A Cross-Country Study on the Relationship between Financial Development and Earnings Management
This paper investigates whether a country's level of financial development influences its 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 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 56,830 observations in 37 countries from 2009 to 2012. The results show that both types of earnings management are more restrained under higher levels of financial development.
|Date of creation:||Nov 2013|
|Date of revision:||Feb 2016|
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