The Relationship between Proprietary Costs of Financial Reporting and Earnings Quality : A Cross-Country Study

Previous studies have documented the mixed relation between proprietary costs of financial reporting and earnings quality within a single country. Using four country-level latent factors devised by Isidro et al. (2020), this study investigates the impact of the financial reporting environments on the relation between proprietary costs of financial reporting and earnings quality. I find the negative relation in poor financial reporting environments, while the positive one in strong financial reporting environments. Further, I find that enhanced investor protection is the most effective in restricting managers’ use of discretion in financial reporting. This study provides lesson to accounting oversight bodies in countries with poor financial reporting environments that it is more urgent to improve investor protection and confidence in order to recover firms’ financial reporting quality