Earnings Management within Multinational Corporations

2018 ◽  
Vol 94 (4) ◽  
pp. 45-76 ◽  
Author(s):  
Christof Beuselinck ◽  
Stefano Cascino ◽  
Marc Deloof ◽  
Ann Vanstraelen
Keyword(s):  
Earnings Management ◽  
Multinational Corporations ◽  
Home Country ◽  
Institutional Quality ◽  
Regulatory Arbitrage ◽  
Arbitrage Opportunities ◽  
Country Differences ◽  
Cross Country ◽  
Jel Classifications

ABSTRACT Using a large sample of multinational corporations (MNCs), we examine the location of earnings management within the firm. We posit and find that MNCs manage their consolidated earnings through an orchestrated reporting strategy across subsidiaries over which they exert significant influence. Specifically, we find that headquarters' influence on subsidiary earnings management increases with the degree of subsidiary integration and the extent of earnings management opportunities. Most importantly, we provide evidence that MNCs exploit regulatory arbitrage opportunities arising from cross-country differences in institutional quality. We document that, in response to exogenous improvements in the quality of their home-country institutions, MNCs rebalance their reporting strategies by clustering earnings management in subsidiaries from countries with more lenient regulations. Taken together, our findings yield important insights on the drivers of earnings management location within the firm and highlight the need for better cross-country coordination in regulatory design. JEL Classifications: F23; G15; G34; G38; M41; M48.

scholarly journals Foreign Investment, Regulatory Arbitrage, and the Risk of U.S. Banking Organizations

2019 ◽  
Vol 55 (3) ◽  
pp. 955-988 ◽  
Author(s):  
W. Scott Frame ◽  
Atanas Mihov ◽  
Leandro Sanz
Keyword(s):  
Banking Regulation ◽  
Internal Controls ◽  
Location Decisions ◽  
Regulatory Arbitrage ◽  
Holding Companies ◽  
Regulation And Supervision ◽  
Country Differences ◽  
Cross Country ◽  
Banking Regulation And Supervision

This study investigates the implications of cross-country differences in banking regulation and supervision for the international subsidiary locations and risk of U.S. bank holding companies (BHCs). We find that BHCs are more likely to operate subsidiaries in countries with weaker regulation and supervision and that such location decisions are associated with elevated BHC risk and higher contribution to systemic risk. The quality of BHCs’ internal controls and risk management plays an important role in these location choices and risk outcomes. Overall, our study suggests that U.S. banking organizations engage in cross-country regulatory arbitrage, with potentially adverse consequences.

scholarly journals Human Capital and the Wealth of Nations

2014 ◽  
Vol 104 (9) ◽  
pp. 2736-2762 ◽  
Author(s):  
Rodolfo E. Manuelli ◽  
Ananth Seshadri
Keyword(s):  
Human Capital ◽  
Demographic Variables ◽  
Factor Productivity ◽  
Rates Of Return ◽  
Capital Theory ◽  
Country Differences ◽  
Cross Country ◽  
Wealth Of Nations

We reevaluate the role of human capital in determining the wealth of nations. We use standard human capital theory to estimate stocks of human capital and allow the quality of human capital to vary across countries. Our model can explain differences in schooling and earnings profiles and, consequently, estimates of Mincerian rates of return across countries. We find that effective human capital per worker varies substantially across countries. Cross-country differences in Total Factor Productivity (TFP) are significantly smaller than found in previous studies. Our model implies that output per worker is highly responsive to changes in TFP and demographic variables. (JEL E23, I25, J24, J31, O47)

A cross-country comparative analysis of the Russian financial sector model

2018 ◽  
pp. 5-24 ◽  
Author(s):  
M. I. Stolbov ◽  
I. O. Goloshchapova ◽  
O. G. Solntsev ◽  
R. R. Akhmetov ◽  
V. A. Pankova ◽  
...  
Keyword(s):  
Size Structure ◽  
Institutional Quality ◽  
Financial Sector ◽  
Sector Model ◽  
Advanced Economies ◽  
The Em Algorithm ◽  
Country Analysis ◽  
Cross Country

In this paper, based on a cross-country analysis, the authors distil different models of the financial sector, which are characterized by peculiar interrelations among size, structure, efficiency, stability, inclusion and the institutional quality of financial development. Against this backdrop, the model of the Russian financial sector is described. To identify the financial sector models, cluster analysis involving the EM algorithm with a Bayesian extension is performed on a vast sample of countries. The analysis allows setting key long-term indicators of the Russian financial sector development, taking into consideration its potential of transition to the cluster of more financially advanced economies.

scholarly journals Geographic Endowment, Corruption, and Economic Development

2018 ◽  
Vol 9 (1) ◽  
pp. 1
Author(s):  
Sazzadul Arefin
Keyword(s):  
Economic Growth ◽  
Economic Development ◽  
Instrumental Variable ◽  
Institutional Quality ◽  
Developed Countries ◽  
Cultural Factors ◽  
Variable Approach ◽  
Cross Country ◽  
Instrumental Variable Approach

Corruption plays an important role in determining the effectiveness and quality of the institution, and growth. This paper investigates the linkage between corruption, various measures of geographical endowments and economic growth. I use corruption as a proxy for institutional quality and try to solve the endogeneity problem by Instrumental Variable approach as 2SLS for panel data for a sample of 192 countries and showed that corruption matters for economic growth. The results indicate that graphical endowments explain cross-country variation in economic development through their effect on corruption even when I control for other historical and cultural factors. Thus, when considering making policy for developing or developed countries much attention should be paid to this fact.

scholarly journals Institutional Quality and Illicit Capital Outflow: A Comparative Analysis of the Eastern European Countries

