32 Pages Posted: 18 Sep 2001 Last revised: 17 Mar 2008
Date Written: September 2002
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.
Keywords: Corporate Governance, Earnings Management, Investor Protection, Law, Private Control Benefits
JEL Classification: G34, G38, M41
Suggested Citation: Suggested Citation
Leuz, Christian and Nanda, Dhananjay and Wysocki, Peter D., Earnings Management and Investor Protection: An International Comparison (September 2002). MIT Sloan Working Paper No. 4225-01; EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=281832 or http://dx.doi.org/10.2139/ssrn.281832