Language FTR and Earnings Management: International Evidence

Abstract

We study whether a particular aspect of language structure, the future-time reference (FTR) of a language, explains variation in corporate earnings management behaviors around the world. Based on the Sapir-Whorf hypothesis (Whorf 1956), we predict that grammatically referencing the future, which induces humans to perceive the future more sharply distinct from the present, induces myopic management behavior. In support of this idea, we find that firms headquartered in strong-FTR language countries are more likely to engage in accrual and real activities earnings management to meet short-term earning benchmarks.