How culture and legal environment affect classification shifting? Global evidence

Abstract

This study examines the interplay between various cultural characteristics and the legal environment on classification shifting using a global sample that enables variability in underlying cultural characteristics across countries while controlling for heterogeneity. Given that both culture and the legal environment tend to exhibit low variability over time, our international cross‐country analysis with diverse cultural dimensions and legal frameworks enhances the robustness of our empirical findings. Our identification strategy employs several models and shows the significant impact of culture on classification shifting and the interactions between national culture and the legal environment on classification shifting behaviour, though there is variability across countries. We also find that certain traits of culture induce classification shifting. We highlight that strengthening the legal environment becomes crucial in creating an institutional framework that effectively curbs unethical practices induced by certain national culture traits and enhances transparency and accountability in financial reporting.