A Cross-Country Study on the Relationship between Financial Development and Earnings Management
This paper investigates if the level of financial development influences accrual-based and real earnings management in an international setting. It is likely that financial development heightens the monitoring and scrutiny of accounting figures, because of strengthened laws and regulations for investor protection and by the extension, sophisticated market participants. Therefore, we first hypothesize that both accrual-based and real earnings management decrease with greater financial development. However, managers tend to apply real earnings management, instead of accrual-based earnings management, under strict accounting standards, regulations, and close scrutiny by auditors. Thus, we explore the alternative hypothesis that financial development decreases accrual-based earnings management but increases real earnings management. We examine the relationship between financial development and both types of earnings management by using 54,178 observations in 37 countries from 2009 to 2012. The results show that managers are restrained with regards to both types of earnings management under higher levels of financial development. We interpret these results as showing that (1) higher quality accounting information is needed in countries with more developed financial systems, (2) financial development disciplines managers and mitigates their incentives to manage earnings, and (3) a link between financial development and accounting institutions in each country.
|Date of creation:||Nov 2013|
|Date of revision:||Aug 2014|
|Contact details of provider:|| Postal: |
Phone: +81-(0)78 803 7036
Fax: +81-(0)78 803 7059
Web page: http://www.rieb.kobe-u.ac.jp/index-e.html
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- In-Mu Haw & Bingbing Hu & Lee-Seok Hwang & Woody Wu, 2004. "Ultimate Ownership, Income Management, and Legal and Extra-Legal Institutions," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 423-462, 05.
- Siew Hong Teoh & Ivo Welch & T.J. Wong, 1998. "Earnings Management and the Long-Run Market Performance of Initial Public Offerings," Journal of Finance, American Finance Association, vol. 53(6), pages 1935-1974, December.
- Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
- Beck, Thorsten & Levine, Ross, 2004.
"Stock markets, banks, and growth: Panel evidence,"
Journal of Banking & Finance,
Elsevier, vol. 28(3), pages 423-442, March.
- Warfield, Terry D. & Wild, John J. & Wild, Kenneth L., 1995. "Managerial ownership, accounting choices, and informativeness of earnings," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 61-91, July.
- Beck, Thorsten & Levine, Ross, 2002.
"Industry growth and capital allocation:*1: does having a market- or bank-based system matter?,"
Journal of Financial Economics,
Elsevier, vol. 64(2), pages 147-180, May.
- Thorsten Beck & Ross Levine, 2002. "Industry Growth and Capital Allocation: Does Having a Market- or Bank-Based System Matter?," NBER Working Papers 8982, National Bureau of Economic Research, Inc.
- Peter Wysocki, 2011. "New institutional accounting and IFRS," Accounting and Business Research, Taylor & Francis Journals, vol. 41(3), pages 309-328, August.
- Teoh, Siew Hong & Welch, Ivo & Wong, T. J., 1998. "Earnings management and the underperformance of seasoned equity offerings," Journal of Financial Economics, Elsevier, vol. 50(1), pages 63-99, October.
- Patricia M. Dechow & Amy P. Hutton & Jung Hoon Kim & Richard G. Sloan, 2012. "Detecting Earnings Management: A New Approach," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 275-334, 05.
- Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
- John R. Graham & Campbell R. Harvey & Shiva Rajgopal, 2004.
"The Economic Implications of Corporate Financial Reporting,"
NBER Working Papers
10550, National Bureau of Economic Research, Inc.
- Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
- Masahiro Enomoto & Fumihiko Kimura & Tomoyasu Yamaguchi, 2012. "Accrual-Based and Real Earnings Management: An International Comparison for Investor Protection," Discussion Paper Series DP2012-13, Research Institute for Economics & Business Administration, Kobe University, revised May 2015.
- Boonlert-U-Thai, Kriengkrai & Meek, Gary K. & Nabar, Sandeep, 2006. "Earnings attributes and investor-protection: International evidence," The International Journal of Accounting, Elsevier, vol. 41(4), pages 327-357, 012.
- DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
- Mary E. Barth & Wayne R. Landsman & Mark H. Lang, 2008. "International Accounting Standards and Accounting Quality," Journal of Accounting Research, Wiley Blackwell, vol. 46(3), pages 467-498, 06.
- Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
- Bushman, Robert M. & Piotroski, Joseph D., 2006. "Financial reporting incentives for conservative accounting: The influence of legal and political institutions," Journal of Accounting and Economics, Elsevier, vol. 42(1-2), pages 107-148, October.
- Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
- Cohen, Daniel A. & Zarowin, Paul, 2010. "Accrual-based and real earnings management activities around seasoned equity offerings," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 2-19, May.
- Ball, Ray & Robin, Ashok & Wu, Joanna Shuang, 2003. "Incentives versus standards: properties of accounting income in four East Asian countries," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 235-270, December.
When requesting a correction, please mention this item's handle: RePEc:kob:dpaper:dp2013-34. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Office of Promoting Research Collaboration, Research Institute for Economics & Business Administration, Kobe University)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.