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Title: How does culture impinge upon managers’ demeanor of earnings management? Evidence from cross-country analysis
Authors: Nandy, M
Chaney, P
Lodh, S
Keywords: Accrual Earnings Management;Real Earnings Management;National Culture;Prospect Theory;Agency Theory
Issue Date: 2018
Abstract: We examine the impact of national culture on managers’ risk preference and on their likelihood of using accrual or real earnings management. We measure national culture using Hofstede’s five dimensions of culture (1984, 2001, and 2010). Using data from 27 countries during 1997-2011, we find that managers are likely to use both accruals and real earnings management in high power distance, long-term oriented, and uncertainty avoidance countries. In countries with high masculinity, managers are more likely to use real earnings management. Finally, in countries with high individualism, managers are less likely to use either type of earnings management. Using the results from the estimation, we develop a cultural index for each country indicating the overall impact of culture on accruals and real earnings management. The findings indicate that a universal set of accounting standards may not be appropriate 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.
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