Cogent Business & Management

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

Manuscript Number: COGENTBUSINESS-2022-0486R3

Article Type: Research Article

Keywords: Earnings management; culture value; uncertainty avoidance; financial health; Asia
Pacific

Manuscript Classifications: 50.1.3 Asian Studies; 50.11.3 Cultural Studies; 50.6.4 Business, Management and
Accounting

Abstract: Prior empirical studies on management discretion of accounting policies have focused
on firms’ performance or cultural values in isolation rather than in combination. By
using OLS multiple regression method, this study scrutinizes the influence of the
uncertainty avoidance dimension as a nation’s cultural value and firms’ financial health
on earnings management practices across nine Asia-Pacific countries. It finds that
companies in a country with higher uncertainty avoidance and companies with better
financial performance are less likely to manage earnings figures. It also reports that the
magnitude of earnings management is higher amongst firms that tend to encounter
financial failure. The findings assist stakeholders in identifying a firm’s specific
characteristic of financial performance as early warning signals for managing earnings
figures and understanding the influence of national culture on international differences
in financial reporting. This study contributes to the literature that national culture and a
firm’s financial performance are important factors in explaining corporate managers’
discretion practices in countries in the Asia Pacific region. The findings from the study
inform international strategy stakeholders of management discretion practices and
insights into future international business research.

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A cultural aspect, firms' financial health, and earnings management:

Evidence from the Asia-Pacific region

Rusmin Rusmin
Fakultas Bisnis dan Humaniora
Universitas Teknologi Yogyakarta, Yogyakarta, Indonesia
rusmin@uty.ac.id

Zulhawati Zulhawati
Fakultas Bisnis dan Humaniora
Universitas Teknologi Yogyakarta, Yogyakarta, Indonesia
zulhawati@uty.ac.id

Emita W. Astami
Fakultas Bisnis dan Humaniora
Universitas Teknologi Yogyakarta, Yogyakarta, Indonesia
eastami@uty.ac.id

John Evans
Faculty of Business and Law
Curtin University, Australia
John.Evans@curtin.edu.au

Corresponding author:
Emita W. Astami
Fakultas Bisnis dan Humaniora
Universitas Teknologi Yogyakarta
Ringroad Utara, Sleman, Yogyakarta, Indonesia
Email: eastami@uty.ac.id

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Abstract

Prior empirical studies on management discretion of accounting policies have focused on

firms' performance or cultural values in isolation rather than in combination. This study
employs a fixed effect model to scrutinize the impact of uncertainty avoidance as a
nation's cultural value and firms' financial health on earnings management practices
across nine Asia-Pacific countries. The study finds that companies in a country with
higher uncertainty avoidance and companies with better financial performance are less
likely to manage earnings figures. It also reports that the magnitude of earnings
management is higher amongst firms that tend to encounter financial failure. The
findings assist stakeholders in identifying a firm's specific characteristic of financial
performance as early warning signals for managing earnings figures and understanding
the influence of national culture on international differences in financial reporting. This
study makes a valuable contribution to the existing literature on agency theory and
earnings management by highlighting the significance of national culture and a firm's
financial performance in explaining corporate managers' discretion practices in countries
in the Asia Pacific region. The findings of this study provide significant perspectives to
stakeholders regarding management discretion practices and offer a direction for future
research in the field of international business.

Keywords: Earnings management, culture value, uncertainty avoidance, financial health,

Asia Pacific
Paper type: Research paper

1. Introduction
Accounting policies include a set of standards that govern how a company prepares its
financial statements. All accounting policies must conform to generally accepted
accounting principles (GAAP) and or international financial reporting standards (IFRS).
However, as GAAP has been designed to expand management discretion, the choices of
accounting practices may differ from company to company. The management may
manipulate earnings legally by selecting a set of accounting policies. Based on agency
theory, corporate managers may practice earnings management by using accounting
techniques to deliberately produce financial statements to show that the reported
earnings match an intended or specific target (Atik, 2009).

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 The empirical literature on earnings management is pervasive, and the evidence of
earnings management has been examined in the context of various events. Generally,
previous studies have suggested that firm managers engage in earnings management
opportunistically for their benefit. For example, Healy and Wahlen (1999) document that
managers use judgment in financial reporting and structuring transactions to alter
financial reports to either mislead some stakeholders about the underlying economic
performance of the company or to influence the contractual outcomes that depend on
reported accounting numbers. Zhao (2017) and Broome (2004) highlight a number of
specific cases where management deliberately misclassifies financials to present a better
picture of the company's operating performance. Wang and Hagigi (2019) note that firm
managers can strategically manipulate financial figures to optimize their earnings. While
earnings management has been criticized for being unethical and misleading, they argue
these practices can provide valuable information to investors and analysts.
Furthermore, some other studies (e.g., Lazzem & Jilani, 2018; Li et al., 2020; Lin et
al., 2016; Viana Jr. et al., 2022) investigate the earnings management practice of financially
distressed firms. Likewise, Astami et al. (2017), Han et al. (2010), Guan & Pourjalali (2010),
and Viana Jr. et al. (2022) examine the influence of national culture on earnings
management behavior. However, there is a lack of consistent empirical evidence
regarding the association of such rules with earnings management. In addition, most
prior empirical studies have focused on firms' performance or cultural values in isolation
rather than in combination. This study investigates the influence of the uncertainty
avoidance dimension as a nation's cultural value and the firms' financial health on the
practice of earnings management by managers in publicly listed companies across
national cultural differences.
Our study contributes to the current level of knowledge in many areas. First, it
contributes to the literature by providing empirical evidence of how uncertainty
avoidance, a national level of a cultural aspect (Hofstede, 1983), assists in explaining the
magnitude of earnings management. Second, it provides empirical evidence of how

