The Effect of Multinationality of Firms on Earnings Management

[Purpose]The purpose of this study is to examine the effect of multinationality of firms on earnings management. Relying upon the agency theory, I predict that multinationality can increase earnings management because of high uncertainty and complexity within multinational structure. [Methodology]For this purpose, multinationality is measured as four single－item measures including foreign sales, foreign assets, foreign subsdiaries, and foreign nations, and a composite index. Earnings management is measured with absolute discretionary accruals. [Findings]By regressing multinationality on earnings management, I surprisingly find that multinatlity of firms rather decrease earnings management in Korean firms. I also find that earnings management is more prevalent in domestic firms, and multinationality in multinational firms reduces earnings management on the contrary. Lastly, I find that large business group tends to make less earnings management, and multinationality in large business group reduces the degree of earnings management. [Implications]One possibility of a negative effect of multinationalty of firms on earnings management could attribute to institution theory that intensified corporate governance and internal control systems of host firms are maintained or propagated to other firms in foreign subsidiaries. In addition, the finding on lower level of earnings management in multinational firms supports the reliability of prior studies between multinationality and firm performance.