The Relative Importance of Firm and Country Characteristics for Earnings Quality Around the World

We examine the relative importance of firm, industry, and country characteristics in explaining earnings quality around the world in a wide sample of firms in 38 countries over 1990-2003. An aggregate earnings quality measure based on seven earnings attributes (accrual quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism) indicates firm and industry characteristics today explain much more of the variation in earnings quality rankings than country characteristics. The main results hold for different levels of a country’s economic development and investor protection. We also find that firm and industry characteristics became more important in the late 1990s as accounting and financial globalization accelerated. Thus, firm and industry characteristics have incremental explanatory power beyond cross-country variation in determining earnings quality worldwide.