Cross-Country Research on Earnings Quality:
A Literature Review and Future Opportunities*
MASAHIRO ENOMOTO†
Research Institute for Economics and Business Administration,
KOBE UNIVERSITY

ABSTRACTOver the last two decades, a growing body of literature has investigated the factors
influencing the differences in financial reporting, especially earnings quality, in aninternational setting. The purpose of this paper is to provide an overview of the crosscountry research that focuses on earnings quality and to offer suggestions for future
topics in the field. In this study, I first discuss the relationship between earnings quality
and the following institutional and cultural factors that have been examined in priorliterature: legal tradition, investor protection (outside investor rights and legal
enforcement), tax system, regulations, financial development, market competition,accounting standards (divergence from IAS), enforcement of accounting standards,
culture, religiosity, and language. Second, the relationship between the improvement of
earnings quality and International Financial Reporting Standards (IFRS) adoption is
described. The results are mixed and suggest that a single set of accounting standards
that are generally viewed as high quality does not always improve earnings quality. In
addition, the relationship varies with the institutional and cultural factors of a country. Itmeans that improvement through IFRS adoption would require the development of an
institutional environment. Finally, as a prospect for future research, this paper discusses
the extension from a single-country to cross-country study, the impact of IFRS adoption* We gratefully acknowledge the useful comments and feedback from Keishi Fujiyama, Fumihiko Kimura, KazunoriMiwa, Kazuhisa Otogawa, Shota Otomasa, Masahiro Sakata, Akinobu Shuto, Shun-ichi Toyota, and Tomoyasu
Yamaguchi. I would like to thank the financial support of JSPS KAKENHI Grant Number 17K04053 and
15K03763. Parts of this paper have been reconstructed based on Enomoto (2018). However, I have made significant
additions to this paper, including analyzing the data, and updates to the referred studies, and providing future research
areas†
Address: Research Institute for Economics and Business Administration, Kobe University, Rokkoudai 2-1, Nada, Kobe,
657-8501 Japan. Phone: 078-803-7031; Email: menomoto@rieb.kobe-u.ac.jp.
Received October 12, 2020; available online December 28, 2020
DOI: 10.11640/tjar.10.2020.01
Copyright©2020 Research Institute for Economics and Business Administration – Kobe University.

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on the contracting role of accounting through the change in earnings quality, andearnings quality of non-listed firms in an international setting. These topics have becomea more fruitful avenue of research with the recent increase in the availability of data.
Keywords: Cross-Country Research; Earnings Quality; IFRS

1. Introduction
For last two decades, a growing body of literature has studied the differences in financial
reporting, especially earnings quality, in a cross-country research setting (e.g. Ball et al. 2000).
Evidence of earnings quality in the individual country setting has been already provided bynumerous studies. The institutional and cultural factors in a country should be associated with therelationship between stakeholders and management, corporate governance, and audits that are
frequently focused on in the individual country setting. However, studies at an individual country
level can ignore these factors because they have the same effects on all of the sample firms in thatcountry. Therefore, a cross-country study is a suitable and useful setting to compare the effect of
institutional and cultural factors on accounting information. This type of study provides an answer
to questions as to what the crucial factors the differences in international accounting practices are.
The purpose of this paper is to give an overview of cross-country research that analyzed earnings
quality and provide suggestions for potential future research topics in this area.1
Country-level factors influencing earnings quality, outside-investors right, legal enforcement,
financial development, tax system, market competition, accounting standards, and so forth havebeen tested in previous research. In most of the previous studies, common-law and strong investor
protection countries have high earnings quality. Some studies show that financial development has
a similar effect, but studies on cultural aspects report mixed results.
Controlling the divergence of accounting standards is a critical issue in the international setting.
However, since firms listed on stock exchanges in EU countries are required to provide their annual
report based on IFRS, these standards have prevailed around the world. IFRS provides many
research opportunities to investigate the factors affecting earnings quality at country- and firmlevel. De George et al. (2016) report that research on IFRS published in academic accounting
journals is increasing year by year especially since 2010. This corresponds to increased data
availability since the enforcement of IFRS in EU security markets.
IFRS is generally viewed as high-quality accounting standards. The empirical research on theeffect of IFRS adoption on earnings quality has failed to conclusively document the improvementof this quality (e.g. Barth et al. 2008; Ahmed et al. 2013b). Moreover, several studies report that theeffect is conditional on the institutional environment in a country. Wysoki (2011, 322) states that
accounting standards are just one of many institutional features in a country that influence firms’
and managers’ reporting incentives and therefore actual reporting and disclosure outcomes. In otherwords, adopting a single accounting standard that is viewed as high quality does not necessarily
improve earnings quality. Rather, it may be important to establish institutional environments thatenforce the accounting standards function appropriately.
The remainder of this paper is structured as follows. Section 2 summarizes the earnings quality
1

Gordon et al. (2019) also provide several potential areas of future international accounting research.

Enomoto: Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities

3

metrics in cross-country research. Section 3 presents the discussion on the relationship between
earnings quality and institutional factors in the country, based on prior literature. For review, crosscountry studies are divided into three groups: (1) studies that explore institutional and cultural
factors that determine earnings quality, (2) studies that examine whether IFRS adoption has
improved earnings quality, and (3) studies that analyze the effect of institutional and cultural factors
in the country on the relationship between earnings quality and IFRS adoption. In section 4, I
discuss the future development of cross-country research. Section 5 concludes this paper.

2. Earnings Quality Measures
Numerous researchers have stated various definitions of earnings quality in their studies.
Dechow et al. (2010, 10), who comprehensively survey earnings quality literature, define it asfollows: Higher quality earnings provide more information about the features of a firm's financial
performance that are relevant to a specific decision made by a specific decision-maker. Dechow etal. (2010, 346) classify the earnings quality measures in previous research into three categories asfollows:(a) Properties of earnings - earnings persistence, abnormal accruals and modeling the accrual
process, earnings smoothness, asymmetric timeliness and timely loss recognition, and target
beating,(b) Investor responsiveness to earnings, and(c) External indicators of earnings misstatements - indicators of firms subject to Securities andExchange Commission (SEC) enforcements (Accounting and Auditing Enforcement
Releases (AAERs)), Restatements, and internal control weaknesses.
In this survey, the range of earnings quality measure is limited to focus on managerial behaviors
directly affecting accounting numbers. Investor responsiveness to earnings is excluded because it
does not directly respond to managerial behaviors to alter accounting numbers. External indicatorsof earnings misstatements are not included because, due to the limited availability in aninternational database, the studies are scarce. Hence, this paper concentrates on (a) properties of
earnings that can be interpreted as direct managerial intervention in accounting numbers. A certain
percentage of studies reviewed in herein examine earnings management in an international setting.
Earnings management occurs when managers use judgment in financial reporting and in
structuring transactions to alter financial reports either to mislead stakeholders about theunderlying economic performance of the company or to influence contractual outcomes that
depend on reported accounting numbers (Healy and Wahlen 1999, 368). According to thedefinition, earnings management leads to a distortion of the accounting numbers. This study,
therefore, assumes that earnings management decreases earnings quality as posited in most previous
papers.2
Earnings management research shows that it is closely associated with the transparency andinformation asymmetry that comprise earnings quality. Thus, earnings management represents a
crucial factor affecting earnings quality (Dechow et al. 2010). Real earnings management and2Holthausen (1990) defines earnings management (accounting choice) from the viewpoints of efficient contracting, andinformation perspectives, in addition to opportunistic behavior. His definition means that a part of earnings
management stems from non-opportunistic motivation and may not deteriorate earnings quality.

