Informal institutions and managers' earnings management choices: evidence from IFRS-adopting countries

Halabi, Hussein, Alshehabi, Ahmad and Zakaria, Idlan 2019. Informal institutions and managers' earnings management choices: evidence from IFRS-adopting countries. Journal of Contemporary Accounting and Economics 15 (3) , 100162. 10.1016/j.jcae.2019.100162

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Abstract

In this study, we investigate the role of informal institutions (religiosity and culture) in determining managers’ choices of earnings management methods (accruals vs. real activities), after controlling for formal institutions (investor protection, enforcement quality and equity market development). Using an ethical perspective, we find that managers tend to choose an earnings management strategy that meets the prevailing social (informal) norms of the environment where the firm is headquartered. Specifically, our analysis shows that firms domiciled in countries with strong religious adherence and high-power-distance cultures prefer to manage their earnings ‘upwards’ through real activities rather than accruals. Overall, our results suggest that informal institutions determine managers’ earnings management choices at least as strongly as formal institutions do. It would therefore be misleading to analyze managers’ choices in managing earnings solely from the formal rules perspective without considering the role of informal constraints or vice versa.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Elsevier
ISSN:	1815-5669
Date of Acceptance:	4 September 2019
Last Modified:	16 Jan 2023 14:55
URI:	https://orca.cardiff.ac.uk/id/eprint/154166

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