Shades of Gray: An empirical examination of Gray's model of culture and income measurement practices using 20-F data

Gray (1988) developed a theory linking accounting values and systems to Hofstede's (1980) cultural dimensions. To date, no studies have used actual reported data to test the Gray model. This study addresses this shortcoming by using data from the SEC Form 20-F to test proposed relationships between Gray's (1988) accounting value of conservatism (in income measurement practices) and Hofstede's (1980) cultural values. It also tests three other non-cultural environmental variables (tax rates, relative size of capital markets, and influence of the European Union) proposed by Gray (1988) and Salter and Niswander (1995) as modifiers to cultural effects. The results of this study suggest that, as theorized by Gray (1988), the cultural variable individualism is significantly and positively related to differences in income measurement practices between countries. This study also finds that a country's membership in the EU and corporate tax rate is related to income measurement practice differences. However, unlike previous studies, this study does not find that the source of equity is related to income measurement practices.