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accrual-based earnings management are key elements of earnings management. In addition to theaforementioned properties of earnings, it is an important proxy of earnings quality.3 Therefore, thisstudy includes the real earnings management literature at an international level as part of the survey,
although not that reviewed in Dechow et al. (2010).

3. Cross-Country Research on Earnings Quality
3.1. The Relationship between Earnings Quality and Institutional and Cultural Factors in a Country
3.1.1. Legal Tradition and Investor Protection
La Porta et al. (1997; 1998) are novel studies that have influenced cross-country research in
the field of accounting. Their studies document that common-low countries have stronger investor
protection and more developed capital markets, while code-law countries have relatively weak
investor protection and their capital markets are less developed. Since La Porta et al. (1997; 1998),
most cross-country earnings quality research has employed their measures of legal tradition, outside
investor rights, and legal enforcement.4
Ball et al. (2000) draw inferences about the relationship between legal tradition and earnings
quality. In their arguments, the corporate governance system in common-law and code-law
countries is dominated by the shareholder and stakeholder, respectively. On one hand, theshareholder corporate governance system in common-law countries tends to use public disclosure
to mitigate information asymmetry and have timely recognition of economic losses. On the other
hand, the stakeholder corporate governance system in code-law countries is likely to rely on private
communication for the mitigation of information asymmetry and the payout for stakeholders
would therefore be directly related to accounting income. Accounting in code-law countries has atendency towards less timely recognition of economic losses and income smoothing for payout
stabilization.
Based on a sample of 40,359 firm-years from four common-law countries (Australia, Canada,
the U.K., and the U.S.) and three code-law countries (France, Germany, and Japan) between 1985
and 1995, they document that accounting income in common-law countries incorporates economic
losses in a more timely manner than that in code-law countries. However, Ball et al. (2003) provide
evidence that the four common-law countries with accounting standards generally viewed as highquality in East South Asia (Hong Kong, Malaysia, Thailand, and Singapore) show less timelinessand conservative accounting income than code-law countries (France, Germany, and Japan). Theirevidence suggests that earnings quality in a country is necessarily not related to the legal traditionand suggests that researchers should note the managerial incentive to financial reporting.
Turning to the effect of investor protection on earnings quality, Leuz et al. (2003) provide apioneering study indicating the relationship between investor protection and earnings management.
They employ outside investor rights and legal enforcement as investor protection measures. Outside
investor rights represent the extent of investor protection by law and is measured by whether or notfive of the outside investor rights to counter the directors exist.5 Leuz et al. (2003) argue that
insiders (the controlling shareholder and the managers in possible collusion with it) manage
3

Researchers mainly calculate real earnings management measure using the model of Roychowdhury (2006).
Legal family is also considered in many studies.
5
Djankov et al. (2008) propose a new legal protection measure of outsider against expropriation by corporate insiders’self-dealing (anti-self-dealing index). Spamann (2010) presents a revised measure of the index of La Porta et al. (1997,1998).
4

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earnings to conceal an unfavorable earnings decrease caused the expropriation of the minority
shareholders’ wealth. However, if it is difficult for managers to expropriate from minority
shareholders due to strong investor protection, the incentives for implementing earnings
management ought to be curbed. Therefore, they claim that countries with a higher the level ofinvestor protection have higher earnings quality.
Based on a sample of 70,955 firm-years in 31 countries from 1992 through 2001, Leuz et al.
(2003) find that firms in countries with stronger investor protection limit earnings management,
which improves earnings quality. This means that legal protection tends to mitigate the conflict
between minority shareholder and insider. Moreover, they state that weak legal protection may
cause financial reporting to deteriorate and that it undermines the development of so-called “arm’s
length” financial markets.
In accordance with Ball et al. (2000) and Leuz et al. (2003), many studies have been conductedon the association of legal tradition and investor protection with earnings quality. Using data from22 countries between 1990 and 1999, Haw et al. (2004) report that earnings quality is heightenedin a country with common-law, an efficient judicial system, and high tax compliance. Using 86,927
firm-years from 1992 to 2001 across 38 countries, Bushman and Piotroski (2006) show that firms
in common-law countries have greater timely accounting recognition of economic losses (TLR)
compared to those in code-law countries. Even after controlling for the legal tradition, firms incountries with stronger investor protection and judicial systems show similar results.6
Leuz et al. (2003) predominantly focus on accounting accruals as a proxy for earnings
management. Accounting accruals are mainly used as accrual-based earnings management. As
previously mentioned, real earnings management is also one of the primary managerial
discretionary behaviors. Previous research provides evidence that the two discretionary behaviors
tend to have a substitution relationship (e.g. Ewert and Wagenhofer 2005; Cohen et al. 2008).
Enomoto et al. (2015) investigate whether substitution relationships are observed under strong
investor protection. Based on a sample of 222,513 firm-years from 38 countries from 1991 through2010, they document that managers in countries with stronger investor protection tend to engage
in real earnings management in order to compensate for a reduction in accrual-based earnings
management. High analyst coverage, which is a proxy for capital market forces, limits real earnings
management. Similarly, Francis et al. (2016), using a sample of 245,180 firm-years in 38 countries
from 1994 to 2009, demonstrate that managers in countries with stronger investor protection arelikely to curb accrual-based earnings management resulting in an increase in real earnings
management. In other words, they show a substitutional relationship between the two discretional
behaviors.
Similar to Leuz et al. (2003), most research provides evidence of higher earnings quality incountries with stronger investor protection. Boonlert-U-Thai et al. (2006) examine a sample of57,610 firm-years in 31 countries from 1996 to 2002 to explore the relationship between investor
protection and earnings quality, such as accrual quality, earnings persistence, earnings predictability,

6

Bushman and Piotroski (2006) provide the following arguments regarding the relationship between legal system andconservatism. In countries where the quality of legal system is higher, accounting figures play an important role informal contracts, where enforceable contracts are required and verifiable accounting figures are demanded bycontracting bodies. Moreover, the higher the quality of the judicial system, the greater the benefits gained from
litigation. Overstating economic performance will raise potential litigation costs. Therefore, firms in countries with ahigher quality legal system have a greater degree of conservatism.

