Academic journal article Multinational Business Review

Effect of Cultural Environment on Earnings Manipulation: A Five Asia-Pacific Country Analysis

Academic journal article Multinational Business Review

Effect of Cultural Environment on Earnings Manipulation: A Five Asia-Pacific Country Analysis

Article excerpt


This study examines the possible impact of cross-country differences in culture on earnings management or choices of accounting accruals in five Asia-Pacific countries: Australia, Japan, Hong Kong, Malaysia and Singapore. A set of traditional and cultural variables were used to test the hypotheses developed in the paper. The results indicate that both the traditional variables (size and debt-equity ratio) and cultural variables (individualism, power distance, uncertainty avoidance and long-term social values) can explain the choices of accounting accruals in different countries. This paper is the first that links earnings management to cultural values and indirectly provides evidence that accounting values (as defined by Gray, 1998) affect earnings management.

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There is a large volume of empirical research that seeks to document earnings management in the US and identify some of its causes and consequences (see Healy and Wahlen, 1999, and Beneish, 2001 for literature reviews). Some of the more recent studies have examined earnings management in an international context by associating earnings management of various countries to country specific institutional factors (see e.g., Darrough, et. al., 1998, and Bhattacharya, et al., 2001). Factors that have been identified in the prior research as potential determinants of earnings management include debt contracting costs, political costs, type of ownership and management compensation. The research, however, has largely ignored the possible effects of cultural values on earnings management. We address this issue here by identifying measures of cultural values and linking these measures to earnings management in five Asian-Pacific countries.

Gray (1988) has suggested that accounting values are derived from cultural values. This suggests that the cultural values of a country would affect various accounting decisions and choices including managers' tendencies to manage earnings. Along the lines of Hofstede (1983), we scored five Asian-Pacific countries: Australia, Hong Kong, Japan, Malayasia and Singapore, based on four cultural value measures: individualism, power distance, uncertainty avoidance, and long-term social value.1 Our results indicate that cultural values influence earnings management decisions. Specifically we find that measures of power distance and individualism are positively associated with discretionary accruals whereas measures of uncertainty avoidance and long term orientation are negatively associated with discretionary accruals. Among the control variables used, the log of assets and the debt to equity ratio have statistically significant association with discretionary accruals. However, they are statistically significant only after measures of cultural values are included in the model, indicating that cultural values are important determinants of discretionary accruals in our setting.

The rest of the paper is organized as follows. section II provides a literature background and hypotheses development. section HI describes the research methodology and the sample, while a discussion of the results follows in section IV. The last section offers concluding remarks.


The social, cultural, political, legal and economic environment affects accounting accrual choices of a firm. Since it is virtually impossible to consider all of these factors in one project, this paper focuses on the effects of crosscountry differences in the cultural environment on discretionary accrual choices (earnings management). To control for variables previously shown to affect earning management, variables such as the debt-to-equity ratio and size are also included in our model. Sets of testable hypotheses are developed in this section.

Cultural Variables

There are probably an infinite number of ways in which cultures differ. …

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