| This study explores the effects of investor protection on reported earnings quality assessed on the basis of four accounting-based earnings attributes (accruals quality, earnings persistence, earnings predictability, and earnings smoothness). The study hypothesizes that the least favorable values of each earnings attribute (considered individually) generally occur in countries whose institutional characteristics provide weaker investor protection than in countries with stronger investor protection. The results based on K-means cluster and correlation analyses between institutional characteristics and earnings attributes are mixed. If the study defines earnings quality based on earnings smoothness, the results are consistent with the study's hypothesis implying that less earnings smoothness appears to be found in countries whose institutional characteristics are strong. Conversely, if the study defines earnings quality based on accruals quality and earnings predictability, the results contradict the study's hypothesis, indicating that high accruals quality and high predictive ability of earnings appear to be found in countries whose institutional characteristics are weak. In addition, if the study defines earnings quality based on earnings persistence, the results show no effect of differential institutional characteristics on earnings persistence, except that countries with low ownership concentration appear to have high earnings persistence. The results based on regression analysis are consistent with those based on cluster and correlation analyses. Thus, this study concludes that the results based on the association between institutional characteristics and earnings attributes are mixed and it would appear that conclusions about earnings quality depend on how it is defined. |
