Tratamiento de la Información.

Jaggi and Low (2000) and Beck et al. (2003) argue that different legal systems have different types of impact on the formulation of accounting rules and corporate governance systems.

A country’s legal/judicial regime can influence earnings quality. La Porta, et al. (1998 and 2000) suggest that legal protection of outside investors’ rights is the most notable feature of corporate governance and it varies around the world. In effect, legal rules protecting investors and the quality of their enforcement differ greatly and systematically across countries. These rules vary systematically with legal origin, which is common-law or code-law. Their results provide evidence that common law countries have stronger outside investor legal protection than that of code-law countries. Supporting La Porta et al. (1998)’s research, Beck et al. (2003) empirically assess the influence of legal origin on financial development. They come up with two reasons why common-law countries have stronger protection of outside investors’ rights than code-law countries. First, the legal tradition of common-law regimes which emphasize the decentralized nature of state power has evolved to protect property rights of individuals. Second, code-law regimes are inflexible and inefficiently rigid relative to common-law regime, and thus provide significant gaps between legal capability and commercial needs. La Porta et al. (2006) examine the

effect of securities law on stock market development. They suggest that securities laws of common-law countries emphasize market discipline, private litigation, and standardized disclosures, which benefit the stock market. Consequently, common-law regimes afford stronger legal protection for investors and are more market-oriented than those of code-law regimes.

Ball (2001) argues that these differences between common-law and code-law regimes affect the quality of financial reporting. In common-law regimes, information asymmetry between management and contracting parties of firms is resolved by public financial reporting and disclosure, whereas in code-law regimes, information asymmetry is resolved by private communication such as insider access between managers and stakeholders. Therefore, common-law regimes have evolved well-developed and reliable public financial reporting and disclosure infrastructure. This includes: (1) auditor independence from management, since independence from management can objectively monitor and observe management without any constraint. Accordingly, auditor independence increases quality of financial reporting; (2) efficient corporate governance systems to produce reliable public information, since provision of fair and faithful financial statements is the primary responsibility of the top management. The board of directors and audit committee have the responsibility to monitor the financial reporting process and attest to the accuracy of financial reporting. Thus, efficient corporate governance can achieve a higher quality of financial reporting; (3) a system for setting and maintaining high quality and independent financial accounting standards because governments in code-law countries establish and enforce accounting standards that are representative

of interests of various political groups such as financial institutions, unions, and governments. Hence, political influence impairs the quality of financial reporting; (4) independent legal systems for protecting and punishing fraud, manipulation and failure to comply with accounting standards and disclosure. For example strong investor protection and legal punishment such as the Sarbanes-Oxley Act 2002 can be expected to reduce accounting frauds and to impose management’s accountability for providing higher-quality financial reporting. Based on well-developed infrastructure, common-law financial accounting standards place more emphasis on credibility and accountability, compared with code-law accounting standards. Hence, earnings quality in common-law countries is generally higher than in code-law countries.

Ball et al. (2000) classify countries into common-law (shareholder governance model) and code-law (stakeholder governance model) regimes respectively, and examine properties of accounting information, defined as conservatism21_{, in different legal regimes. Common-law regimes focus on} shareholder rights, and thereby financial accounting practices in common-law countries are market-oriented and have evolved into a non-legalistic approach such as accounting custom. A purpose of the accounting system in common-law countries is to fulfill the decision-making needs of investors and creditors. In contrast, code-law regimes are legalistically oriented and tend to protect stakeholders. Governments in code-law countries establish and enforce accounting standards that are representative of the interests of various political groups such as financial institutions, unions, and

21 _{Ball et al. (2000) interpret that conservatism captures the concept of financial statement}

governments. Thus, the demand for accounting information is strongly influenced by other stakeholders, rather than by stockholders. Empirical results suggest that accounting income in common-law countries is significantly timelier than in code- law countries, due to quicker recognition of economic losses. Hung (2001) investigates value-relevance of financial statements across countries with different legal regimes. Consistent with Ball et al. (2000), the use of accrual accounting increases the value-relevance of financial statements in common-law countries, whereas in code-law countries it does not increase the value-relevance of financial statements. Haw, Hu, Hwang, and Wu (2004) examine the role of legal institutions and earnings management induced by control-ownership disparity of controlling shareholders between common-law and code-law countries. They document that earnings management induced by the control-ownership disparity is significantly limited in common-law countries where there is stronger outside investor protection, higher disclosure and accounting quality, compared with code-law countries. Bushman, Piotroski, and Smith (2004) analyze corporate transparency determinants, interpreted as financial transparency22 and governance transparency23, across countries. They find that governance transparency is primarily related to the legal/judicial regime and is higher in common-law countries than in code-law countries, while financial transparency is significantly related to political regime and is higher in countries having lower state ownership of firms and banks. With respect to countries’ legal/judicial systems, Bushman and Poitroski (2006) find that earnings of firms in countries with strong investor protection and high quality judicial systems

22 _{The intensity and timeliness of financial disclosure, interpreted and distributed by analyst and the}

media.

23 _{The intensity of governance disclosure and the intensity and timeliness of financial disclosure used}

report in a more timely fashion than firms in countries with weak investor protections and low quality judicial systems. Further, they find that earnings of firms in countries with strong public enforcement are characterized by an independent, powerful public enforcer are more conservative than firms in countries with weak public enforcement. DeFond, Hung, and Trezevant (2007) explore the association between the financial reporting environment and the information content of annual earnings announcements across 26 countries. They find that annual earnings announcements are more informative in countries with higher quality earnings (less earnings management), better enforced insider trading laws, and stronger investor protection institutions.