Firm Informativeness, Information Environment, and Accounting Quality in Emerging Countries

Abstract

Using standard proxies for accounting quality, with a focus on earnings persistence and earnings management, we examine how the association between firm-level informativeness and accounting quality varies according to the quality of the country-level information environment. Our sample comprises over 15,000 publicly traded firms from 21 countries included in the Morgan Stanley Capital International (MSCI) Emerging Markets Index, between the years 2000 and 2016. Using novel proxies that aggregate several firm- or country-level characteristics associated with lower information asymmetry or higher-quality information environment, we find that in emerging markets with weaker information environments, the positive association between firm-level informativeness and accounting quality is more pronounced, suggesting that greater firm-level informativeness may partially compensate for weaker country-level institutions. Consistent with the substitution effect, we also document that the positive association between firm-level informativeness and stock market performance is greater in emerging countries with weaker information environments.

Value relevance da contabilidade e das previsões dos analistas: o ambiente de informação do país emergente é importante?

“…The Worldwide Governance Indicators (WGI) is a global governance indicator that measures six dimensions of the quality of governance in each country: (i) voice and accountability; (ii) political stability; (iii) government effectiveness; (iv) regulatory quality; (v) rule of law; and (vi) control of corruption (World Bank, 2020). This indicator can be used as a proxy to assess the level of governance in each country (Langbein & Knack, 2010) and is intended to measure the perception of stakeholders about the quality of governance in a country, in addition to facilitating comparisons between countries, being used in studies related to the quality of the country's information environment (Langbein & Knack, 2010;Martins & Barros, 2021).…”

“…From Langbein and Knack (2010) and Martins and Barros (2021), the Countries' Information Environment Index (CIEI) is built with the six dimensions of the WGI and the IFRS experience. CIEI is represented by the only main component with an eigenvalue greater than 1 (one), which alone explains about 74.2% of the joint variations of the analyzed proxies.…”

Continuity risks

“…The research is justified, as it complements the research of: Muraro & Rota (2015), who investigated the independent audit reports, regarding the modified opinion aspect; Mota, Tavares & Machado (2012), who researched independent auditors' reports in the search for emphasis paragraphs and, what the reasons for their issue are; Damascena and Paulo (2013), who directed their research to independent audit reports, with exception and/or with emphasis paragraph; and, Martins & Barros (2020), demonstrating that in emerging markets whose information is weak, the positive association between company-level information and accounting quality is more evident.…”

National culture and earnings management in developed and emerging countries

“…Thus, it is likely that strong uncertainty avoidance societies in emerging markets should be even more concerned about creating more detailed rules and guaranteeing effective control on how firms report their financial information. This concern would be less evident in the developed countries, given a higher quality of the informational environment and greater coverage by analysts and sophisticated investors (Martins and Barros, 2021)-typically inherent to more developed economies. In other words, such characteristics of developed countries should constrain potential abusive and unethical practices by managers, thereby making the effect of aversion to uncertainty less pronounced in these markets.…”