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A cross-country study on the effects of national culture on earnings management

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Abstract

This study hypothesizes and tests whether the degree to which managers exercise earnings discretion relates to their value system (i.e., culture) as well as the institutional features (i.e., legal environment) of their country. We find that uncertainty avoidance and individualism dimensions of national culture explain managers' earnings discretion across countries, and that this association varies with the strength of investor protection. This study extends prior literature by documenting that both national culture and institutional structure are important factors that explain corporate managers' earnings discretion practices around the world, and that the influences of these factors on earnings discretion are conditional on each other.

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Acknowledgements

We thank anonymous reviewers, Lee Radebaugh (the editor), and seminar participants at the 2007 American Accounting Association Midyear and Annual Meetings, and the 2007 European Accounting Association Annual Congress, for helpful comments.

Author information

Authors and Affiliations

  1. Singapore Management University, Singapore, Singapore

    Sam Han

  2. Florida Atlantic University, Davie, USA

    Tony Kang

  3. University of Texas at El Paso, El Paso, USA

    Stephen Salter

  4. Korea University, Seoul, Korea

    Yong Keun Yoo

Authors
  1. Sam Han
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  2. Tony Kang
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  3. Stephen Salter
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  4. Yong Keun Yoo
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Corresponding author

Correspondence to Tony Kang.

Additional information

Accepted by Lee Radebaugh, Area Editor, 19 February 2008. This paper has been with the authors for two revisions.

APPENDIX: DEFINITION OF VARIABLES

APPENDIX: DEFINITION OF VARIABLES

Dependent variable

DACC:

Discretionary accruals estimated in the cross-sectional accruals model as in Tucker and Zarowin (2006)

∣DACC∣:

Absolute value of discretionary accruals estimated in the cross-sectional accruals model as in Tucker and Zarowin (2006)

∣[+]DACC∣:

Absolute value of positive (negative)

(∣[−]DACC∣):

discretionary accruals estimated in the cross-sectional accruals model as in Tucker and Zarowin (2006)

Culture-related variables

IND:

Individualism score from Hofstede (1980)

UA:

Uncertainty avoidance score from Hofstede (1980)

MA:

Masculinity score from Hofstede (1980)

PD:

Power distance score from Hofstede (1980)

Legal environment-related variables

INVPRO:

Investor protection score from La Porta et al. (1998)

DIP:

1 if the investor protection score by La Porta et al. (1998) of the country is greater than average score; 0 otherwise

Control variables

LNSIZE:

Natural logarithm of market value of equity

LNBM:

Natural logarithm of book-to-market ratio

LEV:

Leverage ratio, measured by debt to total assets

ISSUE:

1 if shareholders' equity increases by more than 10%; 0 otherwise

LOSS:

1 if the firm reported a loss during the year; 0 otherwise

DYR:

Indicator variables for the years from 1992 to 2003

DIND:

Indicator variables for industries based on two-digit SIC code

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Han, S., Kang, T., Salter, S. et al. A cross-country study on the effects of national culture on earnings management. J Int Bus Stud 41, 123–141 (2010). https://doi.org/10.1057/jibs.2008.78

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  • DOI: https://doi.org/10.1057/jibs.2008.78

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