Earnings management and investor protection: An international comparison

Christian Leuz, Dhananjay Nanda, Peter D. Wysocki

Research output: Contribution to journalArticlepeer-review

2176 Scopus citations

Abstract

This paper examines systematic differences in earnings management across 31 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 findings are consistent with this prediction and suggest an endogenous link between corporate governance and the quality of reported earnings.

Original languageEnglish (US)
Pages (from-to)505-527
Number of pages23
JournalJournal of Financial Economics
Volume69
Issue number3
DOIs
StatePublished - Sep 1 2003

Keywords

  • Corporate governance
  • Earnings management
  • Investor protection
  • Law
  • Private control benefits

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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