RIEB, Kobe University

Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities

Over the last two decades, a growing body of literature has investigated the factors influencing the differences in financial reporting, especially earnings quality, in an international setting. The purpose of this paper is to provide an overview of the cross-country research that focuses on earnings quality and to offer suggestions for future topics in the field. In this study, I first discuss the relationship between earnings quality and the following institutional and cultural factors that have been examined in prior literature: legal tradition, investor protection (outside investor rights and legal enforcement), tax system, regulations, financial development, market competition, accounting standards (divergence from IAS), enforcement of accounting standards, culture, religiosity, and language. Second, the relationship between the improvement of earnings quality and International Financial Reporting Standards (IFRS) adoption is described. The results are mixed and suggest that a single set of accounting standards that are generally viewed as high quality does not always improve earnings quality. In addition, the relationship varies with the institutional and cultural factors of a country. It means that improvement through IFRS adoption would require the development of an institutional environment. Finally, as a prospect for future research, this paper discusses the extension from a single-country to cross-country study, the impact of IFRS adoption on the contracting role of accounting through the change in earnings quality, and earnings quality of non-listed firms in an international setting. These topics have become a more fruitful avenue of research with the recent increase in the availability of data.