Culture and corruption-driven agency costs and earnings management: Evidence from south east Asian countries

Abstract

Purpose: This study scrutinised whether agency costs driven by culture and corruption could determine the earnings quality in six South-East Asian (SEA) countries: Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam. Design/methodology: This research restricted the categorisation of each SEA country whether they have low or high agency cost. This study employs 581 firm-years observations from the 30 biggest market capitalisation firms of six SEA countries. This paper runs multiple regressions of three main accrual models for main analysis (Jones, 1991; Dechow, Sloan & Sweeney, 1995; Kasznik, 1999) to get discretionary accruals. Findings: Results show that firms in low agency cost countries have lower earnings quality and indicate that earnings management behaviour in this study is efficient rather than detrimental. Furthermore, results present that large firms engage less in earnings management conduct compared to their counterparts. Research limitations/implications: This study has implications on standard setters and regulatory bodies, (prospective) investors, and wider society. Originality/value: This study provides broader acknowledgement of how cultural values and corruption and their assumed correlation to agency cost could affect earnings management behaviour in South East Asia. Authors use a single proxy of high/low agency cost based on national cultural and corruption index.