Earnings Management within Multinational Corporations

99 Pages Posted: 4 May 2010 Last revised: 29 Aug 2019

See all articles by Christof Beuselinck

Christof Beuselinck

Catholic University of Lille - IESEG School of Management

Stefano Cascino

London School of Economics

Marc Deloof

University of Antwerp; University of Antwerp - Antwerp Management School

Ann Vanstraelen

Maastricht Accounting and Auditing Research and Education Center (MARC); Maastricht University

Date Written: August 28, 2019

Abstract

Using a large sample of multinational corporations (MNCs), we examine the location of earnings management within the firm. We posit and find that MNCs manage their consolidated earnings through an orchestrated reporting strategy across subsidiaries over which they exert significant influence. Specifically, we find that headquarters’ influence on subsidiary earnings management increases with the degree of subsidiary integration and the extent of earnings management opportunities. Most importantly, we provide evidence that MNCs exploit regulatory arbitrage opportunities arising from cross-country differences in institutional quality. We document that MNCs headquartered in jurisdictions with stricter regulations manage earnings through subsidiaries domiciled in countries where regulations are weaker. A difference-in-differences estimation reveals that, in response to exogenous improvements in the quality of their home-country institutions, MNCs rebalance their reporting strategies by clustering earnings management in subsidiaries from countries with more lenient regulations. Taken together, our findings yield important insights on the drivers of earnings management location within the firm and highlight the need for better cross-country coordination in regulatory design.

Keywords: Earnings management, Multinational corporations, Subsidiaries, Consolidation, Regulatory arbitrage, Enforcement, Regulation

JEL Classification: F23, G15, G34, G38, M41, M48

Suggested Citation

Beuselinck, Christof and Cascino, Stefano and Deloof, Marc and Vanstraelen, Ann, Earnings Management within Multinational Corporations (August 28, 2019). The Accounting Review 94 (4): 45-76. Available at SSRN: https://ssrn.com/abstract=1599678 or http://dx.doi.org/10.2139/ssrn.1599678

Christof Beuselinck

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Puteaux, 92800
France
+33320545892 (Phone)

Stefano Cascino (Contact Author)

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)20 7955 6457 (Phone)
+44 (0)20 7955 7420 (Fax)

HOME PAGE: http://www.lse.ac.uk/accounting/people/stefano-cascino

Marc Deloof

University of Antwerp ( email )

Prinsstraat 13
Faculteit TEW
Antwerpen, 2000
Belgium
+32 3 265 41 69 (Phone)
+32 3 265 47 99 (Fax)

HOME PAGE: http://https://www.uantwerpen.be/en/staff/marc-deloof/

University of Antwerp - Antwerp Management School ( email )

Boogkeers 5
Antwerp, 2000
Belgium

Ann Vanstraelen

Maastricht Accounting and Auditing Research and Education Center (MARC) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

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