Author(s): Wil Martens & Phuong T.M. Pham
We examine whether selected institutional setting variables and societal trust can curtail Earnings Management (EM) practices in emerging economies. Results reveal that minority investor rights, legal enforcement, disclosure requirements, and a greater number of analysts following are inversely correlated with EM activity. These findings align with findings from developed market studies. In contrast to developed market studies and original to this paper, higher levels of societal trust fail to show statically significance in curtailing EM. From this, we infer that findings on variables that reduce EM are not broadly applicable, supporting segmented market research on EM. Further, we infer that formal institutions enact greater EM constraint than informal institutions in emerging markets. Our findings help extend the literature by further identifying factors that reduce agency conflicts and influence EM.