The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality Around the World

46 Pages Posted: 8 Sep 2006

See all articles by Jere R. Francis

Jere R. Francis

Maastricht University

Dechun Wang

Texas A&M University

Multiple version iconThere are 2 versions of this paper

Date Written: September 7, 2006

Abstract

The association of a country's investor protection regime with the quality of reported earnings is examined for a large sample of firms from 42 countries. Three attributes of earnings are evaluated: the magnitude of abnormal accruals, the likelihood of reporting losses, and earnings conservatism (timely loss recognition). We find that earnings quality increases for firms with Big 4 auditors when a country's investor protection regime gives stronger protection to investors; specifically, abnormal accruals are smaller, there is a greater likelihood of reporting losses, and earnings conservatism is greater. In contrast, earnings of firms with non-Big 4 auditors are largely unaffected by different investor protection regimes. The study adds to a growing body of research showing that accounting practices are influenced by a country's institutions. However, our results differ from prior studies by demonstrating that country-level effects are mediated by audit enforcement, and in particular the incentives of Big 4 auditors to perform higher quality audits in countries with stricter investor protection regimes.

Keywords: Big 4 auditors, investor protection, earnings quality, accounting conservatism, abnormal accruals, earnings management

JEL Classification: G38, K22, M49, M41, M43, M47

Suggested Citation

Francis, Jere R. and Wang, Dechun, The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality Around the World (September 7, 2006). Available at SSRN: https://ssrn.com/abstract=928988 or http://dx.doi.org/10.2139/ssrn.928988

Jere R. Francis (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Dechun Wang

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States

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