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

Article


Chaney, P., Lodh, S. and Nandy, M. 2021. How does culture impinge upon managers' demeanor of earnings management? Evidence from cross-country analysis. The International Journal of Accounting. 56 (02). https://doi.org/10.1142/S1094406021500098
TypeArticle
TitleHow does culture impinge upon managers' demeanor of earnings management? Evidence from cross-country analysis
AuthorsChaney, P., Lodh, S. and Nandy, M.
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.

KeywordsAccounting, Finance
PublisherWorld Scientific Publishing Co. Pte Ltd
JournalThe International Journal of Accounting
ISSN1094-4060
Electronic2213-3933
Publication dates
Online24 Apr 2021
Print30 Jun 2021
Publication process dates
Deposited18 Oct 2019
Accepted02 Aug 2019
Output statusPublished
Accepted author manuscript
Copyright Statement

Electronic version of an article published as The International Journal of Accounting, 0, 0, 2021, 2150009 https://doi.org/10.1142/S1094406021500098
© World Scientific Publishing Company:https://www.worldscientific.com/worldscinet/tija

Additional information

Related discussion and reply publications:
1] Radhakrishnan, S. & Janakiraman, S., 2021. Discussion of “How Does Culture Impinge Upon Managers’ Demeanor of Earnings Management? Evidence From Cross-Country Analysis.” The International Journal of Accounting, 56(02), p.2180006. Available at: http://dx.doi.org/10.1142/s1094406021800068.
2] Chaney, P.K., Lodh, S. & Nandy, M., 2021. A Reply to the Discussion of “How Does Culture Impinge Upon Managers’ Demeanor of Earnings Management? Evidence From Cross-Country Analysis.” The International Journal of Accounting, 56(02), p.2180007. Available at: http://dx.doi.org/10.1142/s109440602180007x.

Digital Object Identifier (DOI)https://doi.org/10.1142/S1094406021500098
LanguageEnglish
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