Earnings Management, Investor Protection, and National Culture

This paper examines the impact of investor protection and national culture on earnings management for a sample of 30 countries. The results indicate that earnings management is negatively associated with outside investor rights, consistent with Leuz et al. (2003). We also find that earnings management is relatively high in countries with high uncertainty avoidance scores and relatively low in countries where the primary language is English. Supplementary analysis of earnings management components indicates that uncertainty avoidance and masculinity are associated with earnings discretion but not with earnings smoothing. We conclude that culture is an important determinant of accounting choice and should be considered by standard setters enacting and enforcing international financial reporting rules.