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financially healthy and distressed firms in vibrant Asia-Pacific countries manage their
reported earnings, as these companies have been associated with an agency problem.
Third, in the Asia-Pacific Economic Cooperation (APEC) economies, attention has
gradually shifted to the structural and regulatory obstacles that inhibit cross-border trade
and investment by creating behind-the-border barriers to business. The Economic
Committee of APEC (2012) suggests that one of the critical issues is financial reporting
practice. Therefore, scrutinizing evidence from countries in the Asia-Pacific region
provides us with the opportunity to exploit a setting where a specific cultural difference
prevails. At the same time, other potentially influential variables are relatively constant
across countries. Fourth, our study incorporates nine Asia-Pacific countries that present
differences in cultural aspects and includes a data set of over 11,999 firm years, which
provides a unique data set that allows for both robustness and policy analysis. Countries
in the Asia-Pacific region sit in geopolitical importance, as this region has become the key
driver for the global economy. The Asia-Pacific region accounted for one-quarter of the
worldwide GDP, predicted to make up more than 35% of the world economy in 2020
(Schumacher, 2016). Therefore, the findings of this study provide insights into
stakeholders, including investors, managers, and regulators, in the decision-making
process.
The paper is organized as follows. Section 2 provides the theoretical framework and
proposed hypotheses. Section 3 presents the research design encompassing the sample
selection process and the variables used. Section 4 reports the results and discussions of
our study. Finally, section 5 offers the study's conclusion, implications, and limitations.

2. Theoretical Framework and Hypotheses

2.1. The agency theory and earnings management
Agency theory has been widely used to explain the incentives of corporate management
to manage earnings figures. Earnings management arises due to a conflict of interest in
the agency relationships between shareholders (principals) and managers (agents).

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Typically, this conflict of interest manifests through the manipulation of earnings
information. Corporate managers may have incentives to manipulate earnings data to
serve their interests, which may not align with the interests of shareholders. A study by
Wang (2006) reveals that professional managers are more prone to present financial data
that differs from the actual economic transactions that underlie it to increase their benefits
at the owners' expense.
Numerous past studies commonly cited reasons for managing reported earnings,
including meeting analysts' forecasts, avoiding violating debt covenants, maximizing
executive remuneration, conveying private information, and maximizing corporate value
(Choi et al., 2018; Grougiou et al., 2014; Saleh & Ahmed, 2005; Walker, 2013). Beyond
those reasons, Ehsan et al. (2021) and Wang and Hagigi (2019) observe that the firms'
longer-term financing needs also influence the managers' incentive for earnings
management. However, several high-profile accounting scandals renewed the interest in
managing earnings and the various factors that may influence corporate management to
manipulate the firm's reported earnings (Astami et al., 2017; Ater & Hansen, 2020; Filip
& Raffournier, 2014; Jaggi et al., 2022; Santos-Jaén et al., 2021).
Earnings management refers to the deliberate actions taken by corporate managers
to present a company's distorted or misleading image to attract stakeholders' attention.
The types of earnings management cover a broad spectrum. Generally, it occurs when
managers take deliberate steps within the constraints of Generally Accepted Accounting
Principles (GAAP) to achieve the desired level of reported earnings (Davidson et al., 1987;
Evans et al., 2015). This study posits that selecting accounting methods is the most
appropriate characterization of opportunistic earnings management.

2.2. Nation's culture and managers' behavior on earnings management

At an international level, previous research indicates systematic differences in earnings

management across countries and suggests that national culture contributes to the
variation in earnings management practices across countries (Doupnik, 2008; Gray et al.,

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2015). However, the usage of national culture in accounting research has been limited. A
study by Ansah & Louw (2019) reports that national culture strongly influences
multinational companies' organizational culture. In addition, Seleim and Bontis (2009)
and DiRienzo (2019) note that culture drives social norms and affects an individual's
perception of whether or not to engage in ethical behaviori.
Hofstede's (1983) classifies four underlying differences in nations' cultural values:
individualism, power distance, uncertainty avoidance, and masculinity. Amongst
cultural dimensions of Hofstede's, uncertainty avoidance (UA) is directly and strongly
linked to earnings management practices (Doupnik, 2008; Gray et al., 2015; Guan &
Pourjalali, 2010). A nation with a high UA attempts to avoid risk and to create security
by emphasizing technology and other infrastructures, such as buildings, laws and rules,
and religion. On the other hand, a weak UA society will practice a more flexible situation
in which an implementation counts more than principles and, therefore, is more easily
tolerated (Zhang & Wu, 2014). Prior works, for example, Han et al. (2010), Guan and
Pourjalali (2010), and Astami et al. (2017), confirm that the UA as a cultural dimension
has negatively influenced the level of earnings management. In nations characterized by
higher degrees of UA, firms are less inclined to manage their earnings figures. More
recently, using a sample of 6,313 firm-year observations from 11 emerging markets and
27,605 firm-year observations from 22 developed countries, Viana Jr. et al. (2022) find that
firms from countries with a greater degree of uncertainty avoidance and individualism
exhibit a reduced propensity to engage in earnings management. Furthermore, they
suggest that the influence of uncertainty avoidance is more pronounced in developing
countries.
Based on the above argument and applying the cultural values as suggested by
Hofstede (1983), the following hypothesis is proposed:
H1: The higher the degree of uncertainty avoidance in a nation, the less likely the firms
are to practice earnings management.

