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

Masahiro Enomoto, Fumihiko Kimura and Tomoyasu Yamaguchi
Additional contact information
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

No DP2013-34, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

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.

Keywords: Financial development; Accounting institution; Accrual-based earnings management; Real earnings management (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013-11, Revised 2017-10
New Economics Papers: this item is included in nep-acc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2013-34.pdf Revised version, 2017 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kob:dpaper:dp2013-34

Access Statistics for this paper

More papers in Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University 2-1 Rokkodai, Nada, Kobe 657-8501 JAPAN. Contact information at EDIRC.
Bibliographic data for series maintained by Office of Promoting Research Collaboration, Research Institute for Economics & Business Administration, Kobe University ().