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and income smoothing. In contrast to Leuz et al. (2003), they report that countries with stronger
investor protection show lower earnings quality, lower earnings predictability, and less smoothed
earnings. The results of earnings persistence are unclear. They also draw inferences that, due to theextensive use of accounting information for contracting in developed countries, managers tend toobtain gains through earnings management.7
Although the aforementioned studies are based on non-financial firms and exclude financial
firms as their sample, Shen and Chih (2005) focus on banks. Based on a sample of banks from 1993
to 1999, they report that in two-thirds of 48 countries banks engage in earnings management toavoid loss and/or decrease in earnings. They find that the strength of investor protection andtransparency of accounting disclosure is significantly negatively associated with the tendency of loss
avoidance, whereas legal enforcement is positively related to avoidance of decrease in earnings.
These results are inconsistent with Leuz et al. (2003), but they do not provide a clear explanation
for the conflict.
Differing from Shen and Chih (2005), Kanagaretnam et al. (2010) study a sample of 6,072
bank-years in 29 countries from 1993 to 2006 in order to compare the relationship between audit
quality and earnings management in an international setting. Firms with high-quality auditing andin countries with strong legal enforcement have a less tendency towards loss and decrease inearnings avoidance. In addition, Fonseca and Gonzalez (2008) and Kanagaretnam et al. (2014) also
have similar results to Kanagaretnam et al. (2010).
3.1.2. Culture
Cultural effects constitute one of the main avenues of earnings quality research in aninternational setting. Most research use the power distance, individualism, masculinity, uncertainty
avoidance, and long-term orientation as cultural factors in Hofstede (1980, 2001).8 Gray (1998)
states that individualism and uncertainty avoidance are more closely related to accounting. Hope(2003) finds that individualism and uncertainty avoidance are associated with the level ofaccounting disclosure.
There are two competing arguments in previous studies on how culture influences earnings
quality at a country level.9 When narrowed down to individualism and uncertainty avoidance as
pointed out by Gray (1998), Hope (2003), Guan et al. (2005), Han et al. (2010), Kanagaretnam etal. (2011), and Pacheco Paredes and Wheatley (2017), there is evidence that greater individualism
and lower uncertainty avoidance lead to a decrease in earnings quality. For example, Han et al.
(2010) argue that countries with greater individualism have more flexible accounting standards
from the viewpoint of self-governance and measurement flexibility. Moreover, the accounting
profession in countries with a higher level of individualism is assumed to report the most optimistic
figures as far as is permitted by the accounting standards. Accounting regulation in countries with
7

They claim that since the earnings management measures in Leuz et al. (2003) are developed to test U.S. firms, themeasures may not be suitable for cross-country research.
8
Several studies examine the relationship between earnings quality and Gray's (1988) accounting values (professionalism,
uniformity, conservatism, and secrecy) based on national cultural dimensions as in Hofstede (1980). For example,
Doupnik (2013) , Salter et al. (2013), and Wijayana and Gray (2019) employ the conservatism dimension.
9
These mixed findings appear to partly reflect the differences in how to aggregate the earning quality data. Guan et al.
(2005), Han et al. (2010), Kanagaretnam et al. (2011), and Pacheco Paredes and Wheatley (2017) calculate earnings
quality measures by firm-year, while Doupnik (2008) and Callen et al. (2011) aggregate them by country. It could bethat the difference in empirical results depends on researcher’s setting.

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higher uncertainty avoidance imposes many rules and its approach ought to be conservative. As
such, Han et al. (2010) state that higher uncertainty avoidance tends to lead to less earnings
management.
Doupnik (2008) and Callen et al. (2011) present opposite results. They presume that the higher
the level of uncertainty avoidance, the more earnings quality deteriorates due to the implementationof earnings management in order to avoid violations of debt covenant and missing the earnings
forecasts of analysts. In contrast, if there is a strong collectivist culture, employees hope that they
will be treated like a member of the family in their organization and that their interests will beprotected. Income smoothing then plays an important role in goal achievement. Doupnik (2008)
finds that countries with weaker individualism (i.e. strong collectivism) tend to smooth income and,
thereby, protect the collective interests.10,11
3.1.3. Financial Development and Others
Accounting information plays an important role in financing from financial institutions andsecurities markets. The financial development of a country has a relationship with accounting
information, including earnings quality. However, there are not enough studies to test therelationship between them. Degeorge et al. (2013) assume that in countries with high financial
development, more accounting information is provided, investors demand more accounting
information, analysts are better qualified, and as firms are followed by more analysts they have the
incentive to be monitored.12 Using the data of 65,799 firm-years from 21 countries between 1994
and 2002, their results show that in countries with high financial development, the higher the
analyst coverage, the lower the level of earnings management and, therefore, the higher the earnings
quality. However, these results are not observed in countries with lower financial development. The
results suggest the complementary effect of analyst coverage on financial development.
Enomoto et al. (2018) examine the relationship between financial development and earnings
management in a sample of 56,830 firm-years from 37 countries from 2009 to 2012. 13 They
document that managers in countries with higher financial development tend to avoid both accrualbased and real earnings management (i.e., earnings quality is high), indicating the possibility that
financial development effectively disciplines managerial discretional behaviors.
In addition to the aforementioned literature, Braam et al. (2015) show the effect of politicalconnection and freedom of the press on earnings quality, using a sample of 5,493 firms in 30
countries. They provide evidence that politically connected firms tend to employ real earnings
management in substitution for accrual-based earnings management more than non-politicallyconnected firms. Yung and Root (2019), based on a sample of 79,230 firm-years from 18 countries
between 2001 and 2014, find that higher policy uncertainty leads to an increase in earnings
management.
10

Ding et al. (2005) find that culture is a more important explanatory factor for the difference between local GAAP andIAS than legal origin. Specifically, when culture is incorporated into the regression of divergence on institutional
factors, they do not find a relationship between divergence and legal origin.
11
In addition to the aforementioned literature, Kanagaretnam et al. (2015) show the effect of religiosity on earnings
quality. Kim et al. (2017) provide evidence that earnings quality is affected by language.
12
For example, financial development is measured by bank credit as the claims of the banking sector on the private sector
divided by GDP and the value of listed shares as a share of GDP (Beck and Levine 2002).
13
They use the average score of seven indices reported in the World Economic Forum (2012) as a measure of financial
development.

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3.1.4. Brief Summary of the Relationship between Institutional Factors and Earnings Quality.
Results of previous literature suggest that earnings quality is influenced not only by accounting
standards, but also by the institutional and cultural factors in a country. Specifically, it is likely thathigher earnings quality is observed in countries that have common-law, stronger outside investor
rights and legal enforcement, and higher financial development.
In cross-country research on earnings quality, there is a limitation in that it does not consider
differences in the accounting standards of each country. Ding et al. (2007) focus on divergence as
the extent to which accounting rules are different from local accounting standards and IAS for thesame accounting issue. They find a negative relationship between earnings quality and divergence.
The results suggest that differences in accounting standards themselves are related to earnings
quality and that controlling the difference is crucial for cross-country study.
Next, most cross-country studies do not identify the mechanism of how institutional factors
at country level influence managerial accounting behavior. Wysocki (2011, 316) pointed out thatthe limitation of the broad “code” vs. “common” law approach is that it is unclear which institutions
from “common law” regimes are the drivers and facilitators of (a) arm’s length contracting and (b)determinants of timely loss recognition (TLR). In addition, the outside investor rights index is
calculated based on whether or not these rights are enacted. It is also unclear whether the rights
actually function as expected, nor whether it is a comprehensive proxy covering the entire scope ofinvestor protection. Obinata (2016) also casts doubt on whether the five law provisions selected in
La Porta et al. (1998) are sufficient as a proxy for the protection of shareholders’ and creditors’ rights,
or whether there are no other mechanisms to protect them even if it is not included in the law.
As with the investor protection measures, the ambiguous relationship between legal
enforcement and earnings quality has been pointed out (e.g. De George et al. 2016). Brown et al.
(2014) mitigate the concerns by developing measures for accounting standard enforcement. Theirmeasures allow us to elaborate the relationship between enforcement and earnings quality.
The effect of cultural factors on accounting information remains dubious. When managerial
behaviors through cultural factors decrease earnings quality, it is not clear why these behaviors occurin spite of the predictable economic consequences of managerial behavior. Moreover, one of theimportant concerns is that the relationship between culture and earnings quality can be interpreted
twofold. As previously described, Doupnik (2008) and Han et al. (2010) present conflicting
prediction and results. Since culture ought to influence the institutional environment at a countrylevel as well as influence managers at a firm level, it would be difficult to specify the relationshipbetween them correctly.14
As accounting systems are mutually dependent on other systems (legal system, corporate
governance mechanism, investor protection, and disclosure, etc.), “chicken and egg” problems need
to be highlighted (Wysocki 2011, 312). To solve the problems requires complicated model
specifications, but may provide the opportunity for interesting future research.

