RMI Working Paper No. 12/07
Submitted: September, 2012
Abstract
This study analyzes the impacts of the firm-level corporate governance and country-level corporate governance on the information content of earnings announcements using data from 23 developed markets. Our evidence supports the monitoring hypothesis which predicts a positive relationship between the firm-level corporate governance and information content of earnings announcements.
Furthermore, the positive impact of firm-level corporate governance is not subsumed by the presence of country-level corporate governance variables. Finally, the analysis of interaction effect indicates that the firm-level corporate governance have positive impact on the information content of earnings announcements only for firms from countries with high level of country-level corporate governance indicating a complementary relationship between the firm-level corporate governance and countrylevel corporate governance.
JEL Classification Number: G10, G14, G15
Keywords: Earnings Announcements, Information Content, Corporate Governance and Investor
Protection
Sie Ting Lau
Nanyang Technological University, Singapore
E-mail: astlau@ntu.edu.sg
Keshab Shrestha
National University of Singapore
Risk Management Institute
E-mail: rmikms@nus.edu.sg
Jing Yu
University of Western Australia
E-mail: jing.yu@uwa.edu.au
____________________________
The authors would like to thank Philip Brown, Mark DeFond, Lilian Ng, Chuan Yang Hwang, Ke Bin and other seminar participants from Nanyang Technological University, National University of Singapore and University of Western Australia, and the 2010 annual meeting of the FMA for their helpful comments. We gratefully acknowledge the financial support from the Nanyang Business School and University of Western Australia
Business School.
© Keshab Shrestha. Views expressed herein are those of the author and do not necessarily reflect the views of
NUS Risk Management Institute (RMI).

∗
∗
Lau is from Nanyang Technological University, Singapore, Shrestha is from Risk Management
Institute, NUS and Yu is from University of Western Australia. Authors’ Contact Information:
Lau: astlau@ntu.edu.sg, (65) 6790-4649; Shrestha: rmikms@nus.edu.sg, (65) 6601-1064; and Yu: jing.yu@uwa.edu.au, (61) 8-6488-1759. We would like to thank Philip Brown, Mark DeFond, Lilian
Ng, Chuan Yang Hwang, Ke Bin and other seminar participants from Nanyang Technological University, National University of Singapore and University of Western Australia, and the 2010 annual meeting of the FMA for their helpful comments. We gratefully acknowledge the financial support from the Nanyang Business School and University of Western Australia Business School.

This study analyzes the impacts of the firm-level corporate governance and country-level corporate governance on the information content of earnings announcements using data from
23 developed markets. Our evidence supports the monitoring hypothesis which predicts a positive relationship between the firm-level corporate governance and information content of earnings announcements. Furthermore, the positive impact of firm-level corporate governance is not subsumed by the presence of country-level corporate governance variables.
Finally, the analysis of interaction effect indicates that the firm-level corporate governance have positive impact on the information content of earnings announcements only for firms from countries with high level of country-level corporate governance indicating a complementary relationship between the firm-level corporate governance and country-level corporate governance.
Keywords: Earnings Announcements, Information Content, Corporate Governance and Investor Protection
JEL Classification Number: G10, G14, G15

