Individual-Collectivism, Private Benefits of Control, and Earnings Management: A Cross-Culture Comparison

28 Pages Posted: 17 Mar 2010

Date Written: March 16, 2010

Abstract

Corporate ethical behavior is influenced by the social context in which a corporation operates. The social context consists of legal rules, law enforcement as well as shared norms (culture). Prior literature explores the effects of legal rules and law enforcement on private control benefits and earnings management, however, the role of culture has been neglected. In this study I highlight the relationship between individual-collectivism, a main dimension of culture, and private control benefits (earnings management). In collectivist cultures, people make their moral judgment based on relationship rather than justice, and people behave in accordance with their group norms rather than their moral reasoning. So, the agency problems between corporate insiders and outside investors are severe in collectivist cultures. In collectivist cultures managers enjoy a large amount of private control benefits and in order to protect their private control benefits, they use earnings management to conceal firm performance from outsiders. My empirical results support this hypothesis. Using private control benefits and earnings management data from 41 countries and regions around the world, I find that private control benefits are large and earnings management is severe in collectivist as opposed to individualist cultures. These results are robust to the inclusion of controls for country wealth, and economic heterogeneity across countries, and international differences in ownership concentration.

Keywords: Individualism, Collectivism, Private control benefits, Earnings management, Corporate governance, Moral behavior

JEL Classification: G34, M14, M41

Suggested Citation

Zhang, Xu, Individual-Collectivism, Private Benefits of Control, and Earnings Management: A Cross-Culture Comparison (March 16, 2010). Available at SSRN: https://ssrn.com/abstract=1572272 or http://dx.doi.org/10.2139/ssrn.1572272

Xu Zhang (Contact Author)

University of Macau ( email )

Macau

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