Earnings Management In Countries Research Articles

Cultural tightness and financial reporting behavior around the world

This study examines the effect of cultural tightness on earnings management globally through an institutional economics perspective. We find that managers are less (more) likely to use accrual-based (real) earnings management in countries with tight cultures, consistent with the notion that managers switch to real earnings management when accrual-based earnings management is constrained in tight cultures. Our findings are robust to several endogeneity and sensitivity tests. Additionally, our results show that the strength of investor protection attenuates the effect of cultural tightness on earnings management, suggesting a substitutive relationship between this effect and the legal regime. The results also show that transactions with other countries (i.e., more imports and exports or foreign sales) weaken the effect of cultural tightness. Thus, by focusing on norm-based cultural tightness rather than Hofstede’s value-based cultural dimensions, this study advances the understanding of how culture affects corporate reporting practices.

Do firms practicing integrated reporting engage in less myopic behavior? International evidence on opportunistic earnings management

AbstractResearch Question/IssueEarnings management is often perceived as a typical response to managers' short‐term objectives at the expense of long‐term benefits. However, this is not aligned with the most recent development in corporate reporting—integrated reporting (IR)—which encourages long‐term orientation and a trustworthy, honest, and ethical corporate culture. We thus examine whether firms practicing IR to a greater extent exhibit lower levels of earnings management.Research Findings/InsightsUsing multiple IR measures and an international sample of 19,926 firm‐year observations from 2008 to 2015, we document that while firms practicing IR engage in less accrual‐based earnings management, they do resort to real activities earnings management. Such opportunistic earnings management behavior is most pronounced when firms' incentive to manage earnings is high. We also show that opportunistic earnings management behavior is moderated in countries and regions where IR is mandatory, where capital markets are more developed, and where financial reporting is less frequent.Theoretical/Academic ImplicationsOur study contributes to the growing literature on whether IR is an effective governance tool in constraining earnings management behavior. The results show that the institutional environment plays an essential role in enabling corporate reporting initiatives such as IR to affect substantive internal changes rather than being used opportunistically.Practitioner/Policy ImplicationsFirms that practice IR to a greater extent are associated with a lower level of earnings management in countries where IR is mandatory, which contributes to the policy debate on mandating IR.

Institutional investors and bank governance: An international analysis of bank earnings management

Despite the growing importance of institutional investors in global capital markets and the link between bank earnings management and financial crash risk, little is known about the role of institutional investors in mitigating bank earnings management. We conduct the first international analysis of this issue using a broad sample of banks and institutional investors. We find a negative relation between institutional ownership and bank earnings management, after controlling for the stringency of a country's bank regulations and other relevant bank and country characteristics. Additionally, institutional ownership is more negatively related to earnings management in countries with more-stringent bank disclosure requirements or when ownership is held by domestic rather than foreign institutional investors. Institutional ownership is also more negatively related to earnings management in countries in which insiders extract more private benefits or when ownership is held by institutional blockholders. Our findings have important policy implications regarding institutional investors' engagement with banks.

Institutional Investors and Bank Earnings Management

Despite the growing importance of institutional investors in global capital markets and the link between bank earnings management and financial crash risk, little is known about the role of institutional investors in mitigating bank earnings management. We conduct the first international analysis of this issue using a broad sample of banks and institutional investors. We find a negative relation between institutional ownership and bank earnings management, after controlling for the stringency of a country’s bank regulations and other relevant bank and country characteristics. Additionally, institutional ownership is more negatively related to earnings management in countries with more-stringent bank disclosure requirements or when ownership is held by domestic rather than foreign institutional investors. Institutional ownership is also more negatively related to earnings management in countries in which insiders extract more private benefits or when ownership is held by institutional blockholders. Our findings have important policy implications regarding institutional investors’ engagement with banks.

The Association between Audit Committee Members’ Multiple Directorship, Ownership and Earnings Management in Saudi Arabia

<p>This study examines the association between the multiple directorship and stock ownership of audit committee members and companies’ earnings management. Based on a sample of 98 Saudi nonfinancial listed companies, this study finds that the multiple directorship of audit committee members is not statistically associated with a reduction in the level of earnings management; however, the stock ownership of audit committee members is significantly related to a reduction in the level of earnings management.</p><p>The results of this study add to the field of knowledge as they provide evidence on the alignment hypotheses from less developed countries (i.e. Saudi Arabia). Furthermore, these findings are useful to understand the current situation of the multiple directorship and stock ownership of audit committee members and their role in improving the monitoring system and reducing earnings management in countries with special characteristics like Saudi Arabia (i.e., with a less developed legal system and new corporate governance regulations).</p>