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2.3. Firms' financial health and earnings management
This study refers to the agency theory in developing the hypothesis that explains the
relationship between firms' financial health and earnings management. Many empirical
studies generally document that firms facing greater financial difficulties have incentives
to inflate their reported earnings (Campa & Camacho-Minano, 2015; Filip & Raffournier,
2014; Franz et al., 2014; Viana Jr. et al., 2022). In other words, Jaggi et al. (2022) propose
that companies with inferior financial standings are inclined to present favorable
information in their financial statements. Specifically, managers of troubled firms
systematically take income-increasing action to keep their jobs and reduce potential
intervention by the firms' boards (Dichev & Skinner, 2002; Habib et al., 2013; Moyer,
1990). This view is supported by a survey conducted by Graham et al. (2005), who find
that CFOs acknowledge that in the event of a company experiencing a downward spiral,
the primary focus of its managers would be on devising strategies to ensure its survival,
thereby overshadowing their reporting concerns.
An illustration of this phenomenon can be found in the research conducted by
Lazzem and Jilani (2018), which demonstrates that companies that experience an increase
in financial leverage tend to participate in earnings management activities. With respect
to breaches of debt covenants, Iatridis and Kadorinis (2009) and Fung and Goodwin
(2013) document that managers of companies close to debt covenant violations are more
strongly motivated to engage in income-increasing earnings management in order to
avoid the costs of a breach. Chen et al. (2010) use a sample of China-listed firms over the
period 2002-2006 and find that financially troubled companies in China increased their
reported income to avoid a delisting threat and special monitoring by the government.
Furthermore, a study conducted by Bisogno and De-Luca's (2015) analyses earnings
management practices among non-publicly listed small and medium entities (SMEs) in
Italy. The findings show that private Italian SMEs manage earnings to maintain bank
financing. Finally, using a sample of Chinese listed firms between 2007 and 2015, Li et al.
(2020) reveal empirical findings that financially distressed firms prefer to undertake more

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accrual earnings management and less real earnings management. Given the above
empirical evidence on the association between distressed firms and earnings
management strategies, our second hypothesis is stated as follows:
H2: The better (worse) a firm's financial health, the less (more) likely the firm is to practice
earnings management.

3. Research Approach

3.1. Sample selection

This study focuses on large capitalized companies in the Asia-Pacific region listed on the
Hong Kong, Singapore, Indonesia, Malaysia, New Zealand, Australia, Taiwan, Shenzhen,
and Thailand Stock Exchanges. The data are collected from the ORBIS database for 2013-
2015. Similar to past earnings management research, all firms from the financial sector
are eliminated from the study as firms in this sector are subject to different regulatory
requirements (Bamber et al., 1993; Zmijewski, 1984). Our initial population comprised
6,020 firms, equating to 18,027 firm-year observations. Because of some cases where
complete financial information could not be collected, the final sample was reduced to
4,612 firms or 11,999 firm-year observations.

3.2. Proxy for dependent and independent variables

Earnings management. We use a standard methodology by employing discretionary
accruals (DAC) as a proxy for earnings management. Consistent with existing literature
in earnings management, our study focuses on the absolute value rather than the actual
sign of discretionary accruals. The amount of unsigned discretionary accruals is the best
measure to indicate the opportunistic behavior of management and appears insensitive
to whether firms manage earnings upwards or downwards (Francis et al., 2016; Kim &
Sohn, 2013). To construct the value of DAC from the modified model of Jones (1991), we
first compute total accruals (TAC) calculated as:
TACjt = (∆CAjt - ∆Cashjt) – (∆CLjt - ∆LTDjt - ∆ITPjt) - DPAjt
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Where:
TACjt is total accruals for firm j in year t; ∆CAjt is the change in current assets for firm j from year t-1 to t;
∆Cashjt is the change in cash balances for firm j from year t-1 to t; ∆CLjt is the change in current liabilities for firm j from
year t-1 to t; ∆LTDjt is the change in long-term debt included in current liabilities for firm j from year t-1 to t; ∆ITPjt is
the change in income tax payable for firm j from year t-1 to t; and DPAjt is depreciation and amortization expense for
firm j in year t.

