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Country factors in earnings management of ADR firms

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  • Chen, Clara Chia Sheng
  • Chou, Yan-Yu
  • Wei, Peihwang

Abstract

This study examines the impact of investor protection, market monitoring, and stock liquidity on the degree of earnings management using a sample of 430 firms from 34 countries cross-listed as American Depository Receipts (ADRs). Our primary findings are that ADR firms from countries with strong legal system, strong outside investor rights, more institutional shareholders, and more financial analysts following are less likely to engage in earnings management. Auditor quality is not a significant factor. Further, firms with low stock liquidity tend to manipulate earnings relative to those with high liquidity. Legal factors, institutional holdings, and stock liquidity are particularly significant factors, suggesting that threats of lawsuits and monitoring by investors are effective mechanism to reduce earnings manipulation. Results also indicate that cross-listed firms exercise more earnings management in the pre-listing period than in the post-listing period and that stocks listed in the OTC market tend to have more earnings management than those in major exchanges.

Suggested Citation

  • Chen, Clara Chia Sheng & Chou, Yan-Yu & Wei, Peihwang, 2020. "Country factors in earnings management of ADR firms," Finance Research Letters, Elsevier, vol. 32(C).
    • Handle: RePEc:eee:finlet:v:32:y:2020:i:c:s1544612318307335
    DOI: 10.1016/j.frl.2019.04.003
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    Cited by:

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    2. Chardonnens, Patrick & Fiechter, Peter & Wallmeier, Martin, 2022. "The disappearance of the zero-earnings discontinuity: SOX, dotcom boom or gradual decline?," Finance Research Letters, Elsevier, vol. 49(C).

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    More about this item

    Keywords

    Earnings management; Investor protection; Market monitoring; Liquidity; ADRs;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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