3.2. The Relationship between Earnings Quality and IFRS Adoption
This subsection aims to review empirical studies on how IFRS adoption effects earnings
quality and which institutional factors in the country promote or weaken the effects.

14

Griffin et al. (2017) analyze the direct influence of culture on institutions in a country, using multi-level analysis.

Enomoto: Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities

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The following three key features of IFRS appeared in the literature on earnings quality.
(1) Principle-based standards
IFRS develops basic principles and does not set detailed rules. In the accounting process, it isnecessary to make judgments according to individual circumstances and economic events.
(2) Fair value measurement
IFRS use the asset / liability approach. Therefore, there are many cases where a manager
estimates fair value.
(3) Restriction on accounting choice
IFRS limit the options of accounting choice in order to eliminate earnings management by
discretionary accounting choice as far as possible.
There are conflicting but plausible arguments regarding whether or not the adoption of IFRS
improves earnings quality based on the aforementioned characteristics (Ashbaugh and Pincus 2001;
Barth et al. 2008; Ahmed et al. 2013b). On one hand, the increase in the opportunity for fair value
measurement in order to disclose the present value of assets and liabilities could improve earnings
quality and provide useful information for investor’s decision-making. The reduction of alternative
accounting choices would increase earnings quality through the limitation of managerial
discretionary behaviors.
On the other hand, insufficient implementation guidance due to principle-based accounting
standards may increase managerial behaviors to manage earnings. More opportunities for fair value
measurement may increase managers’ flexibility with regard to calculation of values. The
elimination of alternative accounting choices would prevent the disclosure of the true underlying
economics of a business. These two are often described in cross-country research on IFRS.
3.2.1. Effect of IFRS Adoption on Earnings Quality
Focusing on the effect of voluntary IFRS adoption on earnings quality, Barth et al. (2008)
compare the earnings quality of firms that voluntarily adopted IFRS with that of non-adoption
firms based on a sample of 1,896 firm-years in 21 countries from 1994 through 2003. They findthat voluntary adoption firms show higher earnings quality (less earnings management, incomesmoothing, and loss avoidance) and value-relevance. They conclude that IAS adoption leads to theimprovement of earnings quality.
In contrast to Barth et al. (2008), Ahmed et al. (2013b) investigate the effect of mandatory
IFRS adoption. Using a sample of 16,310 firm-years from 25 countries from 2002 through 2004
(pre-IFRS) and 2002 through 2004 (post-IFRS), they find that mandatory adoption leads togreater income smoothing, larger accounting accruals, and lower timely loss recognition, whichmeans a deterioration in earnings quality. They also find that earnings management to meet or beatearnings benchmarks increase after IFRS adoption. However, based on a sample of 20,278 firmyears from 15 countries from 1994 through 2009, Capkun et al. (2016) find that mandatory
adopters exhibit higher levels of earnings quality after IFRS adoption. Chen et al. (2010) documentthat mandatory adopters reduce earnings management, improve accounting accrual quality, andlower earnings management to meet or beat earnings benchmark following IFRS adoption. Theirfindings were based on a sample of 21,707 firm-years from EU 15 countries from 2000 through10

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2007.15
Using a sample based on 1,574 in European countries between 2001 and 2008, Zeghal et al.
(2012) find that mandatory adopters show less earnings management, higher quality of accounting
accruals, less loss avoidance (the improvement of earnings quality).16 Houqe et al. (2016), using asample of 24,034 firm-years in 16 EU countries, report similar results. However, based on a sample
of 15,206 firm-years from EU 22 countries between 2000 and 2010, Doukakis (2014) finds thatIFRS mandatory adoption does not have a significant effect on real earnings management nor
accrual-based earnings management.
The aforementioned results are mixed as to whether or not mandatory adoption of IFRS
improves earnings quality. In the next section, we will discuss how the institutional factors of eachcountry intervene in the change in earnings quality after IFRS adoption.
3.2.2. Effect of Institutional Factors on the Relationship between Earnings Quality and IFRS
Adoption
This subsection discusses whether the evidence in subsection 3.2.1. is conditional on theinstitutional factor of each country. In subsection 3.1., the evidence that earning quality is
influenced by institutional and cultural factors in the country was reviewed. The effect of IFRS
adoption and earnings quality may depend on institutional factor such as investor protection.
Aussenegg et al. (2008) use the data of 18,896 firm-years from 17 EU countries from 1995 to2005 and consider the legal tradition to test the effects of voluntary IAS adoption. They report thatvoluntary adopters improve earnings quality, but it is conditional on legal origin, in particularGerman and French legal origin.17 Countries with legal systems of English or Scandinavian origin
do not significantly benefit from IAS adoption. Zehal et al. (2012) divide their sample based on
the difference between local GAAP and IAS, the adopters in countries where standards are mostdifferent from IFRS improve earnings quality. Using a sample of 128,292 firm-years from 31
countries from 2000 through 2009, Cai et al. (2014) observe that firms adopting IFRS experience
less earnings management after adoption. However, their results only hold for firms in countries
with a high quality of legal enforcement and a relatively small difference between local GAAP and
IFRS. From the sample data of 53,861 firm-years from 14 countries between 1997 and 2015, Oz
and Yelkenci (2018) focus on Morgan Stanley Capital International (MSCI) firms in IFRS
countries. They show that IFRS constrains accrual earnings management in code law origin
countries, but does not under common law. Further, they report the negative joint effect of IFRS
and legal enforcement on real earnings management in common law countries.18
Houqe et al. (2012) focus on the effect of investor protection on the improvement of earnings
quality after IFRS adoption.19 They report that positive effects on earnings quality are confined tofirms in countries with stronger investor protection. Houqe et al. (2016) find that the improvementof earnings quality of mandatory adopters is more pronounced in countries with a stronger culture

15

However, they show stronger income smoothing and less timely recognition of economic losses.
Timeliness, conservatism, and value relevance are not improved.
17
Ding et al. (2007) report that the accounting standards in the countries with the German and French law families arelarge deviations from IAS and that the improvement of earnings quality is observed in those countries, consistent with
Zeghal et al (2012) and Cai et al. (2014).
18
They show that IFRS itself does not reduce real earnings management.
19
The enforcement of the accounting standard in Houqe et al. (2012) is provided by the World Economic Forum (2008).
16

