Skip to main content
SpringerLink
Log in

Do culture and religion mitigate earnings management? Evidence from a cross-country analysis

  • Original Article
  • Published:
International Journal of Disclosure and Governance Aims and scope Submit manuscript

Abstract

This study investigates whether culture in general and religion in particular mitigate earnings management. Using a cross-country data set, empirical tests based on rank regressions indicate that earnings management is unrelated to both religious affiliation and the degree of religiosity. In contrast, earnings management is found to be negatively related to the updated Hofstede cultural variable of individualism and positively related to uncertainty avoidance. The results also indicate that the positive impact of the legal environment in mitigating earnings management, documented by Leuz, can no longer be demonstrated after controlling for culture.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. See, for example, Kuran (2009) on the economic impact of culture, religion and the law.

  2. Han et al (2010) also measure earnings management by (performance controlled) discretionary accruals and cultural variables using Hofstede's (1980) proxies.

  3. This should be so even if the Hofstede (1980, 1991) cultural measures are correlated with religion since they do not measure religion exclusively.

  4. Risk propensity is based on an 11-point risk scale between ‘0 Risk-averse’ and ‘10 Fully prepared to take risks’ – without making reference to any specific risk dimension.

  5. These results may be specific to immigrants who in general are likely to be less risk averse relative to the overall population of the same religion.

  6. Shu et al (2010) find results that are consistent with Barsky et al (1997) in the mutual fund industry.

  7. For the World Values Survey of the World Bank, see www.worldbank.org/wbi/governance/govdata.

  8. It should be noted that Desender et al (2007) employ principle components analysis and OLS regressions to aggregate the Leuz et al (2003) earnings management metrics instead of averaging the ranks (and rank regressions).

  9. Some of the other culture variables are also significant but at the one-tailed level.

  10. Yet, our sample size is identical to that of Leuz et al (2003), and we do find that culture generally matters.

References

  • Ali, A.Y. (1983) The Holy Quran: English Translation of the Meanings and Commentary. Madina-al-Munawwara, Saudi Arabia: King Fahad Holy Quran Printing Complex.

  • Barsky, R.B., Juster, F.T., Kimball, M.S. and Shapiro, M.D. (1997) Preference parameters and behavioral heterogeneity: An experimental approach in the health and retirement study. Quarterly Journal of Economics 112: 537–579.

    Article  Google Scholar 

  • Bartke, S. and Schwarze, R. (2008) Risk-averse by Nation or by Religion? Some Insights on the Determinants of Individual Risk Attitudes. SOEP paper on Multidisciplinary Panel Data Research No. 131, Deutsches Institut für Wirtschaftsforschung.

  • Baskerville, R.F. (2003) Hofstede never studied culture. Accounting, Organizations and Society 28: 1–14.

    Article  Google Scholar 

  • Bergstresser, D. and Phillipon, T. (2006) CEO Incentives and earnings management. Journal of Financial Economics 80: 511–529.

    Article  Google Scholar 

  • Desender, K.A., Castro, C.E. and De Leon, S.A.E. (2007) Earnings Management and Cultural Values. Universidad Autonoma de Barcelona. Working Paper, October.

  • Dyreng, S.C., Mayew, W.J. and Williams, C.D. (2010) Religious Social Norms and Corporate Financial Reporting. Duke University, University of North Carolina and University of Michigan. Working Paper.

  • Fernandes, N. and Ferreira, M.A. (2007) The Evolution of Earnings Management and Firm Valuation: A Cross-country Analysis. Universidade Catolica Portuguesa. Working Paper, October.

  • Friedman, H.H. (2002) Placing a Stumbling Block Before the Blind Person: An In-depth Analysis. Brooklyn College. Working Paper.

  • Getz, K.A. and Volkema, R.J. (2001) Culture perceived corruption and economics: A model of predictors and outcomes. Business and Society 40: 7–30.

    Article  Google Scholar 

  • Grasmick, H.G., Bursik, R.J. and Cochran, J.K. (1991) Render unto Caesar's: Religiosity and taxpayers’ inclinations to cheat. The Sociological Quarterly 32: 251–266.

