There are 4 measures of earnings management have been introduced in this article. They describe the method used to develop their two earnings smoothing measures (EM1 and EM2). EM1 is the country’s median ratio of the firm-level standard deviations of operating income and operating cash flow. EM2 is the country’s Spearman correlation between the change in accruals and the change in cash flow from operations. Smaller values of EM1 and EM2 signify a higher level of earnings smoothing. Austria (EM1) and Greece (EM2) exhibit the highest levels of earnings smoothing, while the United States (EM1) and Norway (EM2) have the lowest levels. For earnings discretion measures, EM3 is the country’s median ratio of the absolute value of accruals and the absolute value of the cash flow from operations. EM4 is the number of ‘small profits’ divided by the number of ‘small losses’ for each country. A firm year observation is classified as a small profit if net earnings are in the range [0,0.01]. A firm year observation is classified as a small profit if net earnings are in the range [−0.01, 0] Larger values of EM3 and EM4 are indicative of higher levels of earnings discretion. Germany (EM3) and Indonesia (EM4) have the highest levels of earnings discretion; South Africa (EM3) and Norway (EM4) have the lowest. To mitigate potential measurement error, an aggregate earnings management is created to rank each measure of earnings management and calculating the average rank across EM1, EM2, EM3 and EM4. Values for this aggregate measure of earnings management (AGGEM) are reported in the far right column of this Table. Higher scores indicate higher levels of earnings management. Austria and Greece have the highest values on AGGEM and the United States has the lowest.
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