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Corruption and earnings management in developed and emerging countries

Isabel Costa Lourenço (Instituto Universitário de Lisboa (ISCTE-IUL), Lisbon, Portugal and Researcher at Business Research Unit (BRU-IUL), Lisbon, Portugal)
Alex Rathke (Universidade de Sao Paulo, Sao Paulo, Brazil)
Verônica Santana (Universidade de Sao Paulo, Sao Paulo, Brazil)
Manuel Castelo Branco (Faculty of Economics, University of Porto, Porto, Portugal and Researcher at CEF.UP and OBEGEF, University of Porto, Porto, Portugal)

Corporate Governance

ISSN: 1472-0701

Article publication date: 3 January 2018

Issue publication date: 23 January 2018

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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.

Keywords

Acknowledgements

This article was supported by FCT – research project UID/GES/00315/2013.

Citation

Lourenço, I.C., Rathke, A., Santana, V. and Branco, M.C. (2020), "Corruption and earnings management in developed and emerging countries", Corporate Governance, Vol. 18 No. 1, pp. 35-51. https://doi.org/10.1108/CG-12-2016-0226

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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