The Effects of Creative Culture on Real Earnings Management

Abstract

Creativity and innovation have been identified by senior executives as some of the most desired characteristics of corporate culture. Accordingly, managers strive to build these cultures within their organizations. However, research in psychology suggests that these attempts may have unintended negative consequences. In this study, I predict and find that managers in a more (versus less) innovative company culture will engage in higher levels of real earnings management (REM). I then test two construal level theory-based interventions designed to reduce REM. As I predict, I find that in more innovative corporate cultures an intervention that makes downside risk more salient reduces REM, but an intervention that encourages managers to consider the “big picture” impact of their decision reduces REM to a greater extent. Unexpectedly, I also find that the effect of the “big picture” intervention reverses in a less innovative corporate culture leading to an increase in REM. My findings contribute to the emerging accounting literature regarding REM. I also extend the psychology literature investigating the link between opportunistic behavior and creativity, as well as expand research into how interventions based on construal level theory can affect judgment and decision making in an accounting context.

Keywords: Creativity, Innovation, Real Earnings Management, Financial Reporting, Construal Level Theory

JEL Classification: M14, M41, O30