Earnings management and investor protection: an international comparison |
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| Institution: | 1. The Wharton School of the University of Pennsylvania, Philadelphia, PA 19104, USA;2. The Fuqua School of Business, Duke University, Durham, NC 27708, USA;3. MIT Sloan School of Management, Cambridge, MA 02142, USA;1. Faculty of Business, University of Wollongong in Dubai, Dubai, United Arab Emirates;2. Faculty of Business, Economics and Social Development, Universiti Malaysia Terengganu, 21030 Kuala Terengganu, Terengganu, Malaysia;3. Bangor Business School, Hen Goleg, Bangor University, College Road, Bangor LL57 2DG, United Kingdom;1. Odette School of Business, University of Windsor, 401 Sunset Ave, Windsor, Ontario N9B 3P4, Canada;2. Telfer School of Management, University of Ottawa, 55 Laurier E. Ottawa, Ontario, K1N 6N5, Canada;3. Antai College of Economics & Management, Shanghai Jiao Tong University, 1954 Huashan Road, Shanghai 200052, PR China;1. International Hellenic University, Greece;2. International Hellenic University, Greece;3. Aston Business School, UK;4. Athens University of Economics and Business, Greece;5. Dominion University College, Ghana |
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| Abstract: | This paper examines systematic differences in earnings management across 31 countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong protection limits insiders’ ability to acquire private control benefits, which reduces their incentives to mask firm performance. Our findings are consistent with this prediction and suggest an endogenous link between corporate governance and the quality of reported earnings. |
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