DefinePK

Abstract

This research investigates the impact of financial development on earnings management in an international setting. It is expected that with high financial development in any country, the monitoring and scrutiny of accounting figures increase leading to greater enforcement and compliance of rules and regulation. Consequently, the markets get sophisticated to protect the investor and stakeholders’ interest in the country. Previous studies indicate that there is a decrease in both real and accrual-based earnings management as financial development increases; however, other studies contend that only accrual-based earnings management decreases. We hypothesize that financial development has an inverse relationship with earnings management. To explore this phenomenon, we take cross-country evidence from two countries: one from developed and the other from developing countries. Our results showed that as financial development of a country increases, its AEM decreases and REM increases.