This study examines the impact of firm-level corporate governance and country-level corporate governance on the information content of earnings announcements, which is measured by intensity of market reaction to earnings announcements, using an international sample of firms from 23 developed markets.
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The information content of earnings announcements has been one of the traditional and central topics of research in accounting and finance (Bailey,
Karolyi and Salva (2006);Verrecchia (2001)).
It is well recognized fact that there is information asymmetry between insider of a firm and the outsider to the firm. The regular earnings announcements is one of the mechanisms which is supposed to reduce the level of information asymmetry between the insider and outsider of a firm. The theoretical work by Kim and Verrecchia (1991) posits that market reaction to a company’s public announcement (e.g., earnings announcements) is an outcome of a market’s perception about the quality of disclosed information. In this paper, we build on this theoretical prediction and contend that effective monitoring of managers contributes to more informative earnings announcements in that better-monitored managers are expected to provide more credible earnings announcements with higher quality accounting information.
In an international framework, we specifically look into the effects of managerial monitoring at both the firm and country levels on the information content of earnings announcements.
The firm level monitoring is proxied by firm-level corporate governance. Recently, practitioners, regulators as well as academics have paid a lot more attention to the issue of corporate governance (Blue Ribbon Committee Report 1999; Ramsay Report 2001; Sarbanes-Oxley
2002; Klein 2002; Cohen, Krishnamoothy, and Wright 2004; Bebchuk and Cohen 2005;
Agrawal and Chadha 2005). This is partly due to the recent highly publicized financial reporting frauds with devastating consequences committed by such high profile firms as Enron,
WorldCom, Adelphia, Parmalat and Tyco International. Therefore, avoidance of such frauds
1 In this study, country-level corporate governance relates to country-level financial institutions and environments, culture, norms as well as country-level legal and regulatory environments.
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and improvement in the quality of financial disclosure has become one of the important functions of corporate governance. As noted by Cohen, Krishnamoorthy and Wright (2004) one of the most important functions that corporate governance can play is ensuring the quality of the financial reporting process. We also argue that a better an effective firm-level corporate governance would reduce the insider trading which would prevent the news leakage prior to the earnings announcements. Therefore, we predict a positive relationship between the firm-level corporate governance and information content of earnings announcements . This hypothesis is referred to as the monitoring hypothesis.
2
However, there some theoretical arguments which state that in the process of optimal contracting, the firm-level corporate governance is endogeneously determined (Holmstrom
1979; Hermallin and Weisbach 1998; Healy and Palepu 2001; Boone, Field, Karpoff, and
Raheja 2007). Furthermore, there may exist an optimal level of disclosure beyond which the additional disclosure decreases firm value (Hermalin and Weisbach 2012). Therefore, there should not be any relationship between the firm-level corporate governance and the information content of earnings announcements across-firms in equilibrium. This competing hypothesis of no relation is referred to as optimal contracting hypothesis. There exists some empirical evidence supporting this hypothesis (Vafeas 2000; Ahmed, Hossain and Adams
2007; Larcker, Richardson and Tuna 2007). Finally, some argue that financial reporting can play governance role in which case disclosure quality and firm-level corporate governance can be substitutes (Bushman and Smith 2003). Furthermore, there is a possibility that outside auditors my improve the disclosure quality of firms with poor corporate governance (Larcker and Richardson 2004). Also, since the firms with better governance is expected to have
2 There exist a large number of studies that establishes an association between a good firm-level governance and good financial reporting and indirectly support this hypothesis (e.g., Dechow, Sloan, and Sweeney 1996;
Beasley 1996; MacMullen 1996; Beasley, Carcello, Hermanson, and Lapides 2000; Carcello and Neal 2000;
Klein 2002; Anderson, Mansi, and Reeb 2004; Abbott, Parker and Peters 2005; Agrawal and Chadha 2005;
Farber 2005; Francis, Schipper, and Vincent 2005; Vafeas 2005; Ashbaugh-Skaife, LaFond, and Lang 2007;
Garcia Laura, Garcia Osma, and Penalva 2009). It is important to note that most of these studies use only few characteristics of corporate governance (e.g., independence of board, CEO-Chairman duality, audit committee and dual-class shares). Furthermore, in these studies, good financial reporting quality means less misrepresentation, less earnings restatements, less earnings management, less fraud, less likelihood of being investigated by SEC, higher probability that auditor will issue a going-concern report for a financially distressed firms and lower abnormal accruals, lower cost of debt, higher earnings response coefficient etc.
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lower information asymmetry ex-ante, the earnings announcements is expected to have lower information content. These arguments predict even a negative relationship between the firmlevel corporate governance and information content of earnings announcements (Karamanou and Vafeas 2005; Ajinkya, Bhojraj and Sengupta 2005) leading to a information asymmetry hypothesis. In this study, we empirically test these three competing hypotheses.
So far, we only discussed about the impact of firm-level corporate governance no information content of earnings announcements. However, corporate governance depends on both the firm-level and country-level mechanisms (Aggarwal, Erel, Stulz and Williamson 2008).
Extant literature shows that information content of earnings announcements to be higher with better country-level corporate governance (DeFond, Hung and Trezevant 2007; Griffin,
Hirschey and Kelly 2008; Landsman, Maydew and Thornock 2012). However, there is a possibility that the impact of firm-level corporate governance may be subsumed by the impact of country-level corporate governance. The country-level corporate governance may dictate the firm-level corporate governance due to costly firm-level governance beyond those required by laws and common corporate practices (Doidge, Karolyi and Stulz 2007; Aggarwal, Erel,
Stulz and Williamson 2008; Fulghieri and Suominen 2010; Acharya and Volpin 2010).
Alternatively, even in the presence of country-level corporate governance, firm-level corporate governance may still have impact on information content of earnings announcements because the minimum threshold set by the country-level corporate governance may not be binding for many firms (Chhaochharia and Laeven 2007). Furthermore, the firm-level corporate governance may cover specific aspects of improvement in disclosure quality which are too specific to be regulated by country-level laws and regulations which are more general in nature. In this study, we empirically test to see if the firm-level corporate governance is subsumed by the country-level corporate governance.
Finally, it is important to understand if the firm-level corporate governance and the country-level corporate governance are substitutes or complements . This relationship between the firm-level corporate governance and country-level corporate governance is of fun-
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damental importance to practitioners, academics, regulators and policy makers. There is evidence which indicates that firms in a poor investor protection environment tend to establish strong governance practices (La Porta, Lopez-de-Silanes, Schleifer and Vishny 1998;
Durnev and Kim 2005). This evidence support substitute hypothesis. However, Bergman and Nicolaievsky (2007) and Doidge, Karolyi and Stulz (2007) argue that firms only commit to effective governance practices in countries with strong investor protection regimes. This argument supports the complement hypothesis. Both of these studies and Aggarwal, Erel,
Stulz and Williamson (2008) find evidence which supports the complement hypothesis. We test these substitute and complement hypotheses in this study.
In this study, we test above mentioned three sets of hypotheses using a sample of 15,418 firm-year observation from 23 developed markets from 2002 to 2006. Following prior literature (Beaver 1968; Bamber, Christensen and Gaver 2000; Landsman and Maydew 2002;
DeFond, Hung and Trezevant 2007; Landsman, Maydew and Thornock 2012), we use the abnormal stock return variance ratio around annual earnings announcement dates as a proxy for the information content of earnings announcements. As to the proxy for the firm-level corporate governance, we use aggregate corporate governance index consisting of 44 governance attributes from the RiskMetrics database (Aggarwal, Erel, Stulz and Williamson
2008).
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We use seven different proxies to represent the country-level corporate governance.
4
We find strong support for the monitoring hypothesis.
5 The finer analysis using subindices indicates that only the board-related governance ratings matters. In order to explore the economic channels through which the firm-level corporate governance affects the infor-
3 As robustness tests as well as for a more detailed analysis, we subdivide the index into five subindices
(e.g., subindices representing (i) board quality, (ii) existence of various committees, (iii) auditing quality,
(iv) executives’ and directors’ compensations and (v) ownership).
4 The seven proxies includes four proxies for country-level financial information environment ((i) aggregate earnings management (Leuz, Nanda and Wysocki 2003), (ii) accrual quality (Wysocki 2009), (iii) Disclosure requirement (Hail and Leuz 2006), and frequency of interim financial reporting (DeFond, Hung and Trezevant
2007)) and three proxies for country-level legal environment (i) Common law origin, (ii) anti-self-dealing index (Djankov, La Porta, Lopez-de-Silanes and Shleifer 2008) and (iii) securities regulation index (Hail
Leuz 2006).
5
We partially controlled for the low ex-ante information asymmetry associated with better firm-level corporate governance by controlling for the unexpected earnings, number of analysts and analysts’ forecast dispersion. This could explain the strong result.
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mation content of earnings announcements, we perform further analysis and find that firms with better firm-level corporate governance is associated with lower earnings management, appointing Big 4 auditing firms and higher analyst coverage. Our empirical result provides a potential explanation for the positive relationship between firm-level corporate governance and firm value (Gompers, Ishii, and Metrick 2003; Aggarwal, Erel, Stulz and Williamson
2008). Bhattacharya, Ecker, Olsson and Schipper (2012) find that there is a direct path from earnings quality to the cost of equity and our results shows a positive relationship between the firm-level corporate governance and earnings quality.
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In order to take care of the problem caused by possible endogeneity of firm-level corporate governance, we use five different approaches.
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Even with the endogeneity, we still find strong support for the monitoring hypothesis. As to the question of whether the effect of the firm-level corporate governance is subsumed by the effect of country-level corporate governance, we find the effect of the firm-level corporate governance to be significant even in the presence of the country-level corporate governance. Finally, we find evidence in support of the hypothesis that the firm-level corporate governance and the country-level corporate governance are complements.
We contribute to the extant literature in several ways. First, to the best of our knowledge, this is the first study that analyzes the impact of firm-level corporate governance on the information content of earnings announcements using composite corporate governance index as well as firms from multiple countries. Second, we establish a channel through which firm-level corporate governance impacts the information content of earnings announcements.
Third, we establish that both the firm-level and country-level corporate governance have positive impact on the information content of earnings announcements. Fourth, we also test the complementarity and substitutive relationship between the firm-level and country-level
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The argument here is a better firm-level corporate governance leads to a higher earnings quality, which leads to a lower cost of equity resulting in higher firm value.
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We would like to thank one of the reviewers for raising the endogeneity issue and suggesting some solutions.
The five approaches taken to handle this endogeneity issue include the use of (i) firm-fixed effect, (ii) lagged dependent variable, (iii) difference-in-difference method, (iv) 2SLS regression, and (v) an exogenous event involving the adoption of International Financial Reporting Standards (IRFS).
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corporate governance. Finally, we provide a possible explanation to the positive relationship between firm-level corporate governance and firm value.
The remainder of this paper is organized as follows. In the next section, we develop our testable hypotheses based on prior research. Section 3 describes the data and summary statistics, and section 4 presents the empirical results, together with robustness tests. The final section provides conclusions.
Starting with Ball and Brown (1968), there have been many studies that examine equity market response to earnings announcements. Despite these studies, there is still debate about the driving factors that affect the information content of earnings announcements. In this section, we develop hypotheses that predict the relationship between the information content of earnings announcements and the firm-level and country-level corporate governance.
One of the universal features of publicly traded companies around the world is the separation of ownership and control. This separation leads to the agency problem where the interests of the managers, who control the companies in terms of day-to-day operations, do not necessarily align with the interests of the shareholders, who are the ultimate owners of the companies. Board of directors and corporate governance are considered as institutional arrangements that are supposed to help solve or at least reduce this agency problem by monitoring the managers.
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La Porta, Lopez-de-Silanes, Shleifer, and Vishny (2000) define firm-level corporate governance as “a set of mechanisms that protect outside investors against
8 The origin of corporate governance research can be traced back to Berle and Means (1932) who discuss the problem associated with the separation of ownership and control.
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expropriation from the corporate insiders".
9 Some of these mechanisms directly affect the disclosure quality, which, in turn, affects the information content of earnings announcements
(Kim and Verrecchia 1991).
When it comes to financial disclosure, managers have incentive not to report information detrimental to their personal interests, such as information indicating poor performance, or extraction of private benefits (Verrecchia 2001; Armstrong, Guay and Weber 2010).
10
As noted by Cohen, Krishnamoorthy and Wright (2004), one of the most important functions that corporate governance can play is ensuring the quality of the financial reporting process.
Therefore, we expect a higher disclosure quality to be associated with a firm with better firmlevel corporate governance. There exists a large number of academic studies that empirically establishes an association between a good firm-level corporate governance and good financial reporting quality (Dechow, Sloan, and Sweeney 1996; Beasley 1996; MacMullen 1996;
Beasley, Carcello, Hermanson, and Lapides 2000; Carcello and Neal 2000; Klein 2002; Anderson, Mansi, and Reeb 2004; Abbott, Parker and Peters 2005; Agrawal and Chadha 2005;
Farber 2005; Francis, Schipper, and Vincent 2005; Vafeas 2005; Ashbaugh-Skaife, LaFond, and Lang 2007; Garcia Laura, Garcia Osma, and Penalva 2009).
11
Another strand of literature (Carcello, Hermanson, Neal and Riley 2002; Chen and Zhou
9
It is important to note that board of directors plays a dual role of monitoring and advising the managers.
However, the corporate governance, the way it is measured, emphasizes only the monitoring role.
For example, a higher percentage of outside directors represents a better corporate governance even though a higher proportion of inside director may be able to better advise the CEO. Similarly, an independent audit committee represents a better corporate governance simply due to its ability to better monitoring the managers.
10 Here we assume that managers or insiders do not voluntarily disclose all their private information, i.e., we assume that the “unravelling result” by Grossman and Hart (1980), Gorssman (1981), Milgrom (1981), and Milgrom and Roberts (1986) does not hold. Beyer, Cohen, Lys and Walther (2010) has a good discussion on this issue.
11 It is important to note that most of these studies concentrate on the independence of board, CEO-
Chairman duality and audit committee when they talk about the corporate governance even though the recent studies use a broader definition of corporate governance that incorporates a lot more characteristics like managerial and board entrenchment, shareholder rights and protection of minority interest etc. Furthermore, in these studies, good financial reporting quality means less misrepresentation, less earnings restatements, less earnings management, less fraud, less likelihood of being investigated by SEC, higher probability that auditor will issue a going-concern report for a financially distressed firms and lower abnormal accruals, lower cost of debt, higher earnings response coefficient etc. See Cohen, Krishnamoorthy and Wright (2004) for a review of the existing research on corporate governance and its impact on disclosure quality.
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2007) finds that firms with strong corporate governance demand high quality audit services to ensure the credibility of their reported earnings. In line with this empirical evidence, we expect more informative earnings announcements to be released by firms with good firmlevel corporate governance because these firms are more likely to disclose credible and reliable accounting news. Since we expect a positive relationship between the disclosure quality and information content of earnings announcements, we predict a positive relationship between the firm-level corporate governance and information content of earnings announcements due mainly to monitoring. We call this a monitoring hypothesis.
In addition, our monitoring hypothesis can be further strengthen by the argument that an effective firm-level corporate governance can impede insiders trading which would prevent the news leakage prior to the earnings announcements. For example, in Mexico, Bhattacharya,
Daouk, Jorgenson, and Kehr (2000) find no evidence of abnormal market reactions around corporate news announcements due to excessive pre-announcement insider trading. Similarly, Hung and Trezevant (2003) observe more insider trading for firms with weak corporate governance in South-East Asian countries. Both of these studies infer that good corporate governance plays an important role in restricting insider trading and preventing the earnings news to be disclosed in advance of earnings announcements, which,in turn, increases information content of earnings announcements.
However, there are alternate arguments which predict no relationship between the firmlevel corporate governance and the information content of earnings announcements. Optimal, but perhaps imperfect, governance choices arise endogenously in response to firms’ particular circumstances and induce optimal contracting (Holmstrom 1979; Hermalin and Weisbach
1998; Boone, Field, Karpoff, and Raheja 2007) 12 , which drives the equilibrium level of financial reporting quality (Healy and Palepu 2001).
13 Hermalin and Weisbach (2012) present a
12
Theoretical studies such as Holmstrom (1979) and Hermalin and Weisbach (1998) analyze the issue of agency problem and posit governance structures as second-best solutions to organizational optimization problem constrained by information asymmetries. In other words, optimal governance structures are often imperfect and do not necessarily eliminate all bad managerial behavior. Boone, Field, Karpoff and Raheja
(2007) empirically test a host of economic factors that collectively drive internal governance structures.
13 Healy and Palepu (2001) review one stand of theoretical literature stressing the endogeneity of financial
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theoretical model which shows that there exists an optimal level of disclosure beyond which the additional disclosure decreases firm value. Furthermore, optimal disclosure depends on firm’s characteristics. Therefore, across firms, this rationale implies that the information content of earnings announcements should be largely explained by economic determinants and should exhibit no relation with the firm-level corporate governance. There exists some empirical evidence supporting this argument. For example, Vafeas (2000) finds that the fraction of outside directors serving on the board is unrelated to earnings informativeness for the US firms. Ahmed, Hossain and Adams (2006) find similar evidence for the firms in
New Zealand. Larcker, Richardson and Tuna (2007), using principal component analysis, find a very modest and mixed association of firm-level corporate governance indices with abnormal accruals and almost no relation with accounting restatements. Based on these optimal contracting arguments, we predict no relationship between the firm-level corporate governance and information content of earnings announcements. We call this no-relation hypothesis an optimal contracting hypothesis.
On the other extreme, there are arguments which predicts a negative relationship between the firm-level corporate governance and the information content of earnings announcements.
One such argument is based on the premise that financial reporting can play a governance role whereby financial disclosure and governance can be substitutes.
14 Furthermore, it can be argued that outside auditor of a firm with low firm-level corporate governance may play a balancing role.
15 Based on these substitution argument, we predict a negative relationship between the firm-level corporate governance and information content of earnings announcements. Finally, there is a notion that a better firm-level corporate governance is associated reporting. It is argued that financial reporting is determined by similar forces (i.e., firm-specific economic environment) that shape governance structures and managerial incentives.
14 According to Bushman and Smith (2003), “.. when current accounting numbers do a relatively poor job of capturing information relevant to governance, firms substitute towards alternative, more costly governance mechanisms to compensate for inadequacies in financial accounting information.”
15
For example, Larcker and Richardson (2004), using a latent class cluster analysis, find that for a cluster of firms characterized by low market capitalization, high growth prospects, less independent boards, low institutional holdings and high insider holdings (i.e., relatively low firm-level corporate governance firms), the auditor appears to be playing a key role in the governance process to limit abnormal accruals choices.
They note, “.. results are consistent with reputation concerns being the primary determinants of auditor behavior with respect to limiting unusual accounting choices of client firms.”
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with less information asymmetry between the management and shareholders.
16 Since lower information asymmetry implies lower information content of earnings announcements, this evidence is also consistent with the negative relationship, which will be referred to as the information asymmetry hypothesis.
Based on above discussion, when it comes to the relationship between the firm-level corporate governance and information content of earnings announcements which one of the three hypotheses holds is an empirical question. In this paper, we empirically tests these hypotheses using cross-country data. All three hypotheses are summarized below:
H 1
A
: (Alternate A: Monitoring) The quality of firm-level corporate governance is positively associated with the information content of earnings announcements.
H 1
0
: (Null: Optimal Contracting ) The quality of firm-level corporate governance is not associated with the information content of earnings announcements.
H 1
B
: (Alternate B: Information Asymmetry) The quality of firm-level corporate governance is negatively associated with the information content of earnings announcements.
Corporate governance depends on both the firm-level as well as country-level mechanism
(Aggarwa, Erel, Stulz and Williamson 2008). Several recent international studies have identified country-level corporate governance as an important determinant of the information content of earnings announcements. In particular, it is shown that the information content of earnings announcements tends to be higher in countries with little earnings manipulation (DeFond, Hung and Trezevant 2007), infrequent insider trading (DeFond, Hung and
16
In an empirical study, Karamanou and Vafeas (2005) find evidence that is consistent with this notion.
Ajinkya, Bhojraj and Sengupta (2005) find that firms with more outside directors and greater institutional ownership are more likely to issue a forecast and are inclined to forecast more frequently. In addition, these forecasts tend to be more specific, accurate and less optimistically biased. This evidence also implies less information asymmetry for a firm with better firm-level corporate governance.
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Trezevant; Griffin, Hirschey and Kelly 2008), and high-quality accounting disclosure (De-
Fond, Hung and Trezevant 2007; Landsman, Maydew and Thornock 2012). Yet, none of these international studies have considered the effect of firm-level governance mechanisms when analyzing the effect of country-level governance. Examining the effect of country-level corporate governance in isolation of alternate firm-level corporate governance provides an incomplete analysis of the determinants of information content of earnings announcements.
The impact of both firm-level corporate governance and country-level corporate governance is inherently important because laws/regulations and common practices of investor protection set at the country level dictate firm-level governance practices (Doidge, Karolyi and Stulz 2007; Acharya and Volpin 2010).
17 Though adopting sound firm-level internal governance benefits outside investors, there is a cost associated with adoopting a good governance which would be borne by shareholders. If a country can impose regulations and foster “standard” practices that advocate sufficiently efficient governance attributes, then firms would elect not to exercise costly firm-level governance beyond those required by laws and common corporate practices (Doidge, Karolyi and Stulz 2007; Aggarwal, Erel, Stulz and
Williamson 2008; Fulghieri and Suominen 2010). Based on these arguments, we predict the impact of firm-level corporate governance would be subsumed by the country-level corporate governance, i.e., in the presence of country-level corporate governance, the firm-level corporate governance would have no relation with the information content of earnings announcements. However, one can argue that the country-level corporate governance may set a minimum threshold wihch may not be binding for many firms (Chhaochharia and Laeven
2007).
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Furthermore, firm-level corporate governance may cover specific aspects of improv-
17 Acharya and Volpin (2010) propose a governance externality theory stating that the choice of a firm’s governance affects and is affected by other firms in the economy. In support, Doidge, Karolyi and Stulz (2007) report direct evidence that firm-level governance practices do not differ much once country characteristics are controlled.
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Chhaochharia and Laeven (2007) find that governance provisions adopted by firms beyond those imposed by regulations and common practices among firms in the country have a strong, positive effect on firm valuation. They interpret these results to indicate that, despite the costs associated with improving corporate governance at the firm level, many firms choose to adopt governance provisions beyond what can be considered the norm in the country, and these improvements in corporate governance have a positive effect on firm valuation.
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ing disclosure quality that the country-level corporate governance, being a more general nature, may not cover. Based on these arguments, we predict the firm-level corporate governance to have a significant impact on the information content of earnings announcements even in the presence of country-level corporate governance.
Thus in our context, it is necessary to evaluate the incremental effect of firm-level governance in presence of country-level governance that considers both legal regimes and common practices that form the investor protection environment. We test this question in the following hypothesis:
H2: After controlling for country-level corporate governance, firm-level corporate governance still matters for the information content of earnings announcements.
Further, we raise a more intriguing question of how the interactive relationship of firmlevel corporate governance with country-level corporate governance influences the information content of earnings announcements. The interaction between firm-level and country-level governance has attracted much debate in the literature. Some studies argue that firm-level governance mechanisms are substitutes for country-level investor protection. For example,
La Porta, Lopez-de-Silanes, Shleifer and Vishny (1998) and Durnev and Kim (2005) show that in a poor investor protection environment firms tend to establish strong governance practices.
There are, however, suggestions that country-level corporate governance and firm-level governance complement each other. Bergman and Nicolaievsky (2007) posit that the choice of a company’s governance framework results from the trade-off between the benefits and costs of offering protection to shareholders. As a result, Bergman and Nicolaievsky (2007) and Doidge, Karolyi and Stulz (2007) predict that firms only commit to effective governance practices in countries with strong investor protection regimes where firm-level governance implementation is less costly. Similarly, Aggarwal, Erel, Stulz and Williams (2008) find a evidence that investment in internal (firm-level) governance and investor protection
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(country-level governance) are complements rather than substitutes. Therefore, the question as to whether the firm-level corporate governance and country-level corporate governance are complements or substitutes is still an open question. In view of the mixed results from the literature, we test the interactive effects between firm-level corporate governance and country-level corporate governance on the information content of earnings announcements in the following hypothesis:
H3: The effect of firm-level corporate governance on the information content of earnings announcements varies with country-level corporate governance.
This section describes the construction of the sample and variables used in this study.
19
Constrained by the availability of firm-level corporate governance data from RiskMetrics, our sample includes firms from 23 developed countries from 2002 to 2006.
20
Specifically, our sample consists of firm-year observations with annual earnings announcement dates between
2002 and 2006 and firms that meet the following requirements:
(i) Do not operate in highly regulated industries, such as utilities, telecommunication service, insurance, energy, and banks.
(ii) Have valid security identifiers (i.e., SEDOL/CUSIP) that allow us to merge with other data sources.
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19 Brief descriptions of variables, their acronyms and sources, are given in Appendix 3.
20 The information on firm-level corporate governance, which is known as the Corporate Governance Quotient (CGQ), is available from 2003 to 2007 in the RiskMetrics database. However, we regard the sample period ranging from 2002 to 2006 throughout this study because the governance information collected for a given year, in fact, reflects the information in the previous year (Aggarwal, Erel, Stulz and Williamson
2008). Unfortunately, after 2007, RiskMetrics discontinued the publication of CGQ information.
21
In most cases, the primary security identifiers in RiskMetrics are SEDOL codes for international companies and CUSIP codes for some Canadian and U.S. companies. For the identifiers that no longer exist, we take the companies’ names found in RiskMetrics and manually search Datastream/Compustat for SEDOL/CUSIP codes.
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(iii) Have non-missing daily stock return data in Datastream for international stocks or in
CRSP for U.S. stocks.
(iv) Have non-missing number of analyst forecasts, standard deviation of forecasts, and consensus forecasts (i.e., mean) close to earnings announcements. This filter substantially reduces our sample size because we require at least two analysts covering a stock before an earnings announcement in order to compute a standard deviation and mean for analyst forecasts.
(v) Have non-missing actual earnings per share and fiscal year-end date in I/B/E/S.
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(vi) Reporting lag from the actual earnings announcement date to the fiscal year end date is no greater than 180 days. It is suspicious if a company delays its earnings announcement by more than 180 days after the fiscal year-end date. To avoid unnecessary complications, we delete such firm-year observations.
(vii) Have non-missing financial accounting data for non-U.S. firms in Worldscope and for
U.S. firms in Compustat. Observations with zero total assets or a negative market-tobook ratio for a given fiscal year are also excluded from the analysis.
Our final sample consists of 15,418 firm-year observations that meet these requirements.
The first column of Table 1 shows the list of countries covered by RiskMetrics, and the second column reports the number of pooled firm-year observations for each country, which range from 9,019 for the U.S. to 25 for Portugal.
This study analyzes the annual earnings announcement events of firms because interim announcements are typically unavailable for non-U.S. firms. For event study analyses, it is
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Some U.S. studies compute forecast errors using actual earnings from Compustat. Because I/B/E/S earnings forecasts generally exclude extraordinary items and some other special items, we use actual earnings taken from I/B/E/S to be consistent with I/B/E/S consensus forecasts.
14

