Influence of corporate culture on earnings management

The study investigates the association of corporate culture and earnings management. The study utilises the culture score developed by Li et al. (2021). Using the text analysis of the question-and-answer (QA) section of earnings conference call transcripts they quantify culture score. Employing a large sample of 40,736 firm-year observations of US firms between 2001 and 2018, the study documents a negative and significant contemporaneous association between culture and earnings management. We also show that culture positively affects future firm performance through the mediating channel of earnings management. The results are robust after controlling for several potential biases and endogeneity concerns. The top management of a firm sets an organisational culture that improves the governance of the firm and, in turn, benefits the organisation. Thus, our results speak directly to internal management, as well as other stakeholders including, policymakers, standard-setters, lenders, and regulators.