TAC is then decomposed into non-discretionary accruals or normal accruals (NAC) and
DAC using the cross-sectional modified Jones (1991) model estimated as:
TAC jk,t / TAjk,t-1 = α jt [1/ TAjk,t-1] +βjt [(∆REVjk,t - ∆RECjk,t)/ TAjk,t-1] + γj,t [PPEjk,t / TAjk,t-1] + εjk,t
Where:
TAC jk,t is total accruals for firm j in industry k in year t; TAjk,t-1 is total assets for firm j in industry k at the end of year
t-1; ∆REVjk,t is the change in net sales for firm j in industry k between years t-1 and t; ∆RECjk,t is the change in accounts
receivable for firm j in industry k between years t-1 and t; PPEjk,t is gross property, plant and equipment for firm j in
industry k in year t; αj, βj, γj is industry specific estimated coefficients, and εj is the error term.

NAC is the fitted value from Equation 2, and DAC is defined as the residual value (εjk,t).

Uncertainty avoidance as a cultural aspect. Our study employs a cultural variable of

Hofstede (1983) to scrutinize earnings management behavior in different countries. As
referenced in the literature, among the four factors underlying differences in nations'
cultural values of Hofstede (1983), the uncertainty avoidance dimension has a clear
relationship with earnings management (Doupnik, 2008; Gray et al., 2015; Guan &
Pourjalali, 2010). Country cultural scores for each country are acquired from Hofstede &
Bond (1988).

Firms' financial health. The assessment of the financial health of firms is of particular
importance in this study. Numerous bankruptcy models have been previously developed
in the literature (e.g., Altman, 1993; Carcello & Neal, 2000; Fich & Slezak, 2008; McKeown
et al., 1991; Mousavi et al., 2015; Mutchler et al., 1997; Ohlson, 1980; Tinoco & Wilson,
2013; Zmijewski, 1984). This study employs the financial default prediction modeling
technique developed by Altman (1993). The Altman Z-Score model utilizes multiple
discriminant analysis (MDA) methods to classify and identify firms with a high
probability of failure (Lin et al., 2016; Mselmi et al., 2017). Altman initially employed 22

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potentially useful financial ratios to assist in default prediction in the study sample of
manufacturing companies. From these 22 ratios, Altman selects five financial ratios,
namely, working capital, retained earnings, earnings before interest and tax expenses,
leverage, and assets turnover, that provide the best overall power in predicting corporate
bankruptcy. These five financial ratios represent the firm's liquidity, profitability,
leverage, solvency, and activity and are used to compute the risk score of a company.
This model suggests that the greater the score, the lower the probability of a firm likely
to go bankrupt. The Altman score is estimated from the following formula:
Z = 1.2 (working capital to total assets) + 1.4 (retained earnings to total assets) + 3.3 (earnings before taxes
and interest to total assets) + 0.6 (market value of equity to total liabilities) + 1.0 (net sales to total
assets).

Z represents an estimated risk index of the financial condition and indicates the
propensity of the firm to be bankrupt or in financial distress. Firms with high Z scores
are less likely to face financial distress. Therefore, per our proposed hypothesis (H2) and
the Altman score, this study would suggest the larger (smaller) the Altman index of a
firm, the less (more) likely the firm is to practice earnings management.
Table 1 presents an overview of the firm's financial health of the sample
characteristics. It shows the results of our assessment of firms' financial health for each of
the nine countries represented in the study. The study uses an Altman Z-score above 2.99
as the threshold for splitting the sample firms into distressed and healthy firms sub-
samples, as well-established in the literature (Altman, 1993; Casillas et al., 2019). A score
of 2.99 or higher indicates that a company is financially stable and has a low risk of
bankcruptcy.

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

Sample Distressed Firms Healthy Firms

Country 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 1 shows that most companies (4,612 firms or 38.44%) in the sample are listed
on the Shenzhen Stock Exchange, while the smallest percentage is listed on the New
Zealand Stock Exchange (145 firms or 1.21%). The most significant proportion of
companies classified as distressed using the Altman model has publicly listed firms in
Thailand, with 240 companies or 30.97% of the total sample. As well, 14.59% of firms
listed in Taiwan indicated financial hardship.

3.3. Proxy for control variables

This study includes control variables (firm size, firm's leverage, financial performance,
level of investment, cash flow from operations, and audit quality) to evaluate further the
impact of the cultural aspect and firms' financial health on earnings management
behavior. Several prior studies (Chen H. et al., 2021; Lilien & Pastena, 1982; Sutton, 1988)
have shown that large firms are more incentive to engage in income-decreasing
accounting practices to avoid the political actions of regulators. Leverage is included as a
control variable given the work that shows firms have a propensity to smooth reported
earnings to avoid violating debt covenants (Campa & Camacho-Minano, 2015; Chen H.
et al., 2021; Franz et al., 2014). Loss is another control variable given in earlier works (Chen

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H. et al., 2021; Kothari et al., 2005), indicating that firms' reported earnings depend on a
firm's financial performance. We include a Loss variable to control the possible
compounding effects of a company's financial performance. The study also includes a
variable of Invest measured as the increase or decrease of investment in tangible fixed
assets in the current year deflated by lagged total assets. Following Dhaliwal et al. (1999)
and Reynolds and Francis (2001), we predict a negative association between Invest and
earnings management measures. Premised on the works of Becker et al. (1998) and
Reynolds and Francis (2001), we include CFO given the findings of CFO influence on
corporate management actions in managing earnings. Consistent with the previous study
(Habib et al., 2013), the coefficient of this variable is predicted to be negative. Audit
quality is included since this may impact the magnitude of earnings management
(Astami et al., 2017; Frankel et al., 2002; Gul et al., 2003). Prior works (Mayhew & Wilkins,
2003) distinguish between non-Big4 and Big4 audit firms and find the latter to be of
higher quality. Each proxy measure for the dependent, independent, and control
variables is defined in Table 2.

