5.1 Descriptive Statistics
Means and standard deviations for U.S., Canadian, Hong Kong, Japanese, Korean, and Taiwanese company data
used in our subsequent regressions are reported in Table 1. Correlation coefficients for the same data are reported in
Table 2. Compustat data definitions are reported in Appendix 1.
[Insert Tables 1 and 2 about here]
5.2 Regression Results
Because of many similarities between US and Canadian companies it is useful to first compare regressions on US
based and Canadian based firms. Table 3 shows these regression results.
[Insert Table 3 about here]
Results are similar across the two countries. Model F statistics are all significant at 0.001. The structural variables
explaining discretionary expenditures have signs consistent with theory, and are all statistically significant. Firms
with higher (lower) leverage seem to be more (less) likely to engage in earnings management using discretionary
expenses. The relationship with the change in sales shows a positive relation as we expected; firms with more funds
available are unlikely to decrease discretionary expenses. ROA is included to capture profitability; we find that
profitable firms appear to have less incentive for earnings management by decreasing discretionary expenses with
the predicted sign. Most importantly, we see a significant and negative relationship between discretionary accruals
and discretionary expenditures, consistent with predictions. If firms can manage earnings sufficiently with accruals,
they have relatively less need to manage earnings through discretionary expenditures.
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Published by Canadian Center of Science and Education 261
The coefficient estimates for discretionary accruals are larger for U.S. firms than for Canadian firms. Although both
book and tax rules for SG&A and advertising are the same in the U.S. and in Canada (expensing), the accounting
rules for R&D differ. While U.S. GAAP requires expensing of R&D, Canada allows for capitalization and
subsequent expensing. Thus for R&D, Canadian firms have more opportunities to manage earnings though
discretionary expensing or capitalization of R&D.
Across the two countries, the tax variables are significant and consistent with predictions. In years when the firm
experiences a higher statutory tax rate, it increases its discretionary expenses in the current year. The results are
consistent with (2), and suggest that, after controlling for financial reporting objectives, firms tend to increase
discretionary expenditures in higher tax rate years.
Regression results for Hong Kong, Japan, Korea, and Taiwan are shown in Table 4.
[Insert Table 4 about here]
The results (except for the tax rate variable) are similar to those for the U.S. and Canada. Except for Hong Kong
companies, there is a significant negative relationship between discretionary accruals and discretionary real
expenditures, supporting the conjecture of the substitute nature of the two earnings management techniques. All four
countries’ firms show significant and positive effects for ROA; as with U.S. and Canadian firms, these firms
increase discretionary expenditures in years of higher profitability. Similarly, for all countries, discretionary
expenditures increase in years of greater fund availability (increased sales). Unlike their U.S. and Canadian
counterparts, East Asian firms do not show any evidence of creasing their discretionary expenditures in high tax rate
years. As noted earlier, this was not unexpected for Japan (whose consistently high effective tax rates suggest that
firms do not aggressively manage their taxes) and Hong Kong (where marginal rates are low, making some tax
planning less important). On the other hand, we have no conjectures as to why tax rates are not significant for
Korean and Taiwanese firms.