2017 ◽  
Vol 3 (1) ◽  
pp. 66
Author(s):  
Luca Andriani ◽  
Anna Zajaczkowska
Keyword(s):  
Multinational Corporations ◽  
Global Economy ◽  
Institutional Quality ◽  
European Countries ◽  
Eastern European ◽  
Capital Outflow ◽  
Capital Outflows ◽  
Eastern European Countries ◽  
Strategic Allocation

It is estimated that $1 trillion flows out of the developing and emerging economies illegally on a yearly basis. This affects the ability of governments to raise the tax revenue and deprive the citizens of crucial services. Multinational Corporations (MNCs), as one of the big player in the global economy, are suspected to play a role in those capital outflows. For the multinational, the outflows enable strategic allocation pf taxes as a mean to enhance profits. This study tests whether institutional quality and tax level are significant predictors of the illicit capital outflow. The analysis uses panel data regressions on a group of Eastern European countries for the years 2004-2013. Empirical evidence suggests that illicit capital outflow reduces with institutional quality and increases with the tax level. We speculate on the importance of cross-country coordination actions to improve the quality of the institutions not only domestically but also at the supranational level.

scholarly journals Board Interlocks and Earnings Management Contagion

2012 ◽  
Vol 88 (3) ◽  
pp. 915-944 ◽  
Author(s):  
Peng-Chia Chiu ◽  
Siew Hong Teoh ◽  
Feng Tian
Keyword(s):  
Earnings Management ◽  
Audit Committee ◽  
Data Availability ◽  
Contagion Effect ◽  
Financial Reports ◽  
Committee Chair ◽  
Endogenous Matching ◽  
Board Monitoring ◽  
Jel Classifications

ABSTRACT We test whether earnings management spreads between firms via shared directors. We find that a firm is more likely to manage earnings when it shares a common director with a firm that is currently managing earnings and is less likely to manage earnings when it shares a common director with a non-manipulator. Earnings management contagion is stronger when the shared director has a leadership or accounting-relevant position (e.g., audit committee chair or member) on its board or the contagious firm's board. Irregularity contagion is stronger than error contagion. The board contagion effect is robust to controlling for endogenous matching of firms with directors, fixed firm/director effects, incidence of M&A, industry, and contagion via a common auditor or geographical proximity. These findings support the view that board monitoring plays a key role in the contagion and quality of firms' financial reports. JEL Classifications: M40; M41; M49; G34; G39; D83. Data Availability: Data are available from sources identified in the text.

Culture, institutional quality and earnings management: an international evidence

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Ahmed Yamen ◽  
Cemil Kuzey ◽  
Muhammet Sait Dinc
Keyword(s):  
Earnings Management ◽  
Institutional Quality ◽  
Partial Least Square ◽  
Cultural Dimensions ◽  
Real Earnings Management ◽  
Financial Reports ◽  
Content Type ◽  
The Impact ◽  
The Relationship

PurposeThis paper examines the link between culture, institutional quality and real earnings management and accrual earnings management by combing the study by Hofstede (2001) and Enomoto et al. (2015). The paper tries to test the effect of culture on institutional quality and both real earnings management (REM) and accrual earnings management (AEM).Design/methodology/approachThe sample of the research paper includes 38 countries. Hofstede cultural dimensions are used to measure cultural values. Public governance indicators published by the World Bank are used as a proxy for measuring the institutional quality. Earning management scores constructed by Enomoto et al. (2015, p. 191) are used for measuring real earnings management (REM) and accrual earnings management (AEM). Partial Least Square (PLS) based Structural Equation Modelling (SEM) is used to test the relationship between culture, institutional quality and earnings management.FindingsThe results support the relationship between culture and institutional quality. Also, the results reveal a significant relationship between culture and accrual earnings management, but an insignificant relationship between culture and real earnings management. In addition to that, another important finding is that institutional quality has a significant impact on real earnings management, but has no significant effect on accrual earnings management.Practical implicationsThe results suggest that standard setters need to consider the quality of institutions to improve the quality of financial reports. Also, it highlights the role of both formal and informal cultures in shaping financial reports.Originality/valueFor the best of our knowledge, this the first time to test the link between culture and institutional quality and comparing the impact on both real earnings management and accrual earnings management.

scholarly journals Ownership concentration and earnings quality of banks: Results from a cross-country analysis

2017 ◽  
Vol 15 (1) ◽  
pp. 288-297 ◽  
Author(s):  
Libero Mario Mari ◽  
Manuel Soscia ◽  
Simone Terzani
Keyword(s):  
Earnings Management ◽  
Regression Models ◽  
Earnings Quality ◽  
Ownership Concentration ◽  
Earnings Persistence ◽  
Management Activity ◽  
Country Analysis ◽  
Cross Country ◽  
The Impact

This research investigates the impact of ownership concentration on earnings quality of banks. Previous literature shows that ownership concentration reduces agency costs between property and management, resulting in higher quality and transparency of information, and thus on earnings quality. The reason why we focus on banks lies on the specific constraints and regulations to which financial institutions are subjected, and as well as the different incentives to earnings management activities from management and property. Thus, the main issue of our research is to understand whether ownership concentration has an impact on banks earnings quality. We used a sample of 6,323 bank-year observations, across 35 countries, over the period 2001-2016. In the paper three different regression models are adopted to measure earnings quality according to the existing literature: (1) earnings persistence, (2) cash flow predictability and (3) earnings management to just-meet-or-beat the prior year’s earnings. We used OLS and random effects estimations for model (1) and (2) and logistic estimations for the model (3). Our results show that ownership concentration improves earnings quality of banks; this is true for all three estimated models. Our findings support the idea that the higher the ownership control on management activity, the higher the quality of earnings.

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