Earnings Management Contagion in Multinational Corporations

Abstract:     
In this study, we examine whether corporate governance characteristics of multinational corporations (MNCs) and the institutional structure in their home-country influence earnings management by their domestic and foreign-owned subsidiaries. We perform our analyses on a large sample of both publicly traded and privately held majority-owned subsidiaries of listed MNCs across Europe. Our results are consistent with the conjecture that subsidiary-level earnings management is higher when the subsidiary-country institutional quality is weak. Further, we document that the institutional quality of the subsidiary country dominates that of the MNC home-country in explaining the extent of subsidiary-level earnings management. However, we also find that MNC corporate governance characteristics (ownership structure and analyst coverage) do affect the magnitude of subsidiary earnings management, over and above subsidiary-specific characteristics. Overall, our findings are important in that they show that incentives and opportunities of internationally diversified MNCs have contagion effects for their subsidiary-level financial reporting quality.

Number of Pages in PDF File: 35

Keywords: Multinational Corporation (MNC), Earnings Management, Contagion

JEL Classification: F23, M41, M48

working papers series