critical to use accurate event dates. Griffin, Hirschey and Kelly (2008) find that earnings announcement dates contained in the I/B/E/S database usually differ from those reported in the financial press.
23 To the extent that earlier announcement dates represent more accurate announcements, their study shows that earnings announcement dates from Bloomberg are accurate 75% of the time for developed markets. In contrast, earnings announcement dates from I/B/E/S are accurate only 23% of the time for developed markets. Therefore, we use two different databases to cross-check the accuracy of earnings announcements in each non-U.S. country. For U.S. firms, the annual earnings announcement dates are from
Compustat and I/B/E/S.
24
Appendix 1 compares earnings announcement dates for the 15,418 firm-year observations from Bloomberg, I/B/E/S, and Compustat. The Bloomberg database appears to provide more reliable announcement dates than I/B/E/S for non-U.S. companies. In the sample of
6,301 non-U.S. firm-year observations with available announcement dates from Bloomberg and I/B/E/S, 62.2% have identical announcement dates, 31.9% of the Bloomberg dates are earlier than I/B/E/S, and 5.9% of the I/B/E/S dates are earlier than the Bloomberg dates. In contrast, I/B/E/S seems to provide more reliable earnings announcement dates for U.S. companies. Of the 9,019 U.S. firm-year observations, I/B/E/S dates coincide with
Compustat dates 95.8% of the time. In our analysis, when differences in the announcement dates across the data sources occur, we use the earlier announcement dates.
Turning to the measurement of the information content of earnings announcements, following prior literature (Beaver 1968; Bamber, Christensen and Gaver 2000; Landsman and
Maydew 2002; DeFond, Hung and Trezevant 2007; Landsman, Maydew and Thornock 2012) we use abnormal stock return variance around earnings announcement dates as a proxy for the information content of earnings announcements. We define a three-day event window
(i.e., [-1, 1] relative to an earnings announcement) and 100-day estimation window (i.e.,
23
DeFond, Hung and Trezevant (2007) use earnings announcement dates from I/B/E/S, but caution readers that their results might be tainted by the accuracy of these dates.
24 It should be noted that we have no intention of criticizing the quality of earnings announcement dates from the I/B/E/S database because this database has never claimed to feature in providing this information.
15

