The Impact of National Culture on Earnings Management

This study investigates the relationship between earnings management and national culture. We use Hofstede’s(2010) five cultural dimensions - Power Distance, Individualism, Masculinity, Uncertainty Avoidance and Long-term orientation - as a proxy for national culture. We explore how each cultural dimension promotes or constrains the use of earnings management. We measure earnings management using a sample of 335,810 firm-year observations for the period 2006 to 2015 in 52 countries. Our results suggest that Power Distance and Masculinity promote the use of earnings management. Yet, we find that countries with high Individualism mitigate the level of earnings management. Moreover, an interaction between Uncertainty Avoidance and the region where the country is located yields interesting results. Uncertainty Avoidance in East Asia tends to constrain the level of earnings management. In Northern Europe, however, Uncertainty Avoidance tends to increase the level of earnings management. Our study implies the importance of culture in the understanding of managerial behavior across countries.