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11of secrecy.
André et al. (2015) and Bonetti et al. (2016) use the enforcement measures of accounting
standards in the country, which are developed in Brown et al. (2014). André et al. (2015) find thatfirms delay timely loss recognition after IFRS adoption. Based on a sample of 13,711 firm-years
from EU 16 countries from 2000 through 2010, André et al. (2015) illustrate an inadequate
impairment testing as one of the plausible explanations, which means that managers delay therecognition of bad economic news and thereby decrease conditional conservatism. Meanwhile, thedecrease is mitigated by strong accounting standards enforcement. They interpret the findings thatIFRS cannot improve earnings quality without appropriate enforcement because it increases theflexibility of accounting standards. Bonetti et al. (2016) explain the difference in the improvementof earnings quality after IFRS adoption as due to the enforceability of accounting standards. Theyfind that improvement of earnings quality after IFRS adoption is promoted in strong legal systems
and accounting standards, using data of 28,824 firm-years from 14 EU countries between 2002 and2008. They also find that strong corporate governance increases earnings quality, even if the country
has a relatively weak institutional environment.
In contrast, Ahmed et al. (2013b) show that the decline in earnings quality is driven bycountries with strong legal enforcement. Doukakis (2014) reports that the mandatory applicationof IFRS has an insignificant impact on both accrual-based and real earnings management eventhough the legal enforcement is controlled. Using a sample of 53,853 firm-years from 37 countries
between 2000 and 2008, Ipino and Parbonetti (2017) assert that the substitution between accrualbased and real earnings management is strengthened when local accounting standards diverge fromIFRS and financial statements are audited by Big-N audit firms.
3.2.3. Brief Summery
The firms in countries that have adopted IFRS prepare their financial statements in line with
common accounting standards. This mitigates the underlying problem in cross-country studies,
which is the difference in earnings quality caused by divergence between accounting standards.
Earnings quality tends to be improved after voluntary adoption of IFRS, whereas it isinconclusive after mandatory adoption. As Capkun et al. (2016) point out, this result is consistentin that voluntary adopters change to IFRS with incentives to improve earnings quality. Based on asample of German firms, Christensen et al. (2015) document a significant improvement of earnings
quality for voluntary adopters, but not for mandatory adopters. Their findings are consistent withthose of Barth et al. (2008) and Ahmed et al. (2013b).
Several studies have found that earnings quality after IFRS adoption is conditional on strong
investor protection and/or large differences between IFRS and local GAAP. In other words,
earnings quality does not necessarily improve even when adopted accounting standards are
generally viewed as high quality. The improvement of earnings quality depends on the institutional
factors in each country. The difference in improvement of earnings quality also means that the
response of managers to IFRS varies according to differing institutional factors in each country. In
addition, one possible explanation for mixed results is the difference in research design such as thetime-periods and countries used for a sample, earnings management measures, and so forth. Thismay be an empirical issue.
In an analysis of the transition from local GAAP to IFRS, it is necessary to control change ininstitutional factors as well as accounting standards. Although legal enforcement is recognized as a
crucial factor in the improvement of earnings quality and its changes differ across countries, it is

12

The Japanese Accounting Review, 10 (2020), 1-26

not controlled in most studies (Christensen et al. 2013). For example, Ishidro et al. (2020) focus on
the change in country attributes under the relationship between earnings quality and mandatory
IFRS adoption. They find that the effect of IFRS adoption on earnings quality disappears whencontrolling for change.
Ahmed et al. (2013a) conduct a meta-analysis of 57 IFRS adoption studies to investigate
whether adoption has an effect on earnings transparency, which is measured by discretionary
accruals and capital market effects. Their findings show that neither voluntary nor mandatory
adoption of IFRS reduces discretionary accruals.

4. Summery and Future Research
4.1. Interaction within an Individual and Cross-Country Setting
The research overviewed in section 3.1 reports that the following country level factors affectearnings quality, legal origin, investor protection (outsider investor right and legal enforcement),
tax system, regulations, political system, culture, language, religiosity, the development of the
security market and banking system (financial development), and accounting standards
enforcement.
Numerous studies in an individual country setting have also examined the various factors that
influence earnings quality. We can explain the discussion in section 3.1 from the viewpoint of anindividual country setting. It can be said that cross-country research investigate whether theevidence provided by an individual country sample is universal or varies according to the level of
institutional and cultural factors. For example, the U.S., which is frequently used as a sample insingle-country studies, is generally viewed as a country with enhanced investor protection andstrong corporate governance. Nevertheless, it still leaves many unanswered questions about whether
the evidence from the U.S. is true in the case of other countries with the different institutional andcultural environments. Moreover, institutional and cultural factors at the country level may be a
substitute for the factors affecting the earnings quality at an individual firm level (see Bonetti et al.
2016 described later).
For example, given that previous research finds better earnings quality in firms with Big-N
auditors (e.g. Becker et al. 1998 and Francis et al. 1999). Francis and Wang (2008) extend theirstudies to cross-country research and report that the evidence in the U.S. tends to be true only incountries with higher investor protection. This means that the effect of audits conducted by Big-N
auditors on earnings quality weakens in countries with lower investor protection. Gopalan andJayaraman (2012) provide the evidence for income smoothing in firms controlled by insiders onlyin countries with weak investor protection. Degoerge et al. (2013) find that analyst coverage
improves earnings quality, but it is limited to countries with a high level of financial development.
Haw et al. (2015) show the positive relationship between industrial competitiveness andconservatism exists only in countries with high-quality legal systems. Bonetti et al. (2016) findearnings management after IFRS adoption is less noticeable in countries with strong accounting
enforcement. Moreover, for firms with a higher corporate governance score, IFRS adoption
decreases earnings management regardless of the strength of accounting standards enforcement,suggesting that better firm-level corporate governance systems could be a substitute for
institutional factors at the country-level.
As described in Section 2, many attributes of earnings quality are utilized in the previous
literature. For example, discretionary accruals, accounting quality of the model used by Dechow andEnomoto: Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities

13

Dichev (2002), income smoothing, timely loss recognition, and benchmark-beating. Since eachmeasure of earnings quality has its own attribute, it is possible to select quality measures that fit the
research question.
The influence of investor attributes (foreigners, institutions, etc.) on earnings quality has been
examined by studies that extend an individual country setting to an international one. It is
recognized from conflicting results in previous studies at an individual country level that foreign
institutional investors lessen earnings quality by inducing myopic management behavior or improveearnings quality by monitoring managers.
Foreign investors can be investigated from multiple viewpoints at an international level.
Aggarwal et al. (2005) show the relationship between investment from institutional investors in the
U.S. and country- and firm-level quality of accounting. The redesign of their investigation from theviewpoints of cross-country study could provide interesting outcomes. For example, theinstitutional environment in foreign investors’ home and investee’s countries, the geographical,
cultural, and legal distance between the investor and investee, and institutional or individual
investors can be examined simultaneously. Kim et al. (2016), Beuselinck et al. (2017), Lel (2018),
and Tsang et al. (2019) shed the light on these aspects in an international setting. Dou et al. (2016)
examine the effects of individual investors on earnings quality instead of total foreign investor
ownership.20 An extension of Dou et al. (2016), Kim et al. (2016), and Beuselinck et al. (2017), Lel(2018), and Tsang et al. (2019) may be an interesting avenue for future research. The detailed firmlevel corporate governance data allows us to carry out this potential research. It is no exaggeration
to say that the future of cross-country research depends on an availability of firm-level data, suchas corporate governance, shareholders, and board members. (See subsection 4.4.).

