Cultural tightness and financial reporting behavior around the world

Abstract

This study examines the effect of cultural tightness on earnings management globally through an institutional economics perspective. We find that managers are less (more) likely to use accrual-based (real) earnings management in countries with tight cultures, consistent with the notion that managers switch to real earnings management when accrual-based earnings management is constrained in tight cultures. Our findings are robust to several endogeneity and sensitivity tests. Additionally, our results show that the strength of investor protection attenuates the effect of cultural tightness on earnings management, suggesting a substitutive relationship between this effect and the legal regime. The results also show that transactions with other countries (i.e., more imports and exports or foreign sales) weaken the effect of cultural tightness. Thus, by focusing on norm-based cultural tightness rather than Hofstede’s value-based cultural dimensions, this study advances the understanding of how culture affects corporate reporting practices.