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Earnings Management and Investor Protection: An International Comparison

Posted: 4 Nov 2002  

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

Dhananjay Nanda

University of Miami - School of Business Administration

Peter D. Wysocki

Boston University Questrom School of Business

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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.

Keywords: corporate governance, earnings management, investor protection, law, private control benefits

JEL Classification: G34, G38, M41, N43

Suggested Citation

Leuz, Christian and Nanda, Dhananjay and Wysocki, Peter D., Earnings Management and Investor Protection: An International Comparison. Journal of Financial Economics 69, pp. 505-527, 2003. Available at SSRN: https://ssrn.com/abstract=330200

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/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

Dhananjay Nanda

University of Miami - School of Business Administration ( email )

P.O. Box 248126
Florida
Coral Gables, FL 33124
United States
3052843122 (Phone)

Peter Wysocki

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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