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Earnings Management and Investor Protection: An International ComparisonChristian LeuzUniversity of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network Dhananjay NandaUniversity of Miami - School of Business Administration Peter D. WysockiUniversity of Miami - School of Business Administration September 2002 MIT Sloan Working Paper No. 4225-01; EFA 2002 Berlin Meetings Presented Paper Abstract: This paper examines the pervasiveness of earnings management across 31 countries between 1990 and 1999. It documents systematic differences in earnings management across different clusters of 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 evidence is consistent with this prediction. The findings suggest a link between corporate governance and the quality of reported earnings, and complement prior finance research that treats the quality of corporate reporting as exogenous.
Number of Pages in PDF File: 32 Keywords: Corporate Governance, Earnings Management, Investor Protection, Law, Private Control Benefits JEL Classification: G34, G38, M41 working papers seriesDate posted: September 18, 2001 ; Last revised: March 17, 2008Suggested CitationContact Information
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