A cultural aspect, firms’ financial health and earnings management: evidence from the Asia-Pacific region

Figures & data

Table 1. Sample firms classified into distressed and healthy firms based on the Altman prediction models.

Country	Sample		Distressed Firms		Healthy Firms
	n	%	n	%	n	%
China	4,612	38.44	746	16.18	3,866	83.82
Australia	1,084	9.03	331	30.54	753	69.46
Hong Kong	312	2.60	78	25.00	234	75.00
Indonesia	630	5.25	171	27.14	459	72.86
Malaysia	1,312	10.93	251	19.13	1,061	80.87
Singapore	813	6.78	232	28.54	581	71.46
New Zealand	145	1.21	25	17.24	120	82.76
Taiwan	2,316	19.30	338	14.59	1,978	85.41
Thailand	775	6.46	240	30.97	535	69.03
Total	11,999	100.00	2,412	20.10	9,587	79.90

Table 2. Variable definition and description.

Variable description	Prediction	Variable title
Dependent variable:
The firm’s absolute DACs (measured by the Modified Jones, 1991 model).		AbsDAC
Independent variables:
A country’s cultural scores for uncertainty avoidance were obtained from Hofstede and Bond (1988).	-	UnAvoid
A firm’s financial health takes a value of one if a company’s Altman Z-score is higher than 2.99 and zero otherwise.	-	Altman
Control variables:
The firm’s total assets are expressed as a natural logarithm.	-	Size
The cash flow from operations to total assets ratio	-	CFO
The indicator variable scored one if a firm’s auditor is a Big-4 accounting firm; otherwise, it scored zero.	-	Big 4
The total debt to total assets ratio	+	Leverage
The indicator variable scored one if a firm has experienced a financial loss in the current fiscal year; otherwise, it scored zero.	+	Loss
The amount of the increase or decrease in tangible fixed assets from the previous year to the current year, scaled by the last year’s total assets	-	Invest

Table 3. Descriptive statistics.

	Mean	Median	Std Dev	Min	Max
Panel A Continuous variables
Dependent variable:
Earnings management:
a. DAC	0.0006	−0.0025	0.1224	−0.9678	0.9714
b. AbcDAC	0.0768	0.0472	0.0953	0.0001	0.9714
Independent variables:
Cultural aspect (UnAvoid)	41.9349	36.0000	17.9944	8.0000	69.0000
Control variables:
Size (Total Assets in thousand USD)	1,847,668	271,928	14,055,529	680	877,789,728
CFO	0.0460	0.0454	0.1058	−1.0851	1.1852
Leverage	0.4281	0.4215	0.2031	0.0883	0.8835
Invest	0.0061	−0.0027	0.0966	−0.9624	0.5368
Panel B – Categorical Variables				Frequency	Percentage
Independent variable:
Healthy firms				9,587	79.87
Distressed firms				2,412	20.10
Control variables:
Non-Big4				4,883	40.70
Big4				7,116	59.30
Loss				2,497	20.81
Profit				9,502	79.19

See Table 2 for complete definitions and descriptions of the dependent, independent, and control variables.

Table 4. Spearman correlation matrix.

	AbsDAC	UnAvoid	Altman	Size	CFO	Big4	Leverage	Loss
AbsDAC
UnAvoid	0.043*
Altman	−0.341*	−0.024
Size	−0.168*	−0.324*	−0.001
CFO	−0.046*	0.100*	0.149*	0.057*
Big4	0.009	−0.395*	0.013	0.007	−0.131*
Leverage	0.066*	−0.035*	−0.284*	0.341*	−0.126*	−0.005
Loss	0.132*	0.083*	−0.211*	−0.259*	−0.309*	−0.007	0.096*
Invest	0.074*	−0.166*	−0.044*	−0.196*	−0.025*	0.120*	0.032*	−0.218*

* and ** indicate significance at P < 0.01 and P < 0.05 (based on two-tailed tests). See Table 2 for definitions and descriptions of the dependent, independent, and control variables.