Table 2: Variable definition and description

Variable
Variable Description Prediction
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 (UA) were obtained from
- UnAvoid
Hofstede and Bond (1988).
A firm's financial health takes a value of one if a company's Altman Z-score is
- Altman
higher than 2.99 and zero otherwise.

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;
- Big 4
otherwise, it scored zero.
The total debt to total assets ratio + Leverage
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 The indicator variable scored one if a firm has experienced a financial loss in the
Loss
current fiscal year; otherwise, it scored zero. +

The amount of the increase or decrease in tangible fixed assets from the previous
- Invest
year to the current year, scaled by the last year's total assets

3.4. Empirical model equation

The Hausman test is employed as a guide in using fixed or random effect estimation. The
result suggests the use of fixed effect estimation. Dummies for the year, industry, and
country account for the unobserved country, year, and industry-specific characteristics.
The following modeling estimation can be constructed to test the above hypotheses:
DAC = 0 + 1UnAvoid + 2Altman + 3Size+ 4CFO + 5Big4 + 6Leverage + 7Loss + 8Invest +Year
Fixed Effects + Industry Fixed Effects + Country Fixed Effects + εi

Where 0) is the regression intercept; 1 …8 is the regression coefficients; εi is the error term

4. Results and Discussions

4.1. Descriptive statistics
Table 3 depicts the descriptive statistics for the study's dependent, independent, and
control variables.

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Table 3: Descriptive statistics

Mean Median Std Dev Min Max

Panel A- Continuous Variables

Dependent Variable:
Earnings management:
0.0006 -0.0025 0.1224 -0.9678 0.9714
a. DAC
0.0768 0.0472 0.0953 0.0001 0.9714
b. AbcDAC

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

The average DAC is 0.06% of total assets at the beginning of the year. This value is
slightly lower compared to the earnings management scores of Asia-Pacific countries in
the years 2005-2010 (Astami et al., 2017). However, the distribution of discretionary
accruals indicates a wide range of variation. In addition, the number of firms with
positive and negative discretionary accruals is relatively balanced, with 5,845 firms
displaying positive discretionary accruals and 6,154 firms exhibiting negative
discretionary accruals. The approximate equal percentage of positive and negative
discretionary accrual firms is consistent with prior research in this field (Klein, 2002;
Rusmin, 2010). Regarding the cultural dimension (UnAvoid), the average index score is
41.93, ranging from a score of 8 in Singapore and 69 in Taiwan. Han et al. (2010) argue

14
that countries with high uncertainty avoidance will be highly regulated and incorporate
numerous rules and structures to support uniformity in financial reporting, thus
providing fewer opportunities for companies to practice earnings management. Using
both Taiwan and Singapore as an example in interpreting Unvoid, Taiwan, with a high
uncertainty avoidance score of 69, is a highly regulated, rules-based economy that
supports uniformity in financial reporting, and as such there has less flexibility for
companies to practice earnings management. On the other hand, Singapore is low
uncertainty avoidance and affords companies in Singapore a greater opportunity to
undertake earnings management.
The average firm size measured by total assets in thousands of USD is 1,848 million,
with a median value of USD 272 million. The median value is significantly lower than the
mean figure and indicates a small number of large capitalized companies in the sample
firms. The total assets have a wide range of minimum and maximum values, and the data
show that the sample's total assets are skewed to the left. Consistent with the
methodology applied in other studies, this study transforms the data of total assets into
the natural logarithm when measuring a firm's size. Table 3 reports that our sample firms
generate small amounts (4.60% of the beginning total assets) of cash flow from operations.
The sample firms' average total debt to total assets ratio is 42.81%, with a median of
42.15%. The mean level of investment in tangible fixed assets is 0.61% of the total level of
investment at the beginning year reported in total assets. In addition, healthy firms
represent 79.87% of the sample. Big4 accounting firms audit a large percentage (59.30%)
of the sample observations. Finally, most companies (79.19%) in the sample firms report
a profit in the sample fiscal year.

4.2. Correlations
Table 4 presents the Pearson and Spearman correlation matrix that displays the
correlation coefficients between the dependent, independent, and control variables. The
upper half of each panel shows the outcomes of the Pearson pairwise correlation

15
coefficients (crp), whereas the lower section displays the Spearman correlation
coefficients (crs). Correlation results do not fully support the study hypotheses. AbsDAC
is positive and significant (at p<0.01) correlated with UnAvoid for the Spearman
correlation. However, AbsDAC is negative and significantly correlated at p<0.01 with the
Altman score for both the Pearson and Spearman correlations. The findings provide the
initial support for our prediction. The magnitudes of the correlations between the
independent variables are small, so the problem of multicollinearity does not occur in the
regression models. With regards to the correlations between independent and control
variables, as well as among control variables, many significant correlations are reported
in the correlation matrix. The highest correlation is between Big4 and UnAvoid, with a
coefficient of -0.395 (crp). However, those are below the critical limit of 0.80 (Cooper &
Schindler, 2003).