[-120, -21] relative to an earnings announcement). The abnormal return variance in an event window is computed as the average of the squared prediction errors from the following international market model:
(1) r i,c,t
= α i
+ β i r c,t
+ γ i
( r
U S,t
+ ex c,U S,t
) + ε i,t
, where r i,c,t is the local currency return on stock i on day t in country c , r c,t is the local market index return on day t in country c , r
U S,t is the U.S. market index return on day t , and ex c,U S,t is the rate of change in country c ’s spot exchange rate versus the U.S. dollar. Also, to draw meaningful inferences from the regression analysis, we require at least 60 non-missing daily stock returns in an estimation window for each firm-year observation.
25
For comparisons across countries and to take into account the normal level of stock return variance, we use an abnormal return variance ratio. The abnormal variance ratio is computed by dividing the abnormal return variance in the three-day event window by the variance of prediction errors from equation (1) in the estimation window [-120, -21].
This abnormal return variance ratio ( RVar ) is used to proxy for the information content of earnings announcements. The first column of Panel B in Table 1 shows the mean of abnormal stock return variance ratio ( RVar ), which varies from the low of 1.94 for Greece to the high of 7.43 for Denmark, with an average of 4.07 for the whole sample.
The construction of firm-level corporate governance measure is based on a unique and detailed corporate governance dataset provided by RiskMetrics.
26
This dataset tracks 55 gov-
25 We did not use abnormal trading volume to measure the information content of earnings announcements in this study for two reasons.
First, we are concerned that abnormal trading volume around earnings announcements may capture two mixed effects - the information content of earnings announcements and diverse investment opinions among investors (Garfinkel and Sokobin 2006).
At the announcement, one would expect that good firm-level corporate governance may increase the information content of earnings announcements but mitigate the opinion diversity among investors. As a result, the relationship between firm-level corporate governance and abnormal trading volume can be inconclusive. Second, Datastream might not have sufficient coverage for stock trading volume data. Ince and Porter (2006) and Bartram,
Brown, and Stulz (2009) suggest that trading volume data are not widely available for most non-U.S. stocks.
26 This firm-level governance dataset was originally developed by Institutional Shareholder Services (ISS) which was acquired by RiskMetrics Group in 2007. Eventually, RiskMetrics Group merged with MSCI in
16

