The Invisible Hand: Corporate Culture and Its Implications for Earnings Management

• In Event: DSFI: Part I

Abstract

This paper provides large-sample evidence on the effect of corporate culture on earnings management. We define culture following the Competing Values Framework and employ textual analysis of 10-K filings to identify firms’ corporate culture. We find that collaboration (competition)-oriented culture is more (less) likely to manage earnings, while control-oriented culture is positively associated with real activities earnings management only. Supplementary analyses show that collaboration (competition) culture has higher (lower) incentive to manipulate earnings, while competition culture also faces higher potential litigation cost, which may provide disincentive to manipulate. Contributing to the “cultural revolution” led by the economics and finance schools of thought, our study is the first empirical research to demonstrate that corporate culture impacts firms’ financial reporting process.

Author

• Babak Mammadov, Florida Atlantic University