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Where Do Firms Manage Earnings?

Scott Dyreng

Duke University

Michelle Hanlon

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Edward L. Maydew

University of North Carolina at Chapel Hill

May 21, 2011

Despite decades of research on how, why, and when companies manage earnings, there is a paucity of evidence about the geographic location of earnings management within multinational firms. In this study, we examine where companies manage earnings using a sample of 2,067 U.S. multinational firms from 1994-2009. We predict and find that firms with extensive foreign operations in weak rule of law countries have more foreign earnings management than companies with subsidiaries in locations where the rule of law is strong. We also find some evidence that profitable firms with extensive tax haven subsidiaries manage earnings more than other firms, and that the earnings management is concentrated in foreign income. Apart from these results, we find that most earnings management takes place in domestic income, not foreign income.

Number of Pages in PDF File: 57

Keywords: Earnings management, rule of law, tax havens

JEL Classification: M4

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Date posted: May 23, 2011 ; Last revised: September 19, 2012

Suggested Citation

Dyreng, Scott and Hanlon, Michelle and Maydew, Edward L., Where Do Firms Manage Earnings? (May 21, 2011). Available at SSRN: http://ssrn.com/abstract=1849244 or http://dx.doi.org/10.2139/ssrn.1849244

Contact Information

Scott Dyreng
Duke University ( email )
Box 90120, Fuqua School of Business
Durham, NC 27708-0120
United States
Michelle Hanlon
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
Cambridge, MA 02142
United States
617-253-9849 (Phone)
Edward L. Maydew (Contact Author)
University of North Carolina at Chapel Hill ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)
HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

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