The Effects Of National Culture On Earnings Management.

A cross-country study on the effects of national

culture on earnings management


This study hypothesizes and tests whether the degree to which managers

exercise earnings discretion relates to their value system (i.e., culture) as well as

the institutional features (i.e., legal environment) of their country. We find that

uncertainty avoidance and individualism dimensions of national culture explain

managers’ earnings discretion across countries, and that this association varies

with the strength of investor protection. This study extends prior literature by

documenting that both national culture and institutional structure are

important factors that explain corporate managers’ earnings discretion

practices around the world, and that the influences of these factors on

earnings discretion are conditional on each other.

Journal of International Business Studies (2010) 41, 123–141.


Keywords: cross-cultural management; cultural frameworks; international financial

reporting; earnings management; national culture; investor protection; disclosure


As accounting and finance research attempts to come to grips with

the influence of the softer dimension of human values (psycho-

logy, sociology, and possibly anthropology) on capital markets,

there has been increasing interest in how cross-national differences

in societal values (culture) affects capital markets (Chui, Lloyd, &

Kwok, 2002; Doupnik & Tsakumis, 2004; Gray, 1988; Hope, 2003;

Kwok & Tadesse, 2006; Radebaugh, Gray, & Black, 2006; Salter &

Niswander, 1995; Zarzeski, 1996). However, previous culture/value

research has been limited primarily to explaining the effect of

culture/value on the broad systemic or structural differences across

countries. This study attempts to build up the link between

culture/value and cross-country variances, not in the broad

accounting or financial systems, but in the actions of actors as

one portion of the capital markets community.

Specifically, as its first objective, this paper uses differences in

culture across countries to explain the magnitude of discretion that

managers exercise in measuring accounting earnings, a process

referred to as earnings management. Earnings management is a

significant concern to regulators, and a source of much interest

both in the United States and in the rest of the world (see, for

summary, Healy & Wahlen, 1999; Leuz, Nanda, & Wysocki, 2003;

Lopez & Rees, 2002). Previous studies that examine determinants

of earnings management internationally have focused on legal

institutions, but the cultural dimension has received less attention.

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