Table 5. Univariate test on differences in AbsDAC between sub-samples.

	n	Mean AbsDAC	Std Dev	t-value
Distressed firms	2,412	0.1505	0.1524	29.134*
Healthy firms	9,587	0.0582	0.0617

* indicates significance at P < 0.01.

Table 6. Cultural aspects, firms’ financial health and earnings management.

Variables	Prediction	Panel A-Country fixed effect		Panel B-Year fixed effect		Panel C-Industry fixed effect		Panel D-Country, year, industry fixed effect
		Beta	t-stat	Beta	t-stat	Beta	t-stat	Beta	t-stat
(Constant)			6.218*		37.109*		27.024*		5.037*
UnAvoid	–	−0.225	−4.774*	−0.004	−2.399**	−0.004	−2.358**	−0.251	−3.876*
Altman	–	−0.091	−42.816*	−0.102	−48.070*	−0.091	−43.133*	−0.100	−47.407*
Size	–	−0.012	−20.896*	−0.012	−24.449*	−0.012	−22.962*	−0.012	−21.495*
CFO	–	−0.006	−0.771	−0.010	−1.339	−0.005	−0.698	−0.009	−1.171
Big4	–	−0.001	−0.695	−0.001	−0.841	0.001	−0.297	−0.002	−0.744
Leverage	+	0.017	3.797*	0.011	2.563*	0.014	3.103*	0.012	2.770*
Loss	+	−0.001	−0.346	−0.003	−1.220	0.001	0.619	0.004	2.040**
Invest	–	−0.073	−8.998*	−0.050	−6.225*	−0.075	−9.168*	−0.050	−6.213*
Country dummies		Yes		No		No		Yes
Year dummies		No		Yes		No		Yes
Industry dummies		No		No		Yes		Yes
Model Summary
Adj. R-Squared		0.216		0.240		0.214		0.251
F-Statistic		221.639*		222.358*		143.241*		168.331*
Sample Size		11.999		11.999		11.999		11,999

* and ** indicate significance at P < 0.01 and P < 0.05, respectively (based on two-tailed tests). See Table 2 for full definitions and descriptions of the dependent, independent, and control variables.

Table 7. Robustness checks: continuous measure.

Variables	Prediction	Earnings management
		Beta	t-stat
(Constant)			27.818*
UnAvoid	–	−0.003	−1.964**
Altman	–	−0.001	−19.380*
Size	–	−0.015	−25.941*
CFO	–	−0.016	−1.996**
Big4	–	−0.007	−3.640*
Leverage	+	0.026	5.050*
Loss	+	0.011	5.059*
Invest	–	−0.064	−7.448*
Country dummies		Yes
Year dummies		Yes
Industry dummies		Yes
Model summary
Adj. R-Squared		0.123
F-Statistic		169.857*
Sample size		11.999

* and ** indicate significance at P < 0.01 and P < 0.05, respectively (based on two-tailed tests). See Table 2 for full definitions and descriptions of dependent, independent, and control variables.

Table 8. Sensitivity and robustness checks: modified Jones + ROA and excluding large sample size.

Variables	Prediction	Panel A- Modified Jones + ROA		Panel B- Excluding Large Sample
		Beta	t-stat	Beta	t-stat
(Constant)			5.232*		5.333*
UnAvoid	–	−0.374	−4.339*	−0.391	−4.496*
Altman	–	−0.089	−31.760*	−0.097	−27.206*
Size	–	−0.011	−15.300*	−0.010	−10.911*
CFO	–	−0.019	−1.901	−0.001	−0.020
Big4	–	0.003	1.082	0.001	0.302
Leverage	+	0.047	8.243*	0.036	4.852*
Loss	+	−0.002	−0.606	−0.004	−1.227
Invest	–	−0.020	−4.040*	−0.063	−2.500*
Country dummies		Yes		Yes
Year dummies		Yes		Yes
Industry dummies		Yes		Yes
Model Summary
Adj. R-Squared		0.135		0.156
F-Statistic		79.109*		63.018*
Sample Size		11.999		7.387

Legend:.

*, **, and *** indicate significance at p < 0.01 and p < 0.05, respectively (based on two-tailed tests). See Table 2 for full definitions and descriptions of the dependent, independent, and control variables.

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