Table 4: Pearson and Spearman correlation matrix

AbsDAC UnAvoid Altman Size CFO Big4 Leverage Loss Invest

AbsDAC 0.001 -0.394* -0.210* -0.093* -0.002 0.076* 0.164* -0.111*
UnAvoid 0.043* -0.045* -0.164* 0.050* -0.223* -0.024* 0.034* -0.058*
Altman -0.341* -0.024 -0.013 0.145* 0.013 -0.304* -0.221* -0.036*
Size -0.168* -0.324* -0.001 0.112* -0.037* 0.331* -0.265* 0.109*
CFO -0.046* 0.100* 0.149* 0.057* -0.103* -0.102* -0.298* 0.014
Big4 0.009 -0.395* 0.013 0.007 -0.131* 0.005 -0.007 -0.075*
Leverage 0.066* -0.035* -0.284* 0.341* -0.126* -0.005 0.112* 0.022**
Loss 0.132* 0.083* -0.211* -0.259* -0.309* -0.007 0.096* -0.151*
Invest 0.074* -0.166* -0.044* -0.196* -0.025* 0.120* 0.032* -0.218*
Legend: * and ** indicate significance at p<0.01 and p<0.05 (based on two-tailed tests). See Table 2 for full definitions
and descriptions of the dependent, independent, and control variables.

4.3. Univariate test

We conduct univariate tests to examine whether the magnitude of earnings management
between financially healthy and distressed firms is statistically and significantly
different.

16
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
Legend: * indicates significance at p<0.01.

Table 5 shows that the mean AbsDAC of healthy firms is significantly smaller than
that of distressed firms (5.82% versus 15.05%). The difference in the means is statistically
significant at p<0.01. This result suggests that healthy firms' managers practice less
earnings management than financially distressed firms. Then, we conduct a multivariate
analysis to scrutinize whether the firms' financial health explains the managers' earnings
management practice.

4.4. Multivariate results

Table 6 reports the relationship between cultural aspects, firms' financial health, and
earnings management using the fixed effect estimation.

Table 6: Cultural aspects, firms' financial health, and earnings management

Panel A-Country Panel B-Year fixed Panel C-Industry Panel D-Country,

Predict
Variables fixed effect effect fixed effect year, industry
ion
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

17
 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.

As presented in Table 6, Panels A to D, the regression model estimates exhibit

statistical significance with an F-statistic p-value less than 0.01. The explanatory power
ranges from a high of 25.1% (Panel D) to a low of 21.4% (Panel C). A consistent finding
across all regressions is that UnAvoid exhibits a negative and statistically significant
association with AbsDAC. The findings of our study indicate that companies operating in
countries with higher UA scores prefer to adopt more conservative accounting practices,
leading to a reduced level of earnings management compared to firms in countries with
a low UA cultural dimension score. In other words, our study provides further evidence
that countries with higher scores of the UA engage in lower levels of earnings
management. The result supports H1, the higher the degrees of uncertainty avoidance in a
nation, the less likely the firm is to practice earnings management. Our finding aligns with prior
studies (for example, Astami et al., 2017; Guan & Pourjalali, 2010; Viana Jr et al., 2022),
which document that corporate managers in countries with high degrees of UA are less
inclined to manage their reported earnings. A possible reason for this reduced inclination
might be firms operating in these societies are more likely to prioritize integrity and
accountability, as they recognize the importance of maintaining a positive reputation and
trust among stakeholders. Additionally, in countries with high UA, there is often a strong
regulatory framework and enforcement of accounting standards to ensure the reliability
of financial information (Gray et al., 2015; Zhang & Wu, 2014).
Coefficients on Altman Z-Score are negative and highly significant (at p<0.01) in all
models (see Panels A to D). These results suggest that the companies with larger Altman
Z scores are less likely to conduct earnings management, specifically when their Altman
Z scores are more than 2.99. These findings imply that firms with stronger financial
positions might have less incentive to manipulate their earnings figures as they face a
lower bankruptcy risk. They might have sufficient cash flows, profitability, and liquidity
to meet their financial obligations, reducing the need to resort to earnings management

18
(Jaggi et al., 2022). Furthermore, firms with stronger financial health might have better
corporate governance practices and strong internal controls in place (Mishra et al., 2021).
Additionally, as presented in Table 5, this study also finds that the magnitude of earnings
management is higher amongst companies likely to encounter financial difficulties. Thus,
the results support our hypothesis H2 and several previous studies (Jaggi et al., 2022;
Lazzem & Jilani, 2018; Li et al., 2020; Viana Jr. et al., 2022).
Regarding control variables, we find that Size, leverage, Loss, and Invest help
explain earnings management behavior. Coefficients on Size and Invest are negative,
while Leverage and Loss are positive and significantly associated with the measure of
earnings management. Our findings confirm that large firms exhibit less aggression in
earnings management. One possible interpretation is that our result strongly supports
the political costs hypothesis, which argues that in comparison to smaller firms, larger
firms are subject to more public scrutiny and political actions (Moses, 1987; Watts &
Zimmerman, 1986). In particular, larger firms have incentives to choose accounting
procedures that result in reduced reported earnings. Several previous studies (Lilien &
Pastena, 1982; Sutton, 1988) have provided affirmative evidence that large firms are more
likely to engage in income-decreasing accounting practices to avoid the political actions
of regulators. Han and Wang (1998) show similar behavior by US oil companies, probably
due to high political costs. In line with previous studies (Dhaliwal et al., 1999; Reynolds
& Francis, 2001), our study shows that firms with a more significant investment in fixed
assets are less likely to manage their income figures. The coefficients on Leverage are
positive and significant (at p<0.01) in all models (Panels A to D). This finding is consistent
with previous studies, such as Franz et al. (2014) and Chen et al. (2021), who found a
significant positive association between Leverage and AbsDAC. The directional sign on the
coefficients for Loss is positive but only significant at p<0.05 (see Panel D). This result
supports the argument that companies manage reported earnings to avoid losses and
earnings declines (Chen H. et al., 2021; Kothari et al., 2005).

