On the Relation between Earnings Smoothing and Individualism: An Analysis of U.S. Multinational Firms

• In Event: Concurrent Session 4.3: Culture and Institutional Influences

Abstract

This study examines whether consolidated earnings of U.S. multinational companies (MNCs) are smoother based upon the higher expected levels of individualistic values of the geographic segment managers. I develop a firm-specific weighted average measure of a U.S. MNCs expected individualistic beliefs of its managers, INDIVIDUALISMFirm. The measure is calculated based on the Hofstede (1980, 2001) finding that individualistic versus collectivist values (INDIVIDUALISM) vary based upon the country in which employees of a U.S. MNC, International Business Machines (IBM), work. Consistent with smoothing theory within segments of a large corporation (Fudenberg and Tirole, 1995), I find that earnings are smoother (less smooth) for U.S. MNC’s with higher (lower) levels of INDIVIDUALISMFirm. The finding adds to mixed across country research on earnings smoothing and INDIVIDUALISM score and is relevant to users and regulators of financial statements of U.S. MNCs. The evidence suggests that U.S. MNCs play by a different set of financial reporting rules, not because of the different ‘in practice’ investor protections but due to the exposure to the cultural characteristics of countries that they operate in.

Author

• Glyn J Winterbotham, The University of Texas at Arlington