Impacts of National Cultures on Managerial Decisions of Engaging in Core Earnings Management

TL;DR

This paper examines how Hofstede's cultural dimensions influence abnormal core earnings management across different countries, revealing significant associations with individualism, masculinity, and uncertainty avoidance.

Contribution

It provides new empirical evidence on the impact of national cultures on earnings management, highlighting specific cultural factors that influence managerial financial reporting behaviors.

Findings

Individualism positively correlates with earnings management.

Masculinity negatively correlates with earnings management.

Uncertainty avoidance positively correlates with earnings management.

Abstract

This study investigates the impact of Hofstede's cultural dimensions on abnormal core earnings management in multiple national cultural contexts. We employ an Ordinary Least Squares (OLS) regression model with abnormal core earnings as the dependent variable. The independent variables analyzed include Hofstede's dimensions: Power Distance Index (PDI), Individualism (IDV), Masculinity (MAS), and Uncertainty Avoidance Index (UAI). Our findings reveal that individualism is positively associated with abnormal core earnings, suggesting that cultures characterized by high individualism may encourage practices that inflate earnings due to the prominence of personal achievement and rewards. In contrast, masculinity negatively correlates with abnormal core earnings, indicating that the risk-taking attributes associated with masculine cultures may deter earnings management. Interestingly, uncertainty avoidance is positively linked to abnormal core earnings, supporting the notion that managers tend to engage more in earnings management to minimize fluctuations in financial reports in cultures with high uncertainty avoidance. The relationship between power distance and abnormal core earnings is found to be non-significant, indicating no substantial effect in this context. These findings contribute to the literature on cultural influences in financial reporting, providing valuable insights for policymakers and multinational firms concerning the cultural contexts within which financial decisions and reporting occur.