The Joint Effect of Audit Quality and Legal Regimes on the Use of Real Earnings Management: International Evidence

Ahrum CHOI, Jong Hag Choi*, Byungcherl Charlie Sohn

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    30 Citations (Scopus)

    Abstract

    This study investigates whether and how a firm's real earnings management (REM) is influenced by the strength of a country's legal regime and the presence of a Big 4 auditor. In a cross-country examination using data from 22 countries, we find that REM increases in countries with stronger legal regimes as firms switch from accrual-based earnings management (AEM) to REM. The presence of a Big 4 auditor reduces REM (as well as AEM) and attenuates the positive relation between legal regime strength and REM. Our results suggest that higher-quality auditors limit client firms’ use of REM, especially in countries with a strong legal regime.

    Original languageEnglish
    Pages (from-to)2225-2257
    Number of pages33
    JournalContemporary Accounting Research
    Volume35
    Issue number4
    DOIs
    Publication statusPublished - 1 Dec 2018

    Scopus Subject Areas

    • Accounting
    • Finance
    • Economics and Econometrics

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