A cross-country study on the relationship between financial development and earnings management

Masahiro Enomoto, Fumihiko Kimura, Tomoyasu Yamaguchi

Research output: Contribution to journalArticlepeer-review

16 Citations (Scopus)


This study investigates whether a country's level of financial development is associated with earnings management in an international setting. Financial development is likely to heighten the monitoring and scrutiny of accounting numbers because of strengthened investor protection laws and regulations as well as sophisticated market participants. Therefore, we first hypothesize that both accrual-based and real earnings management decrease with greater financial development. However, research shows that managers tend to apply real earnings management, instead of accrual-based earnings management, under strict accounting standards, regulations, and close auditor scrutiny. Thus, we explore the alternative hypothesis that accrual-based earnings management decreases but real earnings management increases along with higher financial development. We examine the relationship between financial development and both types of earnings management using 56,830 observations in 37 countries covering the period 2009–2012. The results indicate that both types of earnings management are more restrained under higher levels of financial development.

Original languageEnglish
Pages (from-to)166-194
Number of pages29
JournalJournal of International Financial Management and Accounting
Issue number2
Publication statusPublished - 2018 Jun


  • accounting institution
  • accrual-based earnings management
  • financial development
  • real earnings management

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance


Dive into the research topics of 'A cross-country study on the relationship between financial development and earnings management'. Together they form a unique fingerprint.

Cite this