An Empirical Examination of the Antecedents and Consequences of Earnings Management in Emerging Markets

Date of Award

Summer 2014

Document Type


Degree Name

Doctor of Philosophy (PhD)


Business Administration-Strategic Management

Committee Director

Shaomin Li

Committee Member

Anil Nair

Committee Member

David Selover

Committee Member

Michael Stein


The success and reliability of business deals and contracts in emerging markets depend on the quality of financial information (Li, Park, & Bao, 2013). Due to the institutional and historical contexts, financial information provided by firms in emerging markets has often been questioned for its accuracy. Despite the abundance of earnings management research, most studies are predominantly single country studies focusing on the Anglo-American markets. In the few comparative international studies that do exist, the research examines a range of institutional factors primarily associated with developed markets (e.g. Leuz et al., 2003; Han et al., 2010), largely ignoring the unique institutional underpinnings of emerging markets.

While scholars argue that firms in emerging economies manage earnings to a more significant degree than those in developed economies (Li et al., 2011, 2013), antecedents and outcomes of earnings management in emerging economies are not yet fully understood. Taking a 3-essay approach, this dissertation addresses the overarching question of: What are the country and firm level antecedents and outcomes of earnings management in emerging markets?

Building on institutional theory (North, 1990), Essay I explores the formal and informal institutional antecedents of earnings management in emerging markets. Doing this helps us to answer the question of why the extent of earning management differs across countries. Empirical results highlight that in emerging markets, where laws are vague and the enforcement is ineffective, formal institutions such as the quality of rule of law do not have a significant effect on earnings management behavior. In such environments, informal institutions play a much more important role than formal institutions in influencing this firm behavior.

Essay II continues to investigate the antecedents of earnings management by considering how country level governance increases or mitigates the influence of firm level governance on earnings management in the setting of emerging markets. Using data from 1200 firms in 24 emerging markets in 2012, I find that internal firm level control mechanisms do not function in isolation, but rather are reinforced or attenuated by the external governance environment.

Essay III explores the outcomes of earnings management by examining how firms' earnings management affects their long-run firm value, and how national governance quality and level of trust moderate this relationship. By doing this, I also highlight the managerial implications of earnings management and provide directions for future research in earnings management in emerging economies.





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