ernance attributes for non-U.S. companies and 61 governance attributes for U.S. companies.
The comprehensive spectrum of governance practices allows us to design a variety of corporate governance indexes that could capture different aspects of a company’s corporate governance practices. An additive approach is adopted to measure the level of corporate governance in a single index.
27
The RiskMetrics data manual provides us with guidelines for each corporate governance attribute. For a given attribute, the corresponding governance index takes a value of one if a firm meets the minimal acceptable standard in accordance with the RiskMetrics guideline and zero if otherwise. We exclude the attribute if the governance information about the attribute is not disclosed. For each company, the rating of its governance is computed as the number of criteria met by the company in that particular index divided by the total number of non-missing attributes in the same index.
One aggregate corporate governance index is constructed in this study as the key governance measure. This governance index aims at reflecting a firm’s overall corporate governance structure. The composition of this index follows Aggarwal, Erel, Stulz and Williamson
(2008) and includes 44 governance attributes common for both international and U.S. companies in the RiskMetrics database. This aggregate governance index is labelled as CGov , which captures important aspects of firm-level governance mechanisms such as board quality, audit practices, executive compensation and ownership plan. It is noteworthy that corporate governance is a complex system and involves several specific governance mechanisms.
Decomposing the aggregate governance measure allows us to identity any a particular governance mechanisms that may contribute more to the informative earnings announcements.
28
Therefore, we construct five governance sub-indices to represent five different governance mechanisms. The first sub-index represents the board of directors ( Board ) which consists of 25 board-related attributes. Since committees are formed for specific tasks, existence of different committees also represents certain aspects of corporate governance. Our second
2010.
27
For early use of this approach, see Gompers, Ishii and Metrick (2003) on the corporate governance research of US firms.
28 We would like to thank one of the reviewers for making this suggestion.
17