19
4.5. Additional sensitivity and robustness checks
We undertake several additional sensitivity and robustness tests to increase the main
findings' reliability. In the first check, we replace the use of a dichotomous measure to
assess the financial health of sample firms and use a continuous measurement. The results
of this first additional sensitivity test are summarized in Table 7.

Table 7: Robustness checks- Continuous measure

Earnings Management
Variables Prediction
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
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 dependent, independent, and control variables.

Comparing the statistical findings in Tables 6 and 7, we can see a consistent

association between uncertainty avoidance (UnAvoid) and firms' financial health (Altman)
with earnings management. Regarding control variables, we also find that Size and Invest
have a highly significant negative relation to the measure of earnings management.
Additionally, Table 7 shows that Leverage and Loss are positive and significant control
variables in the model. Table 7 reports that the coefficients on CFO and Big4 are negative
and statistically significant at p<0.005 and p<0.001, respectively. Thus, when using a
20
continuous measurement to assess the financial health of sample firms, our study reports
that Size, CFO, Big4, Leverage, Loss, and Invest assist in explaining management incentives
to manage reported earnings.
In the second additional test, we repeat our regression analysis by following Kothari
et al. (2005) and estimate earnings management by using the modified Jones (1991), which
includes the return on assets (ROA) as a control for firms' operating performance. Third,
we exclude firms from a large country cluster, China, which accounts for approximately
38.44% of the sample size, to ensure an individual country does not drive the main
reported results. The regression results of the second and third additional tests are
presented in Table 8.

Table 8: Sensitivity and robustness checks-Modified Jones+ROA and excluding large sample
size

Panel A- Modified Panel B- Excluding

Prediction
Variables Jones+ROA 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.

21
 All regression model estimates reported in Table 8 are highly significant (F-statistic,
p<0.01), with the explanatory power (adjusted R2) at 13.5% (Panel A) and 15.6% (Panel
B). The results of the multiple regression analysis from the sensitivity and robustness tests
are qualitatively similar to that of the primary regression analysis (Table 6). The
coefficients of the UnAvoid and firms' financial health (Altman) are all highly significant
(at p<0.01) and in the predicted direction. Thus, these findings support the results of the
primary regression analysis presented in Table 6. Additionally, except for the variable of
Loss, the results for control variables in Table 8 generally align with the main finding
reported in Table 6. In conclusion, the results of statistical analyzes are robust (1) when
using alternative techniques to detect earnings management practices, (2) are not driven
by an individual country, and (3) do not change when we proxy for financially distressed
firms using a dichotomous measure.

5. Conclusion
This paper aims to link a nation's cultural value and a firm's financial health to managers'
responses to earnings management practices. For the work in our paper, we adopt
Hofstede's dimension to identify a nation's cultural value and the Altman Z Score to
predict financial health. We focus on large capitalized companies that are publicly traded
and listed on nine stock exchanges in the Asia-Pacific region.
Our study documents that UA cultural aspects explain managers' accounting
choices. Specifically, our result indicates that countries with a strong cultural emphasis
on UA tend to have companies that engage in a lower magnitude of earnings
management. Consistent with past findings, we find evidence that the better a firm's
financial health, the less likely it is to report optimistic information in its financial
statements. Our result also documents that earnings management practices are higher
amongst companies more likely to encounter financial difficulties. In addition, the results
of several additional sensitivity and robustness checks support that the inferences drawn
are valid.

22
 The findings assist investors and regulators in identifying a firm's specific
characteristic of financial performance as early warning signals for managing earnings
figures and understanding the influence of national culture on international differences
in financial reporting. Investors can use the Altman Z score to assess a company's
financial health and identify potential red flags. This study also provides valuable
insights for investors into the reliability of financial reporting in different countries.
Investors can utilize this information to evaluate the creditability of financial statements
and make more informed investment choices. Regulators can use the findings to target
their enforcement efforts on companies with lower Altman Z scores, which are more
likely to engage in earnings management. By understanding the relationship between
cultural propensity towards unethical accounting practices and manipulation of financial
statements, regulators can design more effective policies and regulations to prevent and
detect financial fraud. They can focus their efforts on countries with a lower level of UA,
where companies might be more prone to engaging in earnings management practices.
Finally, our study adds to the existing literature on agency theory and earnings
management by documenting that both national culture and the firm's financial
performance are important factors that explain corporate managers' earnings discretion
practices around the countries in the Asia-Pacific region. Thus, the results of this study
offer valuable insights to interested parties concerning the practices of earnings
management and present a pathway for future research in the field of international
business.
This study is not without limitations. Knowing the accounting behavior in the
association between firms' financial health and earnings management practice is essential
for all stakeholders. However, our study focuses on predicting earnings management
practices by examining the financial characteristics of firms at the firm's level and the
uncertainty avoidance cultural aspect on a national level. Future research can scrutinize
other accounting behavior in each country that may explain earnings management
practices, such as investor protection, which may also be a critical aspect to investigate.