4.2. Earnings Quality and its Effect on Accounting Functions
Brüggemann et al. (2013) summarize the economic consequences of IFRS adoption in the EU.
They divide the consequences into three parts: financial reporting, capital market, and macroeconomic. They conclude that IFRS objectives result in favorable capital market andmacroeconomic effects.
As a capital market effect, Daske et al. (2008, 2013) find that IAS/IFRS adoption increases
stock liquidity and lowers the cost of capital. Yip and Young (2012) report an increase incomparability after IFRS adoption. Li (2010) reports a decrease in the cost of capital in countries
with strong legal enforcement.
Gordon et al. (2012) provide the macroeconomic evidence to suggest that direct investment
increases for developing countries adopting IFRS. Chen et al. (2011) also report similar results inOECD countries, especially in countries with greater divergence between IFRS and local GAAP
before the adoption of IFRS.
The effects of IFRS on financial reporting, however, are mixed (e.g. Barth et al. 2008, Ahmed
et al. 2013b, and Doukakis 2014). Moreover, institutional factors such as investor protection andaccounting standards enforcement influence the change in earnings quality after IFRS adoption,
but these results are also mixed. Two plausible explanations for these inconclusive results describedin Brüggemann et al. (2013, 2, 19) are that previous literature applies aggregate measures that
capture only a subset of potential changes in financial reporting and that the financial statement

20

Dou et al. (2016) employ an individual country setting (U.S.), not cross-country.

14

The Japanese Accounting Review, 10 (2020), 1-26

users are also interested in information beyond such aggregate numbers.
The primary area of economic consequences regarding IFRS adoption is research on thechange in the contracting role of accounting such as accounting based debt covenants. Several
studies have addressed the issue of the contracting role of IFRS on the type of debt financing(public versus private), credit relevance, cost of debt, and so forth. However, in previous literature,
the effect of IFRS adoption on debt contracting is conflicting. For example, Kim et al. (2011) reporta decrease in the cost of capital for voluntary adopters, whereas Chen et al. (2015) show in increase
in it for mandatory adopters. Although some studies assume the improvement of financial reporting
quality after IFRS adoption and the mitigation of information asymmetry, it does not seem thatthe improvement always occurs in the countries mentioned in the sample data.
As in the case of debt contracts, there is scant evidence for the economic consequences of IFRS
adoption on compensation contracts. Ozkan et al. (2012) report a significant increase in accounting
based pay-performance sensitivity and relative performance evaluation.21 The latter results only
hold in countries with a large difference between IFRS and local GAAP, suggesting that IFRS
increases the comparability of accounting numbers after IFRS adoption.
Given that the improvement in earnings quality after IFRS adoption is subject to institutional
factors at the country-level, the change in a contracting role due to IFRS adoption could be
influenced by institutional factors. Future research should attempt to explore the mechanism of
how institutional factors affect the contracting role through the change in earnings quality.
In previous literature, the economic consequences of IFRS adoption are unclear. This isbecause the adoption of IFRS adoption may promote the timely recognition of economic losses
through the expanding measurement of fair value and would also make accounting figuresinformative. However, adoption may increase managerial discretional behaviors and decrease theverifiability of accounting information through widely used fair value measurement. Moreover,managers may engage in earnings management in order to communicate private information,
whereby an increase in earnings management could have a positive effect on earnings quality. Suchfeatures of earnings management could make the economic consequence of IFRS adoption
complicated. However, I believe that future research will shed more light on whether financial
reporting after IFRS adoption improves usefulness in contracts at an international level. It is ofinterest for researchers to incorporate the communication with stakeholders through private
information, including earnings management into research design.

4.3. Cross-Country Research on Non-Listed Firms
This paper has discussed earnings quality at an international level, focusing on listed firms.
However, non-listed firms account for the majority of firms. Hope and Vyas (2017, 506) state that
whereas there are numerous studies on publicly listed companies, the empirical evidence on private
firms is rather limited. Burgstahler et al. (2006) is a novel study reporting the difference in earnings
quality between listed and non-listed firms in an international setting. They find better earnings
quality for listed firms than for non-listed firms, which is caused by institutional factors such as

21

In addition to Ozkan et al. (2012), Voulgaris et al. (2014) investigate the relationship between IFRS adoption andcompensation contracts based on U.K firms. Chen and Tang (2017) examine Hong Kong firms.

Enomoto: Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities

15

book-tax alignment, outside investor protection, and capital market structure.22
Non-listed firms are not necessarily small in size. For example, some non-listed firms like
Bosch and IKEA are well-known as large scale firms and play an important role in the economy.
Japan has relatively higher percentages of large firms that are listed compared to other countries.
Miyajima (2017) reports that the percentage of listed companies in the top 1,000 sales companies
was 54.2% in 2013 while Franks et al. (2012) document that, in 1996 the percentage of those in
the U.K. was 27.4%, Germany 14.5%, France 13.6%, and Italy 8.4%. It is worthwhile considering
non-listed firms for an empirical study on earnings quality from the viewpoint of economic
importance. Hope et al. (2013) use sample firms with total assets of more than one million U.S.
dollars, but exclude observations with negative sales.
In order to discuss cross-country non-listed firm research, the availability of non-listed firm
data at an international level is presented. Table 1 summarizes the available number of listed andnon-listed firms in the 51 countries around the world in 2015. Panel A in Table 1 shows the resultsof 49 countries included in La Porta et al. (1997) and Panel B adds China and Russia. Firm data
is derived from Orbis (Bureau van Dijk) under the condition that in 2015 total assets and sales areequal and more than 100,000 U.S. dollars.23 The second, third, and fourth columns from the left
in Table 1 display the available number of firms. In the fifth to eighth columns in Table 1, theavailable number of return on assets (ROA) and Accruals that are frequently used in earnings quality
studies are presented. ROA is calculated as net income divided by average total assets. Accruals is
calculated in the following way and divided by total assets at the previous fiscal year end.
Accruals = Δ(Current assets - Cash - Short-term investment) - Δ(Current liability- Short-term debt) -Depreciation(1)

Accruals is calculated when both current assets and liabilities have no-zero value. Next, earnings
quality measure used in Hope et al. (2013) is calculated, which compares the earnings quality oflisted firms with that of non-listed firms in the U.S. The measure (Earnings Quality) take thenatural logarithm of the absolute value of accruals divided by CFO and multiple negative one sothat higher values indicate higher earnings quality ( = ln (abs[Accruals / CFO])×(-1)). The firstcolumn from the right shows the percentage of listed-firms among the top 100 sales firms in eachcountry. The number of listed firms whose financial statements are prepared under IFRS is alsopresented.
Panel A of Table 1 shows that 2,651,763 firms are available in 2015 in 49 countries. Even
with calculable of Accruals, available data is 1,660,266 firms. This is a sufficient sample size for
empirical analysis on earnings quality. However, the data availability of non-listed firms is centeredon European countries. This result depends on the economic scale and filing regulations in eachcountry. Gassen’s (2017, 549) Table 5 shows the availability of financial statements of non-listed
firms in 24 countries. He reports that the financial statements of non-listed firms are available

22

Bonacchi et al. (2019) also find that public firms have better earnings quality than private firms. However, when
dividing the private firms into standalone (single entity) and business groups and comparing public firms with thebusiness groups, they find conflicting results.
23
For example, Gassen and Fulbier (2015), who focus on the non-listed firm at an international level, collect theirsample firms with total assets over 100,000 U.S. dollars. Hope et al. (2017) gather the U.S. firms with total assets over
1,000,000 U.S. dollars and non-negative sales as their sample.

