How does culture impinge upon managers' demeanor of earnings management? Evidence from cross-country analysis

Chaney, Paul, Lodh, Suman and Nandy, Monomita (2021) How does culture impinge upon managers' demeanor of earnings management? Evidence from cross-country analysis. The International Journal of Accounting, 56(02), p. 2150009. ISSN (print) 1094-4060

Official URL: https://doi.org/10.1142/S1094406021500098

Abstract

We examine the impact of national culture on earnings. Specifically, we examine managers? likelihood of using accrual or real earnings management and the role of culture on various attributes of earnings (accruals quality, persistence, smoothing, and predictability). We measure national culture using Hofstede's six dimensions of culture (1984, 2001, and 2010). Using data from 36 countries during 1997-2018, we find that managers are likely to use both accruals and real earnings management in high power distance countries. In long-term oriented countries, managers are more likely to use real earnings management. In uncertainty avoidance countries, in high individualist countries, and in higher indulgent versus restraint countries, managers are less likely to use either type of earnings management. In masculine countries, managers tend to use lower accruals management rather and rely on production cost real earnings management. We also find the use of accruals management and the use of real earnings management are substitutes for each other. In addition, we are able to classify countries into four earnings quality groups based on the culture impact on the earnings attributes (primarily driven by accruals quality, predictability, and smoothing). Persistence is generally not significant in classifying countries by earnings attributes. Our findings indicate that a universal set of accounting standards is a challenging goal to achieve given the cultural diversity across countries. To improve the existing corporate governance framework and to ensure high quality and uniform financial statements, the enforcement of standards should be tailored to specific cultures, or at a minimum, corporate boards need to be more culturally diversified.

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