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

The Joint Effect of Investor Protection and Big 4 Audits on Earnings Quality around the World * Contemporary Accounting Research Vol. 25 No. 1 (Spring 2008) pp. 157–91 © CAAA doi:10.1506/car.25.1.6 Contemporary Accounting Research regime becomes stronger, but only for firms with Big 4 auditors. Specifically, signed abnormal accruals are smaller (income-decreasing) and the likelihood of a loss is greater as the investor protection environment becomes stronger. In contrast, for clients of non–Big 4 auditors, abnormal accruals and the likelihood of reporting a loss are unaffected by differences in investor protection regimes. Tests using the Basu 1997 framework are consistent with these results and show that earnings conservatism is increasing in the strictness of a country’s investor protection environment, but only for firms audited by Big 4 auditors. We conclude that the role of investor protection on earnings quality around the world is mediated by the incentives of Big 4 auditors to enforce higher earnings quality as investor protection regimes become stricter. Prior research documents greater financial transparency in countries with stronger investor protection regimes (Bhattacharya, Daouk, and Welker 2003; Bushman, Piotroski, and Smith 2004), and there is evidence that earnings are less managed and more value-relevant in these countries (for example, Ball et al. 2000; Hung 2000; Leuz, Nanda, and Wysocki 2003). Our study http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

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

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Publisher
Wiley
Copyright
2008 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
D.O.I.
10.1506/car.25.1.6
Publisher site
See Article on Publisher Site

Abstract

Contemporary Accounting Research Vol. 25 No. 1 (Spring 2008) pp. 157–91 © CAAA doi:10.1506/car.25.1.6 Contemporary Accounting Research regime becomes stronger, but only for firms with Big 4 auditors. Specifically, signed abnormal accruals are smaller (income-decreasing) and the likelihood of a loss is greater as the investor protection environment becomes stronger. In contrast, for clients of non–Big 4 auditors, abnormal accruals and the likelihood of reporting a loss are unaffected by differences in investor protection regimes. Tests using the Basu 1997 framework are consistent with these results and show that earnings conservatism is increasing in the strictness of a country’s investor protection environment, but only for firms audited by Big 4 auditors. We conclude that the role of investor protection on earnings quality around the world is mediated by the incentives of Big 4 auditors to enforce higher earnings quality as investor protection regimes become stricter. Prior research documents greater financial transparency in countries with stronger investor protection regimes (Bhattacharya, Daouk, and Welker 2003; Bushman, Piotroski, and Smith 2004), and there is evidence that earnings are less managed and more value-relevant in these countries (for example, Ball et al. 2000; Hung 2000; Leuz, Nanda, and Wysocki 2003). Our study

Journal

Contemporary Accounting ResearchWiley

Published: Mar 1, 2008

References

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