The Effect of Language on Earnings Management: International Evidence

• In Event: Earnings management

Abstract

We study whether a particular aspect of language structure, i.e., future-time reference (FTR) of language, explains variation in corporate earnings management behaviors around the world. Based on the Sapir-Whorf hypothesis (Whorf 1956), we predict that grammatically referencing the future, which induces humans to perceive the future events distinctively, induces myopic management behavior. In support of this idea, we find that firms headquartered in strong-FTR language countries are more likely to engage in accrual-, as well as real earnings management, to meet short-term earnings benchmarks and to boost current period earnings.

Authors

• Tony Kang, McMaster University

• Giorgio Gotti, University of Texas at El Paso

• Yi Liu, McMaster University

• Marco Fasan, Ca' Foscari University