Abstract
Purpose – The purpose of this study is to examine whether firms from countries presenting higher levels of corruption are more likely to have higher levels of earnings management than their counterparts from countries with lower levels of corruption. It also explicitly examines how this relationship compares between emerging and developed economies. Design/methodology/approach – Using multiple regression analysis, this study tests the hypothesis of positive association between the countries’ level of corruption and the level of earnings management using a sample of foreign firms with American Depositary Receipts in the US market. Findings – Findings indicate that higher corruption perception is related to higher incentives for firms to manipulate earnings in the case of emerging countries. Such results are not identified in developed countries where the level of minority investors’ protection is higher. Findings also indicate that in developed countries earnings management is negatively related to investor protection, which is not the case for emerging countries. Originality value – As far as the authors are aware, this study is the first to examine the effects of corruption on earnings management on the basis of accounting firm-level data.
5. Conclusion
This study analyses the relationship between earnings management and countries’ corruption levels by examining whether foreign firms with ADR in the US market from countries presenting higher levels of corruption are more likely to have higher levels of earnings management than their counterparts from countries with lower levels of corruption. It also explicitly sorted out the relationship between corruption and earnings management in emerging versus developed economies. Control variables pertaining to important factors that earlier literature reports as being linked with earnings management were considered.
The findings confirm results of earlier studies pertaining to the impact of corruption on accounting quality using country-level accounting data (Riahi-Belkaoui, 2004; RiahiBelkaoui and AlNajjar, 2006). In addition, the analyses presented in this paper highlight the relevance of recognizing different relationships between corruption and earnings management in two socio-economic contexts – emerging and developed. The empirical findings suggest that corruption perception is related to higher incentives for firms to manipulate earnings for firms located in emerging countries, while such results are not identified in developed countries.
Although Houqe and Monem (2016) examined the impact of accounting quality on corruption rather than the impact of corruption on accounting quality, as we have done, we consider that our findings are consistent with the findings they have obtained, which reveal that developing countries benefit more from IFRS experience than their developed counterparts in terms of its effect in curbing corruption. We do not negate the existence of the role potentially played by accounting in curbing corruption proposed in studies such as Wu (2005), Malaguen˜o et al. (2010) and Houqe and Monem (2016).