Listed

88
1,231
66
139
345
974
185
69
143
37
206
136
739
610
196
230
3,389
506
72
390
295
3,595
171
54
880
129
147
136
118
179

Country

Argentina
Australia
Austria
BelgiumBrazilCanadaChile
Colombia
Denmark
Ecuador
Egypt
FinlandFranceGermany
GreeceHong Kong
India
Indonesia
IrelandIsraelItaly
Japan
Jordan
Kenya
Malaysia
MexicoNetherlands
New ZealandNigeria
Norway

79
1165
56
108
310
921
174
59
121
36
4
115
492
421
193
213
1
0
49
281
274
60
161
50
868
100
115
130
111
143

Listed (IFRS)
329
11,806
27,67225,067
8,072
413
287
72,74911,333252
34
68,197418,783
115,871
14,264
1,619
5,877
169
10,596200
504,962
155,740
6
59
31,8501,916
10,827909
16117,980

Non-listed

ROA calculable
ListedNon-listed
85
322
1,195
10,94666
6,881
135
23,948
324
7,611
948
399
181
208
57
64,708142
10,669
33
233
204
26
133
63,270670
368,302592
13,325
196
13,893
229
1,497
3,343
5,732
484
93
69
8,670
388
192
274
480,337
3,392
133,803
168
6
53
59
870
24,142
123
1,302
140
9,454
133
875
118
15
179
112,816

Panel A. The Data Availability in 49 Countries in La Porta et al. (1997)
Accruals calculable
ListedNon-listed
66
56
1,019
98
60
5,834
108
21,004
233
1,414
696
63
105
78
36
14
105
11
3
36
188
4
126
50,680589
331,825548
12,091
187
7,837
207
1,447
3,164
5,384
433
6
59
5,484
314
34
240
454,402
3,187
3,570
142
2
36
0
832
126
82
12
113
755
117
696
90
2
148
87,679Earnings Quality(N≧50) # Listed firms in
ListedNon-listed Top 100 sales
0.346
0.236
40
0.677***
0.244
44
0.343
0.231
16
0.449***
0.139
22
**
0.182
0.283
53
0.374
0.093
72
0.298
0.379
63
33
24
13
78
0.539**
0.335
36
0.544***
0.260
51
0.393***
0.272
43
0.032
0.087
40
0.462***
0.252
29
0.151***
0.093
68
93
0.853***
0.254
28
73
0.252***
0.043
28
0.521***
0.188
77
96
49
0.298
0.262
76
56
0.528
0.350
24
0.658***
0.345
29
85
0.369
0.314
21

TABLE 1. DATA AVAILABILITY FOR LISTED AND NON-LISTED FIRMS IN 2015 (ORBIS, BUREAU VAN DIJK)16The Japanese Accounting Review, 10 (2020), 1-26

393
175
212
55
632
260
2,011
199
244
560
197
1,767
693
337
1,471
4,146
6
22
49
28,884

6,452
332

Listed167
59

Listed (IFRS)

357
143
197
51
612
252
57
182
0
344
108
1719
648
299
1272
5
6
19
47
13,128150,774
447,092

Non-listed

43
55
9,542
121,4291,553
193
170,176
373,04628
64,703654
850
136,403
11,066
129,548
14,52450
26
192,651,763

38
54
8,924
116,015
1,336
58
157,204
363,857
28
62,633627
797
129,628
9,172
113,994
13,9594925
192,342,151

ROA calculable
ListedNon-listed
6,432
122,159332
405,169

388
162
212
55
623
253
1,948
180
244
536
196
1,723
686
328
1,426
4,012
6
21
48
27,9719
16
6,892
104,7541,047
16
116,455
296,91115
49,900
501
256
8,620
4
83,694518
91
41,660,266

Accruals calculable
ListedNon-listed
6,120
29
57
5

343
104
190
51
574
222
1,849
160
208
497
165
1,655
595
286
1,090
3,099
5
10
41
24,377
0.170
0.105
0.411
0.138
0.309
0.440
0.362
0.351

0.280***
0.380***
0.715***
0.716***
0.432
0.432***
0.600***
0.554***

94
78
81
20
16
82
65
32
88
38
56
74
42
41
47
54

Earnings Quality(N≧50) # Listed firms in
ListedNon-listed Top 100 sales
52
14

0.127
0.099
0.266

0.412***
0.329
0.365

Notes: “Listed” (“non-listed”) means listed firms and non-listed firms. “Listed (IFRS)” is listed firms adopting IFRS. The second toseventh columns on this table show the number of available observations of listed and non-listed firms in each country. Observations arelimited to those with both assets and sales over 100,000 U.S. dollars. ROA = Net income / Average total assets, Accruals = Δ(Current
assets - Cash - Short-term investment) - Δ(Current liability - Short-term debt) - Depreciation. Accruals is calculated when both current
assets and liabilities have no-zero value. Earnings Quality = ln[abs(Accruals / CFO)]×(-1). CFO is net income minus Accruals. Median ofearnings quality is calculated by each country only when the number of observations is equal or more than 50. *** (**) indicates that themedian of earnings quality of listed firm is significantly different from that of non-listed firms at the 1% (5%) level (Wilcoxson rank sumtest).

China
RussiaCountry

Panel B. China and Russia

Pakistan
Peru
Philippines
Portugal
Singapore
South Africa
South Korea
Spain
Sri Lanka
SwedenSwitzerland
TaiwanThailandTurkeyU.K.
U.S.
Uruguay
Venezuela
Zimbabwe
Total

Enomoto: Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities
17

18

The Japanese Accounting Review, 10 (2020), 1-26

online in Sweden, whereas they are not available in the U.S. His table presents the greater
availability in European countries compared to in the U.S., Canada, and Japan and this is consistent
with Table 1 in this study.24
It is probable that the earnings quality of non-listed firms inherently differs from that of listed
firms since non-listed firms are not subject to stock market regulations and external audits.
Burgstahler et al. (2006) and Hope et al. (2013) present evidence that listed firms have better
earnings quality than non-listed firms. The second and third columns of Table 1 show that listed
firms’ earnings quality is higher than that of non-listed firms, consistent with their research.
Van Tendeloo and Vanstraelen (2008) present evidence that in Europe, non-listed firms under
Big-N audit have better earnings quality than under non-Big-N audits. However, the results arelimited to countries with higher tax-book conformity. This is because tax authorities instead of
security analysts, regulation authorities, and audit firms carry out high-quality scrutiny of financial
statements in order to protect their reputation.
Previous research on non-listed firms often focuses on the lack of access to the public capital
market unless the firms are scheduled to list. Financing of non-listed firms is not as diversified aslisted firms, but firms still have various methods of financing such as borrowing (banking, leasing,government guarantee), stocks (family members, government, private equity), trade credit, andcrowdfunding (Hope and Vyas 2017). As the type of accounting information of interest would varywith stakeholder, earnings quality may be affected by capital structure. For listed companies,
financial statements are monitored by financial intermediaries such as investors and securities
analysts whereas for non-listed firms the monitoring may be biased as it is only from debt holder
and tax authorities.
It is likely that the relationship between the non-listed firm and fund provider depends on theinstitutional environment in the country. Peek et al. (2010, 55) state that for debt contracting andtimely recognition of economic losses to be an effective solution to creditor–shareholder agency
problems, contracts must be enforceable in court and creditors must have sufficient bargaining
power in bankruptcy procedures. Gassen and Fulbier (2015) find that earnings smoothing isdecreasing in countries with enhanced debt-contracting infrastructure such as the overall
accessibility of credit financing, overall enforceability of contracts, and the effectiveness of
mechanisms to resolve insolvency. I believe that the difference in this relationship in aninternational setting is an interesting question for future research.25

