Nexus between Investor Protection Environment and Financial Reporting Quality in the Sub-Saharan Africa (SSA)

Abstract

This study investigates the effect of investor protection (IP) on the quality of financial reports produced by listed firms in Sub-Saharan Africa (SSA). The study used three indicators of IP (protection minority shareholders’interest -MinInt, regulation of stock exchange – RegSE, and legal right index – LRI) to examine their impact on various forms of financial reporting quality (accounting conservatism - AC, accrual quality - AQ, discretionary accrual-DA and aggregate financial reporting quality index-AFRQ). The study makes the following interesting revelations using system generalised method of moments (sys GMM) estimation technique employed on data from 60,815 firm-year observations across 13 stock exchanges in SSA from 2007 to 2017. The results depict that IP Index has a significant positive impact on all FRQ indicators, except for AC where a negative and significant impact of IP was observed. Meanwhile, IP components such as MinInt and RegSE depicted a negative and statistically significant relationship with the FRQ of firms in SSA. We conclude that individual IP components (MinInt, LRI and RegSE) do not achieve improved FRQ in SSA. Therefore, SSA countries may need holistic strengthening of investor protection environment in order to anhance FRQ.

Keywords: Investor Protection, Minority Interest protection, Regulation of Stock Exchange, Legal Interest Index, Financial reporting quality and Sub-Saharan Africa.

JEL Classification: M48