Earnings management and investor protection: an international comparison

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. (C) 2003 Elsevier B.V. All rights reserved.