A cross‐country study on the relationship between financial development and earnings management |
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| Authors: | Masahiro Enomoto Fumihiko Kimura Tomoyasu Yamaguchi |
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| Institution: | 1. Research Institute for Economics and Business Administration, Kobe University, Kobe, Japan;2. Graduate School of Economics and Management, Tohoku University, Sendai, Japan;3. Faculty of Business Administration, Tohoku Gakuin University, Sendai, Japan;4. School of Business and Tourism, Southern Cross University, Gold Coast, Australia |
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| Abstract: | This study 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 2009–2012. The results indicate that both types of earnings management are more restrained under higher levels of financial development. |
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| Keywords: | accounting institution accrual‐based earnings management financial development real earnings management |
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