Abstract:
In this paper, we study the relationship between national culture and earnings management. Using data of joint-ventures in China from year 2005 to 2007, we find that culture will affect earnings management after controlling for various country, institution, and firm level factors. In specific, firms from countries with higher level of individualism have higher level of both income-increasing and income-decreasing earnings management, while firms from countries with higher level of uncertainty avoidance have higher level of income-decreasing earnings management. This effect is even more significant in foreign-dominant firms. Further study shows that the effect of national culture on earnings management is not affected by level of marketization, while it is ameliorated by years since firms enter China. The results help us understand what roles national culture plays in joint-ventures’ business decisions, and provide guidance in drawing foreign investment and joint-ventures regulation.
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