Earnings Management and Cultural Values
American Journal of Economics and Sociology, Vol. 70, pp. 639-670, 2011
31 Pages Posted: 1 Nov 2007 Last revised: 25 Oct 2013
Date Written: January 1, 2008
Using theory and empirical data from social psychology to measure for cultural differences between countries, we study the effect of individualism as defined by Hofstede (1980) and egalitarianism as defined by Schwartz (1994, 1999, 2004) on earnings management. We find a significant influence of both cultural measures. In line with Licht et al. (2004), who argue that individualistic societies may be less susceptible to corruption, we found that countries scoring high on individualism tend to have lower levels of earnings management. In addition, we find that egalitarianism, defined as a society's cultural orientation with respect to intolerance for abuses of market and political power, is negatively related with earnings management. Our results are robust to different specifications and controls. The main message of this paper is that besides formal institutions, cultural differences are relevant to explain earnings management behaviour. We think that our work adds to the understanding of the importance of cultural values in managerial behaviour across countries contributing to the literature on earnings management and law and institutions.
Keywords: Culture, Earnings Management, Informal Institutions, quality of financial information, Individualism, Egalitarianism
JEL Classification: M41, M43, G32, G34, K22, K40, Z13
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