Abstract

http://ssrn.com/abstract=484682
 
 

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The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms


David Burgstahler


University of Washington

Luzi Hail


University of Pennsylvania - The Wharton School

Christian Leuz


University 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

February 2006


Abstract:     
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is particularly responsive to firms' reporting incentives. We document that private firms exhibit higher levels of earnings management and that strong legal systems are associated with less earnings management in private and public firms. We also provide evidence that private and public firms respond differentially to institutional factors, such as book-tax alignment, outside investor protection and capital market structure. Moreover, legal institutions and capital market forces often appear to reinforce each other.

Number of Pages in PDF File: 49

Keywords: International accounting, Earnings management, Private companies, Legal system, Accounting harmonization, Earnings properties

JEL Classification: G14, G15, G32, G32, K22, M41, M43, M44, M47

working papers series


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Date posted: January 8, 2004  

Suggested Citation

Burgstahler, David and Hail, Luzi and Leuz, Christian, The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms (February 2006). Available at SSRN: http://ssrn.com/abstract=484682 or http://dx.doi.org/10.2139/ssrn.484682

Contact Information

David C. Burgstahler
University of Washington ( email )
555 Paccar Hall, Box 353226
Seattle, WA 98195-3226
United States
206-543-6316 (Phone)
206-685-9392 (Fax)
Luzi Hail (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-8205 (Phone)
215-573-2054 (Fax)
Christian Leuz
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)
HOME PAGE: http://chicagobooth.edu/fac/christian.leuz
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org
European Corporate Governance Institute (ECGI)
Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Center for Financial Studies (CFS) ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
University of Pennsylvania - Wharton Financial Institutions Center
3641 Locust Walk
Philadelphia, PA 19104-6218
United States
CESifo Research Network
Poschinger Str. 5
Munich, DE-81679
Germany
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