Gambling Culture and Earnings Management: A Novel Perspective

Abstract

Do gambling preferences affect earnings management in a corporate context? We examine this potential link and find a positive and significant association between local gambling culture, as proxied by faith and firm-level earnings management. The results are robust to potential endogeneity tested through relocation of corporate headquarters and change regressions. We also show that the impact of local gambling preferences on earnings management is stronger when firms are more risk-taking as proxied by higher earnings volatility. Further, this positive association between gambling preferences and earnings management is mitigated by closer monitoring through institutional investors and takeover threats.

Keywords: Gambling, Earnings Management, Earnings Volatility, Ownership, Takeovers

JEL Classification: G10, G30, L83, M4.