    Article  Google Scholar 

  • Gray, S.J. (1988) Towards a theory of cultural influence on the development of accounting systems internationally. Abacus 24: 1–15.

    Article  Google Scholar 

  • Guan, L., Pourjalali, H., Sengupta, P. and Teruya, J. (2006) Effect of cultural environment on earnings manipulation: A five Asian-Pacific country analysis. Multinational Business Review 13: 23–41.

    Article  Google Scholar 

  • Guay, W.R., Kothari, S.P. and Watts, R.L. (1996) A market-based evaluation of discretionary accrual models. Journal of Accounting Research 34: 83–105.

    Article  Google Scholar 

  • Han, S., Kang, T., Salter, S. and Yoo, Y.K. (2010) A cross-country study on the effects of national culture on earnings discretion. Journal of International Business Studies 41: 123–142.

    Article  Google Scholar 

  • Healy, P. (1996) Discussion of a market-based evaluation of discretionary accrual models. Journal of Accounting Research 34: 107–115.

    Article  Google Scholar 

  • Heaton, P. (2006) Does religion really reduce crime. Journal of Law and Economics 49: 147–172.

    Article  Google Scholar 

  • Hilary, G. and Hui, K.W. (2009) Does religion matter in corporate decision making. Journal of Financial Economics 93: 455–473.

    Article  Google Scholar 

  • Hofstede, G. (1991) Cultures and Organizations: Software of the Mind. New York: McGraw-Hill.

    Google Scholar 

  • Hofstede, G. (2006) What did GLOBE really measure? Researchers’ minds versus respondents’ minds. Journal of International Business Studies 37: 882–896.

    Article  Google Scholar 

  • Hofstede, G. and Hofstede, G.J. (2005) Cultures and Organizations: Software of the Mind. New York: McGraw-Hill.

    Google Scholar 

  • Hofstede, G.H. (1980) Cultures Consequences: International Differences in Work Related Values. Beverly Hill, CA: Sage Publications.

    Google Scholar 

  • Hofstede, G.H. (1983) Dimensions of national cultures in fifty countries and three regions. In: J.B. Deregowski, S. Dziurawice and R.C. Annis (eds.) Expiscations in Cross-Cultural Psychology. Lisse, the Netherlands: Swets and Zeitlinger, pp. 335–355.

    Google Scholar 

  • Hofstede, G.H. and Bond, M.H. (1988) The Confucius connection: From cultural roots to economic growth. Organizational Dynamics 16: 5–21.

    Article  Google Scholar 

  • House, R., Hanges, P., Javidan, M., Dorfman, P. and Gupta, V. (2004) Culture, Leadership, and Organizations: The GLOBE Study of 62 Societies. Thousand Oaks, CA: Sage Publications.

    Google Scholar 

  • Hung, M. (2000) Accounting standards and value relevance of financial statements: An international analysis. Journal of Accounting and Economics 30: 401–420.

    Article  Google Scholar 

  • Husted, B.W. (1999) Wealth culture and corruption. Journal of International Business Studies 30: 339–360.

    Article  Google Scholar 

  • Kim, D., Fisher, D. and McCalman, D. (2009) Modernism Christianity, and business ethics: A worldwide perspective. Journal of Business Ethics 90: 115–121.

    Article  Google Scholar 

  • Kirkman, B., Lowe, K. and Gibson, C. (2006) A quarter century of culture's consequences: A review of empirical research incorporating Hofstede's cultural values framework. Journal of International Business Studies 37: 285–320.

    Article  Google Scholar 

  • Kuran, T. (2009) Preface: The economic impact of culture, religion and the law. Journal of Economic Behavior & Organization 71: 589–592.

    Article  Google Scholar 

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1999) The quality of government. The Journal of Law, Economics and Organization 15: 222–279.

    Article  Google Scholar 

  • Leuz, C., Nanda, D. and Wysockie, P.D. (2003) Earnings management and investor protection: An international comparison. Journal of Financial Economics 69: 505–527.

    Article  Google Scholar 

  • Licht, A.N., Goldschmidt, C. and Schwartz, S.H. (2005) Culture law, and corporate governance. International Review of Law and Economics 25: 229–255.