4.4. Data Availability of International Database
García Lara et al. (2006) state that data availability is one of the traditional obstacles in crosscountry research. They document that the difference in firm coverage among the databases leads
to different results in empirical research. In addition to firm coverage, the following problems
24

In Europe, the filing of financial statements with the relevant regulator is independent of the listing status, whereas in
the U.S., for instance, private firms do not have to file with any easily available public registry (Hope and Vyas 2017,507). As shown in Table 1, European countries, especially France, Italy, and Spain, tend to have relatively larger sample
size than other countries.
25
As non-listed firms are characterized by ownership concentration and small size, the personality of its owner-manager
could affect all aspects of management in the firm more than in listed firms. If so, earnings quality might be explainedby cultural factors rather institutional factors relative to listed firms. Thus, I believe that the culture and earnings
quality of non-listed firm is an interesting field for future research given the differential weight of cultural andinstitutional factors on earnings quality between listed and non-listed firms.

Enomoto: Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities

19

TABLE 2. AVAILABILITY OF FINANCIAL STATEMENT ITEMS IN THE DATABASE

Orbis, Global Format(listed and non-listed firms)
Orbis, Detailed Format(listed firms)
Worldscope(listed firms)
Nikkei NEEDS FinancialQUEST(firms filing annuai report to Cabinet
Office)Balance
Sheet

IncomeStatement

Cash-flow
statement

22

16

1

89

29

28

83

33

38

241

90

102

Notes: The number of footnote items is not included in this table. Nikkei NEEDS
FinancialQUEST counts the items for firms adopting Japanese accounting standards.
regarding databases are highlighted: the aggregation of financial statement items, and the lack ofdata other than financial statement items.
(1) Firm coverage
As shown in Table 1, not a few observations were omitted because of their size (e.g. assets
below $100,000) and some observations did not contain important data such as assets and/or sales.
Similary, the requirement for the calculation of Accruals reduces the sample size by around 15% forlisted firms and 40% for non-listed firms. In addition, the availability of non-listed firm data has atendency to slant in countries mandatory filing of financial statements (as described in Section 4.3.).
The mitigation of such a coverage problem would offer research opportunities.
(2) Aggregation of financial statement items
Databases for cross-country research usually aggregate financial statement items in order to
use the common formats of the financial statement of firms around the world. Table 2 compares
the available number of financial statement items in the database among three types of international
database and one Japanese financial database. Orbis (Global format) is a common format for listed
and non-listed firms, and Orbis (Detailed format) and Worldscope are for listed firms. Nikkei
NEEDS FinancialQUEST (Nikkei Media Marketing) mainly consists of Japanese domestic firmsthat file a Yukashoken-Houkokusho (annual report) to Cabinet Office.26
In Table 2, we can observe that there is a difference in the available items for each database(not all the items contain non-missing data).27 The availability of the balance sheet and income
statement items for the non-listed firm (Orbis, Global format) is only about 25% to 50% comparedto the number of items for the listed firms (Orbis, Detailed format and Worldscope). The number ofbalance sheet items in the Nikkei NEEDS FinancialQUEST is 2.7 (3.0) times as many items as in
26

All of the listed firms in Japan are required to file Yukashoken-Houkokusho to the Cabinet Office within three months
after the fiscal year end. Nikkei NEEDS FinancialQUEST also includes foreign firms listed in Japan.
27
I have accessed the three databases in Table 2 in September 2020 and counted the available items.

20

The Japanese Accounting Review, 10 (2020), 1-26

Orbis detailed format (Worldscope). The number of income statement items in the Nikkei NEEDS
FinancialQUEST is 3.1 (2.7) times as many items as in Orbis detailed format (Worldscope). Moreover,there are significantly more footnote items available in Nikkei NEEDS FinancialQUEST. The
availability of detailed items allows researchers to conduct more detailed analysis.
(3) Data limitation of non-financial statement items
Even though the availability of financial statement data is expanding, there is still a limitationof data other than financial statement items (e.g. corporate governance, ownership, and board
members) and contractual data (e.g. debt contract, and manager’s compensation structure). It isdifficult to obtain the sufficient types of data from the international database compared with the
databases for individual country settings. The increase of data availability will lead to an extensionof the analysis.
The future research described in 4.1 to 4.3 is closely related to the availability of data that
researchers require. It cannot be stressed enough that the development of cross-country researchdepends on the extension of data availability.

5. Conclusion
The development of cross-country studies has provided evidence of what institutional factors
affect earnings quality. This study reviewed the evidence and discusses future research.
Previous research illustrates country-level factors affecting earnings quality; the legal systemsuch as investor protection, tax system, regulation, legal enforcement, political system, culture,religiosity, language, development of the securities market and financial institutions (financial
development), industrial competitiveness, and accounting standards (distance from IAS or IFRS,IFRS adoption), and accounting standards enforcement. For future research, we can extend theindividual country setting to a cross-country setting and investigate whether the evidence presented
in the individual country setting is universal or whether it depends on the institutional and cultural
factors at the country level.
IFRS has been adopted to enhance comparability through a single set of high-quality global
accounting standards. Nevertheless, there is no unanimous evidence for the improvement of
earnings quality after IFRS adoption. In particular, the results of mandatory IFRS adoption havebeen inconclusive. Furthermore, previous studies have revealed that institutional factors at thecountry-level (e.g. investor’s protection and the enforcement of accounting standards) influence theimprovement of earnings quality. The results suggest that the adoption of high-quality accounting
standards alone is insufficient for improving earnings quality. It appears that institutional support
is required to encourage managers to improve quality and the mechanism for controlling manager’s
incentive for earnings management.
In previous research, IFRS adoption has been shown to have positive effects on the capital
market (Brüggemann et al. 2013). It can be interpreted that IFRS promote the decision-supportrole of accounting. However, with respect to the results on the effect on contracting roles, such as
debt contracts, on accounting, the results are not unanimous. I believe that future research will
explore the relationships between the change in earnings quality caused by IFRS adoption and thechange in efficiency of various contracts in an international setting. In addition, this paper also
provided the prospect for cross-country research on non-listed firms. Compared with research on
listed firms, cross-country studies of non-listed firms are scarce. If the limitations of data permit it,Enomoto: Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities

21

a broader research area could be extended from the viewpoint of comparison between listed firms
and non-listed firms.
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