Culture, institutional quality and earnings management: an international evidence
ISSN: 1450-2194
Article publication date: 21 January 2021
Issue publication date: 17 February 2022
Abstract
Purpose
This paper examines the link between culture, institutional quality and real earnings management and accrual earnings management by combing the study by Hofstede (2001) and Enomoto et al. (2015). The paper tries to test the effect of culture on institutional quality and both real earnings management (REM) and accrual earnings management (AEM).
Design/methodology/approach
The sample of the research paper includes 38 countries. Hofstede cultural dimensions are used to measure cultural values. Public governance indicators published by the World Bank are used as a proxy for measuring the institutional quality. Earning management scores constructed by Enomoto et al. (2015, p. 191) are used for measuring real earnings management (REM) and accrual earnings management (AEM). Partial Least Square (PLS) based Structural Equation Modelling (SEM) is used to test the relationship between culture, institutional quality and earnings management.
Findings
The results support the relationship between culture and institutional quality. Also, the results reveal a significant relationship between culture and accrual earnings management, but an insignificant relationship between culture and real earnings management. In addition to that, another important finding is that institutional quality has a significant impact on real earnings management, but has no significant effect on accrual earnings management.
Practical implications
The results suggest that standard setters need to consider the quality of institutions to improve the quality of financial reports. Also, it highlights the role of both formal and informal cultures in shaping financial reports.
Originality/value
For the best of our knowledge, this the first time to test the link between culture and institutional quality and comparing the impact on both real earnings management and accrual earnings management.
Keywords
Citation
Yamen, A., Kuzey, C. and Dinc, M.S. (2022), "Culture, institutional quality and earnings management: an international evidence", EuroMed Journal of Business, Vol. 17 No. 1, pp. 72-87. https://doi.org/10.1108/EMJB-06-2020-0068
Publisher
:Emerald Publishing Limited
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