Does Corruption Influence Earnings Management? Evidence From BRICS Nations

Despite the extensive research on the causes and effects of corruption, there has been scant research on the effect of corruption on earnings management of firms operating in emerging economies under different legal systems. The present paper fills this research gap by investigating the influence of corruption on earnings management of firms operating in the BRICS nations, which are either under common or code law at prima facie. Further, we make a novel attempt to examine the moderating role of cash holdings and cash flow in explaining this association. Our data includes 329 nonfinancial listed firms with 1552 firm-year observations ranging from 2014 to 2021. Using system GMM approach, we find that higher corruption leads to higher earnings management in five emerging BRICS nations. We also gather that managers operating in highly corrupt countries tend to hold high cash levels, maintain a higher cash flow, and engage 3.5%–3.8% more in earnings management. Our results are robust to both the measures of earnings management (real-activity-based and accrual-based). Our findings have significant implications for executives and directors of firms if earnings management is considered illegal in any of these countries and such law is enforced. In addition, our study would share important insights to the external stakeholders, such as investors, policymakers, and regulators.