Lost in Translation: Cultural Differences and Earnings Management Contagion

Abstract: Do cultural differences deter or facilitate accounting-manipulation practices propagated across countries? While firms attempt to operate in countries that offer the best opportunities to maximize returns on their investments, their managers’ acquaintance with different practices at foreign subsidiaries generates contagion effects that eventually influence the firms’ opportunistic accounting decisions to move toward the common practices in those countries. This effect can cause financial reporting practices to converge; however cultural differences may prevent the direct transfer of opportunistic accounting choices between countries. This article proposes and empirically verifies that cultural differences, mainly in power distance and uncertainty avoidance, constrain the contagion effects while differences in masculinity facilitate the spread of earnings management across borders.