    Article  Google Scholar 

  • Mawdudi, S.A.A. (1989) Towards Understanding the Quran. Trans. Z.I. Ansari, Leicester, UK: The Islamic Foundation.

  • McCullough, M.E. and Willoughby, B.L.B. (2009) Religion self-regulation and self-control: Association, explanation and implications. Psychological Bulletin 135: 69–93.

    Article  Google Scholar 

  • McGuire, S.T., Omer, T.C. and Sharp, N.Y. (2010) The Impact of Religion on Financial Reporting Irregularities. Texas A&M University. Working Paper.

  • McSweeney, B. (2002) Hofstede's model of national culture differences and their consequences: A triumph of faith – A failure of analysis. Human Relations 55: 89–118.

    Article  Google Scholar 

  • Parboteeah, K.P., Hoegl, M. and Cullen, J.B. (2007) Ethics and religion: An empirical test of a multidimensional model. Journal of Business Ethics 80: 387–398.

    Article  Google Scholar 

  • Rai, H. (2005) The role of Hinduism in global India and her business ethics. In: E.N. Capaldi (ed.) Business and Religion A Clash of Civilizations. Salem: M & M Scrivener Press, pp. 379–389.

    Google Scholar 

  • Richardson, G. (2008) The relationship between culture and tax evasion across countries: Additional evidence and extensions. Journal of International Accounting, Auditing and Taxation 17: 67–78.

    Article  Google Scholar 

  • Schipper, K. (1989) Commentary on earnings management. Accounting Horizons 3: 91–102.

    Google Scholar 

  • Schwartz, S.H. (1994) Beyond individualism-collectivism: New cultural dimensions of values. In: U. Kim, H.C. Triandis, C. Kagitcibasi, S.C. Choi and G. Yoon (eds.) Individualism and Collectivism: Theory, Method and Applications. Thousand Oaks, CA: Sage Publications, pp. 85–119.

    Google Scholar 

  • Shu, T., Sulaeman, J. and Yeung, P.E. (2010) Having Faith in Your Trade: Mutual Fund Risk-taking and Local Religious Beliefs. University of Georgia and Southern Methodist University. Working Paper.

  • Stack, S. and Kposowa, A. (2006) The effect of religiosity on tax fraud acceptability: A cross-national analysis. Journal for the Scientific Study of Religion 45: 325–351.

    Article  Google Scholar 

  • Tang, L. and Koveos, P.E. (2008) A framework to update Hofstede's cultural value indices: Economic dynamics and institutional stability. Journal of International Business Studies 39: 1045–1063.

    Article  Google Scholar 

  • Trompenaars, F. and Hampden-Turner, C. (1998) Riding the Waves of Culture: Understanding Cultural Diversity in Business, 2nd edn. New York: McGraw-Hill.

    Google Scholar 

  • Tsakumis, G.T., Curatola, A.P. and Porcano, T.M. (2007) The relation between national cultural dimensions and tax evasion. Journal of International Accounting, Auditing and Taxation 16: 131–147.

    Article  Google Scholar 

  • Vitell, S.J. (2009) The role of religiosity in business and consumer ethics: A review of the literature. Journal of Business Ethics 90: 155–167.

    Article  Google Scholar 

  • World Values Survey. (2009) 1981–2008 official aggregate v.20090901. World values survey association, www.worldvaluessurvey.org. Aggregate File Producer: ASEP/JDS, Madrid.

Download references

Acknowledgements

We wish to thank the anonymous referee of this Journal for insightful and constructive comments. We also thank colleagues at the Rotman School of Management, University of Toronto for helpful comments.

Author information

Authors and Affiliations

  1. Joseph L. Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, M5S 3E6, Ontario, Canada

    Jeffrey L Callen

Authors
  1. Jeffrey L Callen
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Mindy Morel
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Grant Richardson
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jeffrey L Callen.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Callen, J., Morel, M. & Richardson, G. Do culture and religion mitigate earnings management? Evidence from a cross-country analysis. Int J Discl Gov 8, 103–121 (2011). https://doi.org/10.1057/jdg.2010.31

Download citation

  • Received:

  • Revised:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/jdg.2010.31

Keywords

Search

Navigation