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Corporate Governance and Earnings Quality: International Evidence

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

We examine the relationship between corporate governance and earnings quality worldwide. Results suggest a substitute relationship between corporate governance and earnings quality. We find that the country effect is extremely relevant in shaping this relationship. Indeed, this relation is more pronounced in developed countries, in countries with strong investor protection. Our findings are consistent with the view that poor accounting information may force firms to adopt costlier corporate governance mechanisms, in particular in environments in which they are effective. Likewise, in such environments, firms with better quality accounting information may not need to invest so much in costly governance mechanisms.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1998Law and Finance 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature 2003Earnings management and investor protection: an international comparison 2002The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors 2010Understanding earnings quality: A review of the proxies, their determinants and their consequences 1996Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*

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