sub-index, Comm , represents four key committees, e.g., audit, compensation, governance and nominating committees.
Audit is our third sub-index that captures audit-related governance provisions. Our fourth sub-index ( Comp ) is related to compensation provisions which represents ‘contracting’ and ‘alignment-of-interest’ aspects of the governance mechanism. Our final sub-index ( Own ) is related to stock ownership provisions of the governance mechanism.
Appendix 2 details the composition of the aggregate corporate governance index ( CGov ) and its five sub-indices ( Board , Comm , Audit , Comp , and Own ).
Panel B of Table 1 summarizes the descriptive statistics of the aggregate corporate governance measure, CGov . The mean and median for CGov is 0.56, with the standard deviation of 0.12. Countries with strong investor protection tend to have highest levels of firm-level internal governance. For instance, the mean values of CGov in Canada, U.K. and U.S. are 0.67,
0.55 and 0.61, respectively, indicating that institutional factors are important determinants of firm-level governance choices.
The effect of country-level corporate governance arises from two aspects: (i) financial information environment which relates to the delivery of accurate and timely financial information, and (ii) legal environment which involves the legal systems put in place and accompanying infrastructures that collectively protect minority shareholders (Bushman and
Smith 2003; Denis and McConnell 2003).
29
To assess the full impact of country-level investor protection, we identify four country-level variables related to financial information environment and three structural factors related to legal environment.
In the selection and construction of the variables related to the country-level financial information environment, we focus on both quality and quantity of disclosure of financial
29
Bushman and Smith (2003) provide an excellent review on the literature stressing the importance of financial information environment in resolving the agency problem while Denis and McConnell (2003) survey research on corporate governance systems around the world which covers various aspects of internal and external governance mechanisms including various legal systems designed for investor protection at the country level.
18

information. The first such variable is the aggregate earnings management score from Leuz,
Nanda, and Wysocki (2003) ( EMgmt ). To be consistent with the firm-level corporate governance variable where higher value indicates better governance, we multiply the earnings management score from Leuz, Nanda and Wysocki (2003) by -1 so that the higher value of this score indicates better financial accounting information in the country.
We compute the second country-level disclosure quality variable ( AQuality ) based on the methodology proposed by Wysocki (2009).
30 The computation of the AQuality involves the estimation of the following two regression equations:
A t
= α + β
1
CFO t − 1
+ β
2
CFO t
+ β
3
CFO t +1
+ e t
A t
= a
0
+ a
1
CFO t
+ u t
(2)
(3) where A t is the working capital accruals (measured as change in working capital) for year t and CFO t is the cash flow from operations for year t . The accrual quality ( AQuality ) is given by the ratio of the adjusted R-squared for equation (2) to the adjusted R-squared for equation (3). In order to compute the country-level AQuality , we first estimate regression equations (2) and (3) using data for all firms in a country covering the period 2002-2006. For the U.S., the regressions include all the firms for which the data is available in Compustat database and, for other countries, the regressions include all the firms for which the data is available in Worldscope database. Then, we use the adjusted R-squared ratio to compute the RQuality .
In addition to information proxies that explicitly measure financial reporting quality, we also consider the quantity of financial disclosure. Specifically, we adopt the disclosure requirements index ( DisReq ) from Hail and Leuz (2006). It scores the disclosure rules mandated
30
Wysocki (2009) proposes modifications to the accruals quality computed based on method suggested by
Dechow and Dichev (DD 2002). Wysocki (2009) notes that accrual quality measure based on Dechow and
Dichev (2002) model has limited ability to distinguish between discretionary and non-discretionary accruals and shows weak and often contradictory associations with other measures of accounting quality for U.S. and international firms.
19

at the country’s largest stock exchange.
31 Another disclosure proxy used is the frequency of interim reporting ( Freq ) from DeFond, Hung and Trezevant (2007). Since Greece, Ireland, and New Zealand are not included in DeFond, Hung and Trezevant (2007), the frequency of their interim reporting information is retrieved from Worldscope.
Our study uses three legal factors related to both investor protection laws and accompanying enforcement to proxy for the legal environment, namely, (i) the legal origin ( Origin ) dummy variable from La Porta, Lopez-de-Silanes, Shleifer and Vishny (1998), (ii) the antiself-dealing index ( Law ) from Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2008) and
(iii) the securities regulation index ( SecReg ) from Hail and Leuz (2006).
La Porta, Lopez-de-Silanes, Shleifer and Vishny (1998) argue that common law countries such as the U.S. tend to provide better protection for minority shareholders’ rights than do civil law countries such as Germany. Therefore, the legal origin ( Origin; common law versus civil law) is used in our analysis as the first proxy for a country’s legal environment.
Our research further employs an anti-self-dealing index ( Law ) from Djankov, La Porta,
Lopez-de-Silanes and Shleifer (2008) which scores legal protection of minority shareholders against appropriation by corporate insiders. We argue that the focus of this index on the self-dealing behavior of controlling shareholders is suitable for our international sample firms
(particularly non-U.S. firms) prevalent with controlling shareholders.
32 A country’s laws would never be effective without proper legal enforcement. It is thus necessary to consider quantitative legal factors that capture the enforcement of laws and regulations. Thus, we
31 Hail and Luez (2006) construct this index based on various quantitative metrics from La Porta, Lopezd-Silanes, and Shleifer (2006).
Specifically, it consists of arithmetic mean of several metrics related to the disclosure requirements at the country’s largest stock exchange in the areas of prospectus requirements, directors’ compensation, ownership structure and inside ownership, related-party transactions, and contracts.
32 The anti-director rights index from La Porta, Lopez-de-Silanes, Shleifer and Vishny (1998) is another widely used index in international finance literature in measuring aggregate legal minority shareholder protection. However, Djankov, La Porta, Lopez-de-Silanes and Shleifer (2008) and the references therein point out the limitations of the index due to the ad hoc collection of variables meant to capture the legal stance for investor protection, potential coding errors and ambiguous definitions of its components. The authors suggest that anti-self-dealing index is better grounded in theory and specifically addresses the protection of minority shareholder against self-dealing transactions benefiting controlling shareholders. Given the common existence of controlling shareholders in non-U.S. firms, we believe that it is more appropriate to use the anti-self-dealing index in our study.
20