23
Further study can also explore the severity of agency costs and the extent of earnings
management practices across national boundaries. In addition, this study covers only the
years 2013 to 2015. Further studies can expand the dataset or conduct similar studies over
a longer time frame and compare the results with current findings.

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Cover Letter

Professor Len Tiu Wright - Editor-In-Chief

Professor Md. Mahmudul Alam, PhD - Editor
Professor Charlie Flores - Journal Editorial Office
Cogent Business & Management Journal

Dear Professor Md. Mahmudul Alam

I hope this email finds you well.

I am writing this letter in light of a revised decision on our manuscript entitled "A cultural
aspect, firms' financial health and earnings management: Evidence from the Asia-Pacific
region" (submission ID 225052895) in your email on 8 September 2023. Thank you very much
for giving us the opportunity to revise the manuscript. We do appreciate all the valuable
comments and suggestions from the Reviewers. We have significantly changed the
manuscript by taking most of the Reviewer's comments and suggestions. I am sorry that the
review process is confusing and very unusual. We (the authors of the manuscript) would like
to know how many reviewers are needed to review our manuscript. And what is the time
frame to get the final decision to publish our manuscript? To help you understand the matter,
below is the sort version of the history.

This manuscript was submitted on 4 April 2022. I received the first review on 17 October 2022.
The review provided us with valuable comments and suggestions from seven reviewers. We
appreciate all comments and suggestions from Reviewers 1, 2, 3, 4, 5, 6, and 7. We (the authors
of the manuscript) have considered all suggestions and comments from the Reviewers and
addressed each Reviewer's comments in detail. I submitted the revised versions of the
manuscript on 15 December 2022.

On 24 March 2023, I received a second revised decision; however, the Editor did not include
comments/suggestions from Reviewers. Then, on 25 March 2023, I emailed the Editor
requesting the Editor to send the Reviewers' comments. The Editor kindly responded to our
inquiry with the same email he sent us on 24 March 2023. I am sorry to inform you that the
email did not help; it was just the same email without any attachments. However, we revisited
the previous suggestions and comments from Reviewers. We tried to make some edits and
submitted the second revised version on 19 April 2023. Recently, on 8 September 2023, I
received an email requesting us (the authors) to consider comments and suggestions from
Reviewer 3.

Now, we have considered and addressed all comments and suggestions from Reviewer 3. The
comments and suggestions from Reviewer 3 are very important and significantly improve the
quality of our manuscript. We do appreciate all the advice and comments. The summary of
our revisions in addressing Reviewer 3's comments and suggestions are as follows:

1. We made revisions by taking the suggestions from the Reviewer regarding literature
review, hypothesis development, and the terminology we use in the methodology section
of the manuscript

2. The manuscript has been revised significantly. The revisions incorporate the work of
revising with major edits on the presentation of tables for data and information, data
analysis, interpretation of results, and discussions.
3. The comments and suggestions from Reviewer 3 regarding the approach used in the
measurement of the Altman Score have provided us with significant insights to revise and
improve the measurement, approach, and classification of the relevant variable. We revised
the approach that we use for the measurement of the variables. Therefore, the composition
of the data analysis, tables, interpretations of results, and discussions have also been
revised significantly

4. The abstract has mentioned using data from nine countries and the estimation method
suggested by Reviewer 3.

5. Uncertainty avoidance is the only cultural variable that provides a direct link in predicting
the behavior of management in regard to the issue being scrutinized, as explained in the
manuscript.

6. As suggested, the conclusion has also been revised and it has already included implications,
limitations of the study, and future research avenues.

7. References that Reviewer 3 suggested have been included in the manuscript.

Please kindly note that all tables have been significantly revised in accordance with the
improved approach (descriptive statistic and inferential statistical) as per the Reviewers'
suggestions. The revisions regarding the introduction, literature review and hypotheses
development, the interpretation of results, discussions, and conclusions are presented in red
letters.

I hope my description above can help you to recall and understand the history of the
manuscript's journey. Our several other email correspondents with the helpdesk have also
built a special experience for the authors.

Finally, we thank you for considering our manuscript. We appreciate the opportunity to revise
the manuscript and the valuable comments and suggestions from Reviewers 1, 2, 3, 4, 5, 6,
and 7. We look forward to receiving your positive and prudent decision regarding the
publication of the manuscript. It has been a long and rewarding journey (more than 18
months). Thank you.

We would also like to extend our appreciation to Professor Len Tiu Wright - Editor-In-Chief,
and Professor Charlie Flores - Journal Editorial Office.

Best regards,
Emita Astami, PhD.
Corresponding author