Meeting Dividend Thresholds through Earnings Management: A Cross-cultural Comparison

Culture affects accounting rules and practices. Dividend distribution influences corporate operating decisions, and a previous year¡¯s dividends represent an earnings threshold. This study collected various countries¡¯ data from 2004 to 2014 from the COMPUSTAT database and analyzed how cultural factors influence the management of income to achieve a dividend threshold (i.e., desired earnings goal). Prospect theory reported that managers making decisions focus on the value from gains or losses with a certain reference point rather than the levels of wealth. The empirical results show that managers of listed firms in societies that exhibit uncertainty-avoidance, individualistic, power-distance, and masculinity meet or exceed dividend thresholds, whereas those in long term orientation societies do not. These findings emphasize the strong and direct effect of cultural values on meeting or exceeding dividend thresholds through earnings management over multiple years. In addition, our empirical results suggest that investors evaluate firm performance (i.e., earnings) before dividends are paid, which should be considered by financial market participants and regulators when assessing financial statements and the reliability of financial reporting among multiple countries. We only used a modified Jones model to measure earnings management. Therefore, tradeoff tools (i.e., real activities or other DA models) should be used to examine earnings management among managers to ensure the robustness of future studies.