Religion and the Method of Earnings Management: Evidence from China

Document Type

Article

Abstract

Previous studies argue that religious firms are more ethical and thus engage less in accrual earnings management. At odds with the ethical view, we use a sample of Chinese listed firms and show that firms in religious regions use more real earnings management. We postulate that besides ethics, religion also proxies for risk aversion, which motivates firms to substitute accrual earnings management with real earnings management. Consistent with this view, we show that the positive (negative) association between religiosity and real (accrual) earnings management is more pronounced for firms with lower litigation risk and for firms with less reputable auditors. In addition, we use a mediation model introduced by Baron and Kenny (J Pers Soc Psychol 51(6):1173–1182, 1986) to show that religiosity affects earnings management through the channel of risk aversion. We conclude that firms choose real earnings management over accrual-based earnings management because of risk aversion, rather than ethical reasons.

Publication Title

Journal of Business Ethics

Publication Date

1-1-2020

Volume

161

Issue

1

First Page

71

Last Page

90

ISSN

0167-4544

DOI

10.1007/s10551-018-3971-6

Keywords

accrual earnings management, ethics, real earnings management, religion, risk aversion

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