Accounting Information Quality of Latin America Firms: The Role of Regulatory Environment

Abstract

This study aims to investigate the relationship between the regulatory environment and the quality of the accounting information of Latin America companies, specifically regarding earnings management through accruals. The study sample is comprised of companies listed on the main stock exchanges in Latin America (Brazil, Chile, Mexico and Peru), according to the availability of information in the Capital IQ database – the main data source for this study – and that adopted IFRS as the basis for preparing their financial statements in the period analyzed (2011 to 2016), thus totaling 2,360 firm-year observations. Considering the absolute value of discretionary accruals as proxy for earnings management, our results suggest a positive relationship between the regulatory environment and earnings management. Our results also indicate that the regulatory environment is positively related to the use of discretionary accruals for companies in Brazil, Peru, Mexico, and considering Latin America as a whole. For Chile, we don’t find any significant relationship between these factors, suggesting that there are aspects related to the country level, whether economic, cultural, or institutional, that were not mentioned by this study and that are possibly able to influence the use of discretionary accruals as a form of earnings management.

Keywords: Regulatory environment, information quality, earnings management, discretionary accruals, Latin America