adopt as our final legal proxy the securities regulation index ( SecReg ) from Hail and Leuz
(2006) which explicitly quantifies the legal enforcement for protection of minority shareholders in the country’s equity market.
As shown in Panel A of Table 1, there is adequate variability across our sample countries, even though they are all considered developed markets. For instance, the country-level earnings quality measure, EMgmt , ranges from -2.0 for the U.S. to -28.3 for Austria and
Greece. In addition, our chosen financial information environment and legal environment proxies appear to achieve the purpose of measuring distinct aspects of investor protection offered at the country level. As an example, the U.S. has the highest accruals quality score,
AQuality , of 3.79 whereas its anti-self-dealing index value is only moderate ( Law = 0.65 for the U.S.). Greece imposes quarterly financial interim reporting for publicly listed firms while the securities regulation score, SecReg for this country is only at a low level of 0.38.
Drawn from extant literature, we include a host of control variables that might or are known to affect the information content of earnings announcements. Our control variables are financial analyst information (i.e., analyst earnings forecast dispersion, unexpected earnings surprise, and number of analyst forecasts), earnings information reporting lag, accounting earnings loss, the U.S. cross-listing, firm ownership concentration, firm size and market-tobook ratio.
We use three analyst activity variables to control for pre-announcement corporate information environment. Particularly, analyst earnings forecast dispersion ( Disp ) is used to control for the noise in the accounting numbers (Imhoff and Lobo 1992). In addition, Francis,
Schipper, and Vincent (2002) show that stock market reactions to earnings announcements depend on the magnitude of unexpected earnings. Hence, we use earnings surprise ( | U E | ) and number of analyst forecasts ( # Ana ) to control for the extent of unexpected earnings information at earnings announcements. Chambers and Penman (1984) suggest that a longer
21

earnings reporting lag increases the likelihood of earnings news disseminated ahead of the public announcements. We therefore control for earnings reporting delay ( RLag ) in our analysis. We also consider the effect of negative accounting earnings ( Loss ) as Hayn (1995) points out that negative earnings is less informative. Further, an American Depositary Receipts
( ADR ) dummy variable is included in the regression because firms with an ADR listing are likely to have a rich information environment (Lang, Lins, and Miller 2003).
Finally, to account for any other unobservable firm characteristics, we control for closely held shares ( Close ) as a proxy for insider ownership following Aggarwal, Erel, Ferreira, and
Matos (2011), firm size and market-to-book ratio. The definition and data sources of these control variables are provided in Appendix 3, with descriptive statistics shown in Panel B of Table 1. To avoid extreme values, we winsorize all the continuous control variables at the top and bottom 1% of the sample distribution.
Several preliminary statistics are noteworthy here. First, we observe that the average number of analyst forecasts is 8.89, and the median is 7. This is consistent with the fact that our sample companies covered by RiskMetrics are part of major stock indexes and thus heavily followed by security analysts.
33 Furthermore, we observe a modest reporting delay in our sample: The mean and median of the earnings reporting lag are 46.87 and 45 days, respectively. Accounting earnings loss is reflected by a Loss dummy variable that has a value of one if net income before extraordinary items is negative and zero otherwise. The sample mean of the Loss variable is 0.20, indicating the majority of sample firms (i.e., 80% of firmyear observations), have a positive net income during the sample period. We set an ADR dummy variable ( ADR ) equal to one if the company has shares cross-listed in U.S. markets and zero otherwise. Interestingly, the prevelance of cross-listings is considerably different across countries, with the proportion of cross-listings ranging from 0 in New Zealand to 0.60
in Austria.
33
In accordance with RiskMetrics data manual, the non-U.S. international companies that RiskMetrics covers are part of the following indexes: Russell 3000, S&P500, S&P 400, S&P 600, MSCI’s EAFE (Europe,
Asia and Far East) index and S&P’s Composite TSX index (Canada).
22

Table 2 contains Pearson correlation coefficients among the firm-level and country-level variables employed in this study. In general, the correlation coefficients between firm-level independent variables are moderate but the correlation coefficients between country-level variables are relatively strong. Due to the high correlations between country-level corporate governance measures, in the subsequent empirical analyses we attempt to use only one of these country-level governance variables at a time in each regression model to avoid the potential multicollinearity problem.
Moreover, the correlation coefficient between the information content of earnings announcements proxy ( RVar ) and the aggregate corporate governance measure ( CGov ) is 0.12.
This observation supports the prediction that good firm-level corporate governance produces strong market reaction around earnings announcements. Also, CGov exhibits significant and positive correlations with all the country-level investor protection proxies. These univariate correlation analyses provide us important preliminary information about the relationships among the variables of interest. However, we refrain from drawing any conclusions based on these correlation coefficients before performing multivariate analyses controlling for other firm characteristics and control variables.
In this section, we empirically examine effects of the firm-level and country-level corporate governance on the information content of earnings announcements. Specifically, we test all the hypotheses presented earlier. The testing includes the marginal as well as interaction effects of the firm-level corporate governance and the country-level corporate governance on the information content of earnings announcements. We also take care of the problems associated with the endogeneity of firm-level corporate governance using different methods.
23

In this subsection, we model the information content of earnings announcements as the function of firm-level governance practices. Formally, we state our ordinary least squares
(OLS) baseline regression model as below:
RV ar = α
0
+ α
1
CGov + α
2
Disp + α
3
| U E | + α
4
# Ana + α
5
RLag
(4)
+ α
6
Loss + α
7
ADR + α
8
Close + α
9
Size + α
10
M B + ε, where RVar is defined as the abnormal return variance in the three-day event window [-1, 1] divided by the variance of prediction errors from equation (1) in the estimation window [-120,
-21] relative to an earnings announcement date.
CGov represents an aggregate corporate governance index consisting of 44 governance provisions. Firm-level control variables include analyst forecast dispersion ( Disp ), unexpected earnings surprise ( | U E | ), number of analyst forecasts ( # Ana ), reporting lag ( RLag ), earnings loss dummy ( Loss ), U.S. cross-listing
( ADR ), closely held shares ( Close ) and firm size ( Size ) and market-to-book ratio ( M B ).
Country, industry and year dummies are also included in most of the regression models.
To begin with, we estimate the baseline regression model in a pooled sample of timeseries cross-sectional firm-year observations. Table 3 reveals a consistently strong positive association between CGov and abnormal return variance in the event window, RVar . The coefficient of CGov is 6.168 ( t -value = 14.21) without controlling for any firm or country characteristic variables in model (1) and reduces to 2.158 ( t -value = 3.02) after controlling for firm characteristics including industry, country and year fixed effects in model (3). In an economic perspective, a one-standard-deviation increase in the overall corporate governance rating, CGov , leads to 26% increase in abnormal stock return variance, RVar based on model
(3) estimation.
The empirical evidence clearly supports the monitoring hypothesis which predict a positive relationship between the firm-level corporate governance and information content of earnings announcements. This seems to validate the argument that corporate governance
24

is primarily set up to monitor the managers. It is important to note that we partially controlled for the information asymmetry by using three variables related to the information asymmetry namely, forecast dispersion ( Disp ), unexpected earnings ( | U E | ) and number of analysts ( #Ana ).
In addition to investigating the aggregate corporate governance effect, we also examine specific governance mechanisms that induce informative earnings announcements by decomposing the firm-level corporate governance into five sub-indices. The decomposition is necessary as corporate governance is a multi-dimensional system and several governance mechanisms may act as substitutes for each other. The five sub-indices considered are board quality ( Board ), independence of board committees ( Comm ), audit quality ( Audit ), executives’ and directors’ compensation ( Comp ) and ownership plans ( Own ). In models (4)-(8), we regress RVar on one of the sub-indices at a time controlling for other firm attributes. The results show that mainly the two board-related sub-indices ( Board and Comm ) are positively related to the information content of earnings announcements. However, the remaining three sub-indices do not seem to have significant impact on the information content of earnings announcements. From the most comprehensive model, Model-9, we get similar results where only the Board sub-index is significant.
Turning to control variables, we find that all the control variables carry the expected signs, although only analyst earnings surprise ( | U E | ) and accounting earnings loss ( Loss ) variables are significant at the 5% level across all the model specifications. Particularly, the results show that abnormal stock return variance ratio ( RVar ) increases with the level of unexpected earnings surprise, indicating that market reaction tends to be intense when a large amount of unexpected news is announced to the public. Also, abnormal stock return variance is negatively related to accounting earnings loss dummy variable ( Loss ) and the level of firm ownership concentration ( Close ), suggesting that market participants are reluctant to respond to potentially distorted earnings news.
In sum, we document a strong positive relation between the information content of earn-
25

