The Influence of Culture on Real Earnings Management

• In Event: Earnings Management: International Evidence II

Abstract

This research extends prior literature regarding the interrelationships between national culture and
accounting practices by examining the impact of culture on real earnings management [REM] for a
sample of firms from 31 countries. Our results reveal a positive association between real earnings
management and Hofstede’s (1980) measures of power distance, individuality and uncertainty avoidance,
but a negative association with masculinity. These results hold even after controlling for discretionary
accruals. Our results further reveal a positive relationship between real earnings management and investor
protection. This finding is opposite that found by prior research with respect to earnings management
through accruals, and indicates that the tradeoff between accruals management and REM is driven, to
some extent, by the strength of the legal system.

Authors

• Angel Arturo Pacheco Paredes, Florida International University

• Clark M Wheatley, Florida International University