The Role of National Culture and Corruption on Managing Earnings around the World

Abstract

Earnings management involves having and using managerial discretion to make choices about how to treat certain financial items which may result in distorting the actual financial performance of the company in order to mislead stakeholders. Exercising discretion to manipulate earnings is arguably an opportunistic activity and one that is not necessarily in the best interest of other stakeholders. Thus, drawing from institutional theory, we argue that two specific dimensions of national culture, power distance and institutional collectivism that are directly related to how individual decision-makers view themselves with respect to others, will be significantly related to firm-level earnings management. Likewise, corruption is associated with individuals behaving in self-interested ways at the expense of others, suggesting it too may play a significant role in explaining cross-national variation in earnings management. We test our theoretical model using a 2012 - 2013 sample of 39,715 firms from 12 developing and 14 developed countries. We find in a multilevel empirical analysis that the GLOBE cultural dimensions of institutional collectivism and power distance along with the normative institution of corruption have significant effects on the magnitude of earnings management. We also find that these national contextual variables interact such that the cultural dimensions exert moderating effects on the relationship between corruption and earnings management.