Examining the Relationship Between National Culture and Earnings Management

Abstract

This study investigates the relationship between national culture and the incidence of earnings management across thirty-one nations while controlling for the strength of corporate governance and type of legal system. The results indicate the importance of national culture in explaining the difference in the incidence of earnings management across nations. Earnings management is found to be higher in countries with low scores on the Individualism dimension and high scores on the Uncertainty Avoidance and Long-Term Orientation dimensions. This study confirms the relationship between national culture and earnings management and contributes to the literature through the inclusion of the Long-term Orientation and Indulgence dimensions of national culture. The potential impact of national culture on earnings quality highlights the need for caution in assuming that the harmonization of accounting standards alone will lead to comparability and consistency of financial reporting.

Impacts of National Cultures on Managerial Decisions of Engaging in Core Earnings Management

“…National cultures exert a substantial influence on the practices of earnings management. Studies suggest that countries with low levels of individualism, high levels of uncertainty avoidance, and long-term orientation are likely to have higher instances of earnings management (Viana Jr et al, 2022;Whelan & Humphries, 2022). Moreover, the correlation between national culture and earnings management differs between developed and emerging economies, with impacts that vary depending on cultural factors such as power distance and masculinity (Mamatzakis et al, 2024).…”