IFRS and accounting quality: legal origin, regional, and disclosure impacts

Purpose The purpose of this study is to examine whether the quality of financial reporting has improved after the adoption of International Financial Reporting Standards (IFRS) in Europe and across the world. The study investigates the impact of IFRS on income smoothing and earnings management in different geographic regions under different legal origins and disclosure environments. Design/methodology/approach To measure income smoothing in the pre- and post-IFRS periods, the authors use the coefficient of variation and the panel unit root model proposed by Im et al. (2003) for testing whether net income is stationary throughout the sample period. The study uses a dynamic panel estimation framework, as it captures the dynamics of IFRS on discretionary accruals efficiently. Discretionary accruals are used to measure earnings management. Findings The results suggest that the adoption of high quality standards, such as IFRS, reduces income smoothing and earnings management. In addition, the study finds that earnings management has decreased in the post-IFRS period, in particular, for French and Scandinavian civil law countries, but not for German civil law countries and common law countries. The latter can be explained by the fact that common law countries have strong investor protection laws, strict law enforcement and high disclosure levels of financial information. The study also finds empirical evidence that the adoption of IFRS reduces earnings management in countries with high levels of financial disclosure. Overall, the study shows that the adoption of IFRS improved the quality of financial reporting. Originality/value This study is useful for accounting standard setters across the world, including those countries that have not yet decided to adopt IFRS. The study contributes to the literature by examining the adoption of IFRS in income smoothing and earnings management under different legal regimes and disclosure environments by using advanced empirical methodologies.

Accrual-based and real earnings management: An international comparison for investor protection

This paper examines the differences in accrual-based and real earnings management across countries from the perspective of investor protection. Following prior research (Leuz et al., 2003), we hypothesize that accrual-based earnings management is more constrained by strict discipline in countries with stronger investor protection. For real earnings management in countries with stronger investor protection, we have two hypotheses. One is that real earnings management is more often implemented to substitute for accrual-based earnings management. The other is that real earnings management is less often implemented, as with accrual-based earnings management. Our examination uses data from 222,513 firm-year observations drawn from 38 countries covering 1991 to 2010. The results show that managers in countries with stronger investor protection tend to engage in real earnings management instead of accrual-based earnings management. We also find that real earnings management is constrained by analyst following. Our results are not affected by the control of audit quality or the calculation method used for earnings management measures according to country and year.

Does gender diverse board mean less earnings management?

We examine the effect board gender diversity has on earnings management in European countries. The findings reveal that a gender diverse board mitigates earnings management in countries where gender equality is high. This provides an explanation to the inconclusive findings in the literature.

Accrual-Based and Real Earnings Management: An International Comparison for Investor Protection

This paper examines the differences in accrual-based and real earnings management across countries from the perspective of investor protection. Following prior research (Leuz et al., 2003), we hypothesize that accrual-based earnings management is more constrained by strict discipline in countries with stronger investor protection. For real earnings management in countries with stronger investor protection, we have two hypotheses. One is that real earnings management is more often implemented to substitute for accrual-based earnings management. The other is that real earnings management is less often implemented, as with accrual-based earnings management. Our examination uses data from 222,513 firm-year observations drawn from 38 countries covering 1991 to 2010. The results show that managers in countries with stronger investor protection tend to engage in real earnings management instead of accrual-based earnings management. We also find that real earnings management is constrained by analyst following. Our results are not affected by the control of audit quality or the calculation method used for earnings management measures according to country and year.

Private Control Benefits and Earnings Management: Evidence from Insider Controlled Firms

ABSTRACTWe examine earnings management practices of insider controlled firms across 22 countries to shed light on the link between consumption of private benefits and earnings management. Insider controlled firms are associated with more earnings management than noninsider controlled firms in weak investor protection countries. Consistent with the private benefits motive, insider controlled firms with greater divergence between cash‐flow rights and control rights are associated with more earnings management in these countries. Growth opportunities attenuate the association between insider control and earnings management even in weak investor protection countries. We also find some weak evidence that insider controlled firms are associated with less earnings management in strong investor protection countries. Overall, our results highlight a strong link between private benefits consumption and earnings management.

Corporate Governance and Investor Protection: Earnings Management in the U.K. and U.S.

This study extends the work of Leuz et al. (2003) by examining the incidence of earnings management in countries where the level of investor protection provided by the legal environment is high. We question whether Leuz et al.'s (2003) country clusters are overly broad in seeking to effectively explain the relation between countries' legal environments and earnings management. Hofstede (2001) notes that, while the U.K. and U.S. are similar in numerous respects, various cultural and organizational differences exist. Accounting research identifies a number of differences in corporate governance between the two countries that could influence earnings management. We examine samples of U.K. and U.S. firms that were taken private in a management buyout (MBO) so as to focus on situations epitomizing the conflict between corporate insiders and outside shareholders. Overall, our results indicate that managers in both the U.K. and U.S. manage earnings downward prior to an MBO, with U.S. managers being significantly more aggressive than U.K. managers. These results may be interpreted as indicating that Leuz et al.'s (2003) country cluster groupings are too broad to adequately explain the relation between countries' legal environments and the extent to which managers engage in earnings management.