The Evolution of Earnings Management and Firm Valuation: A Cross-Country Analysis

39 Pages Posted: 27 Feb 2007 Last revised: 22 Oct 2007

See all articles by Nuno Fernandes

Nuno Fernandes

Catolica Lisbon School of Business and Economics; IMD International

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Date Written: October 2007

Abstract

We investigate the determinants of earnings management and its implications for firm value for more than 24,000 firms in 43 countries for the 1990-2003 period. We find that firm characteristics explain at least as much of the variation in earnings management as country characteristics, and that firm characteristics become relatively more important at the turn of the 20th century. Investment opportunities, dependence on external finance, ownership dispersion, cash holdings, and greater visibility and access to global financial markets tend to decrease earnings management, as firms adopt more rigorous standards when they can benefit the most from them. We find a link between earnings management and firm valuation: a move from the 75th to the 25th percentile of earnings management is associated with an increase in Tobin's Q of 16%. The negative relation between earnings management and firm valuation is found to be particularly strong at the turn of the 20th century and for firms with strong investment opportunities and need of external finance.

Keywords: Earnings management, investment opportunities, financial markets, firm valuation

JEL Classification: G34, G38, F36

Suggested Citation

Fernandes, Nuno and Ferreira, Miguel Almeida, The Evolution of Earnings Management and Firm Valuation: A Cross-Country Analysis (October 2007). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: https://ssrn.com/abstract=965636 or http://dx.doi.org/10.2139/ssrn.965636

Nuno Fernandes (Contact Author)

Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

IMD International ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland

Miguel Almeida Ferreira

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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