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

Journal article


Halabi, H., Alshehabi, A. and Zakaria, I. 2019. Informal institutions and managers’ earnings management choices: evidence from IFRS-adopting countries. The Journal of Contemporary Accounting & Economics. https://doi.org/10.1016/j.jcae.2019.100162
AuthorsHalabi, H., Alshehabi, A. and Zakaria, I.
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 highpower- 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.

KeywordsFormal institution, informal institution, earnings management, IFRS
Year2019
JournalThe Journal of Contemporary Accounting & Economics
PublisherElsevier
ISSN1815-5669
Digital Object Identifier (DOI)https://doi.org/10.1016/j.jcae.2019.100162
Publication dates
Online17 Sep 2019
Publication process dates
Deposited03 Sep 2019
Accepted03 Sep 2019
Output statusPublished
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https://repository.canterbury.ac.uk/item/88z1z/informal-institutions-and-managers-earnings-management-choices-evidence-from-ifrs-adopting-countries

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