Are Legal Families Related to Financial Reporting Quality?

Abstract

A large body of financial accounting research explores the quality of accounting in different countries. A bedrock assumption in most of that research is that common law provides a firmer foundation for good accounting transparency than does civil law. Researchers usually regress their proxy for accounting quality on an indicator variable that designates the firm’s country as a common or civil law jurisdiction (along with other regressors).

What is the support for that nearly universal assumption? We seek an answer for that question. We trace the distinctions by legal scholars that characterize the two families. We study the bedrock research by La Porta, Lopez-de-Silanes, Shleifer and Vishny (1998) that is the nearly universal citation to support the civil/common dummy. We analyze the design and development of research designs that use law in accounting studies. We conclude that the use of the civil/common distinction as applied in accounting studies cannot be supported. We offer suggestions better to investigate the ways in which the law interacts with financial reporting.

Keywords: investor protection, accounting quality, common law, civil law, legal origin, financial reporting