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A Cross-Country Study on the Relationship between Financial Development and Earnings Management

Author

Listed:
  • Masahiro Enomoto

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

  • Fumihiko Kimura

    (Graduate School of Economics and Management, Tohoku University, Japan)

  • Tomoyasu Yamaguchi

    (Faculty of Business Administration, Tohoku Gakuin University, Japan and School of Business and Tourism, Southern Cross University, Australia)

Abstract

This paper investigates whether a country’s level of financial development is associated with earnings management in an international setting. Financial development is likely to heighten the monitoring and scrutiny of accounting numbers because of strengthened investor protection laws and regulations as well as sophisticated market participants. Therefore, we first hypothesize that both accrual-based and real earnings management decrease with greater financial development. However, research shows that managers tend to apply real earnings management, instead of accrual-based earnings management, under strict accounting standards, regulations, and close auditor scrutiny. Thus, we explore the alternative hypothesis that accrual-based earnings management decreases but real earnings management increases along with higher financial development. We examine the relationship between financial development and both types of earnings management using 56,830 observations in 37 countries covering the period 2009 to 2012. The results indicate that both types of earnings management are more restrained under higher levels of financial development.

Suggested Citation

  • Masahiro Enomoto & Fumihiko Kimura & Tomoyasu Yamaguchi, 2013. "A Cross-Country Study on the Relationship between Financial Development and Earnings Management," Discussion Paper Series DP2013-34, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2017.
  • Handle: RePEc:kob:dpaper:dp2013-34
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    File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2013-34.pdf
    File Function: Revised version, 2017
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial development; Accounting institution; Accrual-based earnings management; Real earnings management;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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