Contemporary Accounting Research Vol. 25 No. 1 (Spring 2008) pp. 157â91 Â© CAAA doi:10.1506/car.25.1.6 Contemporary Accounting Research regime becomes stronger, but only for ï¬rms with Big 4 auditors. Speciï¬cally, 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 nonâBig 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 countryâs investor protection environment, but only for ï¬rms 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 ï¬nancial 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
Contemporary Accounting Research – Wiley
Published: Mar 1, 2008
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