Corporate Codes of Ethics, National Culture, and Earnings Discretion: International Evidence

57 Pages Posted: 14 May 2016 Last revised: 16 May 2016

See all articles by Chen Chu

Chen Chu

University of Texas at El Paso

Giorgio Gotti

University of Texas at El Paso (UTEP)

Tony Kang

University of Nebraska - Lincoln

Michael C. Wolfe

Oklahoma State University - Stillwater - Spears School of Business

Date Written: April 28, 2016

Abstract

This study examines the role of codes of ethics in reducing the extent to which managers act opportunistically in reporting earnings. Corporate codes of ethics, by clarifying the boundaries of ethical corporate behaviors and making relevant social norms more salient, have the potential to deter managers from engaging in opportunistic financial reporting practices. In a sample of international companies, we find that the quality of corporate codes of ethics is associated with higher earnings quality, i.e., lower discretionary accruals. Our results are confirmed for a subsample of firms more likely to be engaging in opportunistic reporting behavior, i.e., firms that just meet or beat analysts’ forecasts. Further, codes of ethics play a greater role in reducing earnings management for firms in countries with weaker investor protection mechanisms. Our results suggest that corporate codes of ethics can be a viable alternative to country-level investor protection mechanisms in curbing aggressive reporting behaviors.

Keywords: Corporate ethics policy, Code of ethics, Business ethics, Earnings discretion, Accruals

JEL Classification: G300, L210, M140, M410

Suggested Citation

Chu, Chen and Gotti, Giorgio and Kang, Tony and Wolfe, Michael, Corporate Codes of Ethics, National Culture, and Earnings Discretion: International Evidence (April 28, 2016). Journal of Business Ethics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2772149

Chen Chu

University of Texas at El Paso ( email )

El Paso, TX TX

Giorgio Gotti (Contact Author)

University of Texas at El Paso (UTEP) ( email )

500 West University Avenue
El Paso, TX 79968-0542
United States

Tony Kang

University of Nebraska - Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Michael Wolfe

Oklahoma State University - Stillwater - Spears School of Business ( email )

201 Business
Stillwater, OK 74078-0555
United States

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