultural contexts. The sample was composed of 18,707 observations of companies located in 24 countries belonging to the G20 group, covering 2010 to 2017. The data were operationalized using a multiple linear regression, with robust standard errors and controls for sector and year fixed effects, using the propensity score matching (PSM) method. The premise that CG can minimize EM was confirmed in this research, except in individualistic and indulgent countries. In these cultural contexts, governance mechanisms tend to be ineffective in minimizing EM. These results contribute to the literature by highlighting that the culture of countries can impact the effectiveness of CG in mitigating opportunistic practices, which explains the ambiguous results of previous research.

Highlights

The problems organizations face arising from the separation between ownership and control have been known through the literature since the study of Berle and Means (1932)
It should be noted that the discretionary accruals (EMit) variable was operationalized in absolute values and real activities-based earnings management (REMit) was operationalized in nominal values
It should be noted that the Return on assets (ROA), LEV, and Sales growth (SG) variables are presented in their values winsorized from to 99% and that the corporate governance (CG) and national culture variables had their scales transformed from 0 to 100 to 0 to 10 so that they were similar to the scale of the other variables

Summary

Introduction

The problems organizations face arising from the separation between ownership and control have been known through the literature since the study of Berle and Means (1932). Given the agency problems that can encourage EM practices, Rahman and Ali (2006) state that it is extremely important for organizations to include control mechanisms to safeguard shareholders’ interests and guarantee transparent and quality information for the interested parties. These mechanisms are known as corporate governance (CG) practices and are included in organizations with the aim of controlling agency problems and mitigating EM practices (Peasnell et al, 2005)

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