This thesis is made of three chapters which contribute to the international accounting literature.
The first chapter investigates the effect of the legal enforcement on the use of income increasing earnings management (EAR) and downward expectation management (EXP) to meet or beat analyst earnings forecasts. Using a sample of 4,934 firms from fourteen European countries, we document that the strength of the legal enforcement is negatively associated with EAR and positively associated with EXP. We provide evidence of a substitution effect between EAR and EXP only in the presence of strong legal enforcement, while they are complements when the legal enforcement is weak. We show that the capital market rewards meeting/beating firms, but it penalizes the concurrent use of EAR and EXP and this penalty is positively associated with the strength of the legal enforcement only for EAR. Our results show that legal enforcement has a significant role in the choice between EAR and EXP and that a change in the strength of legal enforcement drives how firms operate to meet or beat analyst forecasts. The contribution of this chapter is two-fold. This is the first study that examines how cross-country variation in the level of enforcement affects the interaction between EAR and EXP to meet/beat analyst forecasts. Second, this chapter is the first study that explores whether the capital market’s reaction to an earnings surprise is related to the strength of the legal enforcement.
The second chapter examines how firm-level governance and country-level enforcement interplay in affecting IFRS mandatory adoption consequences on financial reporting quality. We operationalize financial reporting quality using earnings informativeness, accruals management, and real earnings management. We use a treatment sample of 3,476 firm-year observations from 14 European countries that mandatorily adopt IFRS in 2005 and 29,596 firm-year observations from 11 non-IFRS adoption countries. To account for the confounding effects of general trends in financial reporting quality or concurrent events unrelated to IFRS adoption, we estimate annual panel regressions for IFRS adopter firms and non-IFRS adopter firms using industry-country and separate year fixed effects for the treatment and control sample. Three key findings emerge from our analyses. First, IFRS adoption is, on average, associated with an increase in financial reporting quality. However, there is considerable heterogeneity in financial reporting quality changes, suggesting that IFRS mandatory adoption is not sufficient, per se, to change firms’ reporting practices. Second, in countries characterized by weak enforcement, strong board-level monitoring appears to enhance financial reporting quality, thus suggesting a substitutive effect between firm- and country-level governance. Third, in countries characterized by strong enforcement, firms with strong board-level monitoring exhibit a higher level of financial reporting quality than firms with weak board-level monitoring, thus suggesting that country- and firm-level governance are complementary. The chapter contributes to the literature in two ways. First, this is the first study that examines whether board-based monitoring mechanisms shape IFRS mandatory adoption consequences on financial reporting quality. Second, the chapter contributes to the growing literature on the interplay between firm-level governance and country institutional characteristics. The findings point toward a substitution effects between firm-level monitoring mechanisms and country-level enforcement mechanisms when the legal system is lax, while board monitoring and legal enforcement complement each other when the legal system gets stricter.
The third chapter examines whether informational environment benefits following cross-listing in the U.S. vanish when the financial reporting process suffers by internal control deficiencies according to the Section 302 of the Sarbanes-Oxley Act (SOX, hereafter). Previous literature documents an increase in the quality of the firm information environment following cross-listing in the U.S. and motivates this result with the bonding effect. This study disputes the idea that the cross-listing per se enhances the quality of firms’ information environment. We challenge this idea considering whether the quality of the information environment for cross-listed firms depends on an effective commitment to achieve higher levels of corporate transparency. As research setting, we use Section 302 of the SOX that requires to disclose any discovered internal control deficiency on internal controls over financial reporting. To account for the impact of general trends or concurrent events unrelated to SOX302 disclosures on information environment of cross-listed firms, we employ as benchmark group all firms listed in their home market but not in the U.S. In addition, we employ propensity-score matching models to take into account differences in firm-characteristics between cross-listed and non-cross-listed firms while estimating SOX302 disclosure treatment effect. Our analyses encompasses both changes and cross-sectional association tests. We show that cross-listed firms disclosing internal control deficiencies do not have a better information environment than their home-country peers, but only after the first disclosure on internal control deficiencies according to SOX302. Second, we show that cross-listed firms experience an improvement in the information environment if they remediate to previously disclosed internal control deficiencies. Finally, we show that these results hold only for firms domiciled in countries with weak legal institutions, while cross-listed firms from countries with strong legal institutions do not experience a significant change in the quality of the information environment once they became cross-listed, irrespective from the disclosure of an internal control deficiency. The study contributes to the literature on cross-listing in two ways. First, we show the existence of substantial heterogeneity in cross-listing effects on firm information environment, driven by the adoption of adequate internal controls over financial reporting. Second, we add to the literature on the effects of the SOX. Literature shows that cross-listed firms experience a decrease in the level of opaqueness after the adoption of the SOX. We add to this literature the evidence that the decline in the level of opaqueness depends on cross-sectional differences in corporate transparency and hence it is not homogenous across all firms
