Cultural governance and earnings quality: the role of corporate values and managerial ability

Adam Arian, Sabina Timilsina, Pandula Gamage and John Sands

Journal of Business and Socio-economic Development, 2025, vol. 6, issue 2, 109-130

Abstract: PurposeThis study investigates the role of corporate culture in shaping earnings management behavior, positioning culture as an internal governance mechanism that can enhance financial reporting quality.Design/methodology/approachUsing a large panel of US publicly listed firms from 2001 to 2021, we employ a machine-learning framework that provides a firm-level measure of cultural strength based on the linguistic content of earnings call transcripts. This culture proxy is then used to examine its association with discretionary earnings manipulation.FindingsWe find that firms exhibiting stronger cultural values are significantly less likely to engage in earnings manipulation. This inverse relationship is partially mediated by managerial ability, highlighting the role of capable leaders in reinforcing ethical reporting practices that align with prevailing cultural norms. The effect of culture is particularly pronounced in industries where intangible factors such as trust, innovation and public reputation are critical to sustaining long-term firm value.Originality/valueThis study contributes to the literature on internal governance and financial ethics by documenting the causal and contextual role of corporate culture in constraining earnings manipulation and promoting financial reporting integrity.

Keywords: Corporate culture; Earnings management; Financial reporting quality; Managerial ability; Ethical behavior (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jbsedp:jbsed-07-2025-0321

DOI: 10.1108/JBSED-07-2025-0321

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