Earnings Management and Investor Protection: An International Comparison

Posted: 4 Nov 2002

See all articles by Christian Leuz

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Leibniz Institute SAFE; CESifo Research Network; Center for Financial Studies (CFS)

Dhananjay Nanda

University of Miami - Department of Accounting

Peter D. Wysocki

Boston University Questrom School of Business

Multiple version iconThere are 2 versions of this paper

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. Available at SSRN: https://ssrn.com/abstract=330200

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

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

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Centre for Economic Policy Research (CEPR) ( email )

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Leibniz Institute SAFE ( email )

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Germany

CESifo Research Network

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Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Dhananjay Nanda

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States

Peter D. Wysocki

Boston University Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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