eThesis - School of Business electronic theses

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This study investigates the small rounding of net earnings numbers, also known as cosmetic earnings management, in an international context. Executives of companies are believed to exercise small (mostly upward) rounding of earnings figures in order to increase perception that the financial statement readers receive from earning figures. This kind of small rounding would lead to the occurrence of zeros and nines as second digit to deviate from the Benford's law, which gives the theoretical occurrence of digits in unmanaged earnings. Although not widely used in earlier literature the Benford's law offers very intuitive tool to investigate cosmetic earnings management especially in an international context.

The data of this thesis consists of income statement figures of over 35 000 companies from 43 countries over the time period 2006 - 2014. On top of the financial figures this study uses the Governance Indicators which are governance measures for countries to investigate possible institutional determinants of cosmetic earnings management.

Cosmetic earnings management appears to be worldwide phenomenon but countries do differ to the extent that companies residing in them exercise cosmetic earnings management. Out of the 43 sample countries Norway appears to be only one that doesn't show any signs of cosmetic earnings management. Using OLS regression as well as rank regression negative relationship is found between one of the cosmetic earnings management metrics and one of the Governance Indicators, the estimate for regulatory quality. This finding indicates that as the regulatory quality of a country improves cosmetic earnings management in that country increases. Other than this one negative relationship there doesn't appear to be widespread relationship between the levels of cosmetic earnings management and the Governance Indicators. Companies located in the United States appear to exercise more small rounding of turnover figures than rest of the sample countries.