The influence of national culture on the relationship between corporate governance and earnings management^*,**

ABSTRACT

The aim of the study was to analyze the influence of the dimensions of national culture on the relationship between corporate governance (CG) and earnings management (EM). There is evidence that in certain cultural contexts CG mechanisms appear to be ineffective in minimizing EM. Studies on governance and its influence on accounting information quality can help market participants make better decisions. It is important to include the cultural context in this relationship as it sheds light on an aspect that has hardly been explored in the research, which can improve the informational environment of organizations. In practical terms, the results may contribute to organizations paying more attention to the cultural influence of countries when implementing or improving their governance mechanisms, with the aim of making them more effective in aligning interests and monitoring behaviors in organizations. Moreover, market participants may require alterations in these mechanisms in more individualistic and indulgent cultural contexts. The sample was composed of 18,707 observations of companies located in 24 countries belonging to the G20 group, covering 2010 to 2017. The data were operationalized using a multiple linear regression, with robust standard errors and controls for sector and year fixed effects, using the propensity score matching (PSM) method. The premise that CG can minimize EM was confirmed in this research, except in individualistic and indulgent countries. In these cultural contexts, governance mechanisms tend to be ineffective in minimizing EM. These results contribute to the literature by highlighting that the culture of countries can impact the effectiveness of CG in mitigating opportunistic practices, which explains the ambiguous results of previous research.

Keywords:
earnings management; corporate governance; national culture