Earnings Management and Cultural Values

American Journal of Economics and Sociology, Vol. 70, pp. 639-670, 2011

31 Pages Posted: 1 Nov 2007 Last revised: 25 Oct 2013

See all articles by Kurt A. Desender

Kurt A. Desender

Universidad Carlos III de Madrid

Christian E. Castro

Autonomous University of Barcelona

Sergio Antonio Escamilla de Leon

Autonomous University of Barcelona - Faculty of Economics and Business Studies

Date Written: January 1, 2008

Abstract

Using theory and empirical data from social psychology to measure for cultural differences between countries, we study the effect of individualism as defined by Hofstede (1980) and egalitarianism as defined by Schwartz (1994, 1999, 2004) on earnings management. We find a significant influence of both cultural measures. In line with Licht et al. (2004), who argue that individualistic societies may be less susceptible to corruption, we found that countries scoring high on individualism tend to have lower levels of earnings management. In addition, we find that egalitarianism, defined as a society's cultural orientation with respect to intolerance for abuses of market and political power, is negatively related with earnings management. Our results are robust to different specifications and controls. The main message of this paper is that besides formal institutions, cultural differences are relevant to explain earnings management behaviour. We think that our work adds to the understanding of the importance of cultural values in managerial behaviour across countries contributing to the literature on earnings management and law and institutions.

Keywords: Culture, Earnings Management, Informal Institutions, quality of financial information, Individualism, Egalitarianism

JEL Classification: M41, M43, G32, G34, K22, K40, Z13

Suggested Citation

Desender, Kurt A. and Castro, Christian E. and Escamilla de Leon, Sergio Antonio, Earnings Management and Cultural Values (January 1, 2008). American Journal of Economics and Sociology, Vol. 70, pp. 639-670, 2011 . Available at SSRN: https://ssrn.com/abstract=1026000 or http://dx.doi.org/10.2139/ssrn.1026000

Kurt A. Desender (Contact Author)

Universidad Carlos III de Madrid ( email )

Calle de Madrid, 123
Getafe, 28903
Spain

Christian E. Castro

Autonomous University of Barcelona ( email )

CC Econòmiques i Empresarials-Edifici B-Bellaterra
Barcelona, 08193
Spain

Sergio Antonio Escamilla de Leon

Autonomous University of Barcelona - Faculty of Economics and Business Studies ( email )

Campus Bellaterra
Barcelona, 08193
Spain

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