Earnings quality research: Advances, challenges and future research

This discussion makes several observations regarding the earnings quality research reviewed in Dechow, Ge and Schrand (2010) (DGS). I discuss some of the factors that led to the large growth in the earnings quality literature over the past two decades, and note a few of the important contributions from this literature. I also present what I view as several major challenges the literature faces as well as some avenues for future research. In addition, I discuss the difficulties in evaluating such a diverse body of literature, and comment on DGS's major conclusions.Earnings quality Earnings management Abnormal accruals Proxies

Investor Protection and Corporate Governance: Evidence from Worldwide CEO Turnover

Recent research asserts that an essential feature of good corporate governance is strong investor protection, where investor protection is defined as the extent of the "laws" that protect investors' rights and the strength of the legal institutions that facilitate "law enforcement". The purpose of this study is to test this assertion by investigating whether these measures of investor protection are associated with an important role of good corporate governance: identifying and terminating poorly performing CEOs. Our tests indicate that "strong law enforcement institutions" significantly improve the association between CEO turnover and poor performance, whereas "extensive investor protection laws" do not. In addition, we find that in countries with strong law enforcement, CEO turnover is more likely to be associated with poor stock returns when stock prices are more informative. Finding that strong law enforcement institutions are associated with improved CEO turnover-performance sensitivity is consistent with good corporate governance requiring law enforcement institutions capable of protecting shareholders' property rights (i.e., protecting shareholders from expropriation by insiders). Finding that investor protection laws are not associated with improved CEO turnover-performance sensitivity is open to several explanations. For example, investor protection laws may not be as important as strong law enforcement in fostering good governance, the set of laws we examine may not be the set that are most important in promoting good governance, or measurement error in our surrogate for extensive investor protection laws may reduce the power of our test of this variable. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2004.