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Earnings management within multinational corporations

Beuselinck, Christof and Cascino, Stefano and Deloof, Marc and Vanstraelen, Ann (2018) Earnings management within multinational corporations. Accounting Review. ISSN 0001-4826 (In Press)

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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 MNCs headquartered in jurisdictions with stricter regulations manage earnings through subsidiaries domiciled in countries where regulations are weaker. A difference-in-differences estimation reveals that, in response to exogenous improvements in the quality of their homecountry 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.

Item Type: Article
Official URL: http://aaapubs.org/loi/accr?code=aaan-site
Additional Information: © 2018 American Accounting Association
Subjects: H Social Sciences > HG Finance
JEL classification: F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms; International Business
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
Sets: Departments > Accounting
Date Deposited: 04 Sep 2018 10:04
Last Modified: 04 Sep 2018 10:08
URI: http://eprints.lse.ac.uk/id/eprint/90168

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