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

• In Event: Earnings management

Abstract

This study examines whether a U.S. multinational company’s (MNC) earnings smoothing relates to expected differences in the societal preferences for self-centered versus group-centered actions of employees in the countries in which the U.S. MNC operates. We develop a firm-specific measure of a U.S. MNC’s level of expected employee individualism, INDIVIDUALISMFirm, based upon the geographic segments in which the U.S. MNC operates and the related Hofstede (2001, 1980) INDIVIDUALISM score. Our findings suggest that earnings are smoother (less smooth) for U.S. MNC’s with higher (lower) levels of INDIVIDUALISMFirm. Additional analysis indicates that this result is driven by U.S. MNCs identified as having more autonomous subsidiaries which prior research suggests have subsidiary managers with greater discretionary decision making power that are more likely to share local cultural values (Jaeger, 1983; Tung, 1981; Galbraith, 1977). The study adds to mixed across country research adopting the INDIVIDUALISM score and highlights the potential design concerns in across country analysis. The findings are 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.

Authors

• Glyn J Winterbotham, Winthrop University

• Martin Edward Taylor, University of Texas-Arlington

• Mark Adams, University of Texas at Arlington