Real economic activity and earnings management from a cross-country perspective

This paper provides empirical evidence on differences in the extent of earnings management across countries. I use an earnings management detection model developed by Leuz et al. (2003) to determine this extent in Germany, Japan, and the USA. Based on previous research, I hypothesize due to differences in prevailing institutional factors in those countries that earnings management is most pervasive in Germany and least pervasive in the USA with Japan exhibiting values in between. The results mostly confirm the hypothesis. Moreover, I investigate a possible link between real economic performance of a country and the extent of earnings management. I expect a negative correlation between them, whereas the intensity of this relation decreases with increasing pervasiveness of accounts manipulation in a country. Empirical results confirm these hypotheses partly.

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