ings announcements and firm-level corporate governance supporting the monitoring hypothesis. When it comes to the specific mechanism that may be important for the information content, it is clear that the Board sub-index representing 25 different board characteristics seems to be the most important one.
The basic premise of monitoring hypothesis is the assertion that a better firm-level corporate governance leads to higher quality disclosure which in term lead to higher information content of earnings announcements. Here, we establish this channels through which effective firmlevel corporate governance can translate into high quality financial disclosure by analysing the impact of firm-level corporate governance on three individual measures or proxies of accrual quality and a composite measure derived from three individual measures.
The first measure of disclosure quality is the magnitude of accounting accruals ( Accrual ) which is computed based on Leuz, Nanda and Wysocki (2003). We expect this measure to capture the “accounting flexibility” and room for manipulating earnings by managers.
Accrual in our study is computed as the absolute value of a firm’s total accrual component of earnings scaled by the absolute value of a firm’s cash flows from operations.
34 For ease of interpretation, we multiply this measure by -1 so that a higher value of this variable indicates better financial reporting quality.
Lang and Maffett (2011) argue that higher quality auditors and financial analysts serve as effective monitors in promoting corporate financial transparency. Therefore, the second disclosure quality measure used is the Big4 dummy variable which is equal to one if the firm’s accounting information in a given fiscal year is audited by one of the four top international
34
The accrual component of earnings is equal to change in total current assets minus change in cash/cash equivalents minus change in current total liabilities plus change in short-term debt included in current liabilities plus change in income taxes payable minus depreciation and amortization expense. If a firm does not report information on taxes payable or short-term debt, these two accounting items are set to be zero.
Cash flows from operations is computed by subtracting accrual component from earnings.
26

accounting firms including Ernst & Young, Deloitte & Touche, KPMG and PWC (PricewaterhouseCoopers). Auditor information is obtained from Compustat Global database. We assume Big4 equal to zero if the firm does not have auditor information.
35 #Ana is the third individual proxy used.
Finally, in order to measure the overall financial reporting quality, we aggregate the above three measures by taking the average of percentile ranks of these variables for each firm and denote this variable as FQuality . Similar approach is used in Leuz, Nanda and Wysocki
(2003) and Lang and Maffett (2011).
Table 4 displays the estimation results of regressing the three individual and one aggregate disclosure quality measures on CGov and other control variables included in the baseline regression. It should be noted that two financial analyst-related variables (i.e., Disp and
| U E | ) are excluded from the list of controls due to the simultaneity between these variables and # Ana .
36 We observe consistently positive and significant CGov coefficients regardless of the measure of financial reporting quality used. These results are consistent with the view that effective firm-level corporate governance induces informative earnings announcements via higher firm-level financial reporting quality.
A primary concern about the evidence regarding the effect of the firm-level corporate governance on the information content of earnings announcements is the likely endogeneity of firm-level corporate governance which will certainly bias our results.
37 The biasedness caused by endogeneity is usually difficult to avoid when it comes to the studies, such as ours, which
35
Out of 15,418 firm-year observations, only 1,626 firm-years do not have auditor information. We rerun the analysis excluding firm-years with no auditor information and find qualitatively the same results.
36
In untabulated results, we find that conclusions remain unaltered even with inclusion of Disp and | U E | in the regression model.
37 We would like to thank Associate Editor Schipper and one of the reviewers for pointing out the endogeneity problem and suggesting some of the solutions implemented in this study.
27

use archival data. We perform several analyses to address this concern. These analyses will be presented next.
The earnings information released at annual announcements and firm-level corporate governance structure might be jointly determined by certain omitted firm characteristics.
To address this issue, we incorporate firm fixed effects into the baseline regression model.
This would take care of the omitted variables so long as they remain constant over time.
The results shown in model (1) of Table 5 suggest that including firm fixed effects does not alter our earlier conclusion about accepting the monitoring hypothesis. The coefficient of
CGov is 4.123 and statistically significant at 1% level ( t -value = 2.91).
Firms with strong governance could self-select based on certain firm attributes including informative earnings announcements. To alleviate this concern, we control for lagged RVar variable in model (2) of Table 5. In line with our previous conclusion, we find a positive and statistically significant coefficient on CGov in presence of lagged RVar variable.
From our main findings above, we expect any increase in firm-level governance quality should lead to an increase in the information content of earnings announcements. We reestimate our main equation (4) in first differenced form where we take the first difference of the dependent and all exogenous variables, i.e., we run the regression of first differenced information content of earnings announcements on first differenced RHS variables. The results from the first differenced version of the baseline regression are reported in model (3) of Table 5. The results again confirm our findings.
We further conduct a two-stage least squares regression estimation to address the endogeneity issue. Drawn upon prior literature, we regress CGov on the following instrumental variables: (i) dependence on external finance ( ExtFin ) which is equal to capital expenditures minus cash flows from operations divided by capital expenditures; (ii) Financial leverage ratio ( Lev ) which is computed as total liabilities scaled by total assets; (iii) R&D expense
( R&D ) which is equal to a firm’s R&D expenses divided by total assets; and (iv) GDP per
28

capita ( GDPC ) which is equal to the natural log of GDP per capita.
38 Model (4) in Table
5 presents results of the first-stage regression model of CGov on the four instrumental variables. The results of the second stage are reported under model (5). Again, the coefficient of CGov is positive and significant.
As a final robustness check on endogeneity, we use the mandatory adoption of IFRS as a quasi-exogenous event for firm-level corporate governance reform. As noted in Ball
(2006), one primary purpose promised by IFRS is to promote financial transparency and loss recognition timeliness which thus reduce agency conflicts between managers and shareholders and enhance corporate governance. On this premise, the adoption of IFRS is expected to accelerate the firm-level corporate governance reforms in the country. We obtain countrylevel IFRS adoption status from Deloitte Global Services IASPlus’s website.
39 We use a dummy variable, P ostIF RS , which takes the value of one if a country mandatorily adopted
IFRS from fiscal years on and after 12/31/2005 and zero otherwise (except for Singapore which adopted IFRS from fiscal year ending on 12/31/2003). Models (6) and (7), respectively, present regression results of RVar on P ostIF RS and other control variables on a subsample of firms from countries that mandatorily followed IFRS during our sample period and on the full sample. The coefficients of P ostIF RS are 0.654 and 1.149, respectively in models (6) and
(7) and statistically significant at 1% level. These results support the monitoring hypothesis of a positive association between the information content of earnings announcements and firm-level corporate governance.
38
Durnev and Kim (2005) and Doidge, Karolyi and Stulz (2007) show that firms that rely on external finance tend to adopt strong governance structure. Gillian (2006) identifies debt investors as an important decision maker for a firm’s governance structure.
Boone, Field, Karpoff and Raheja (2007) posit that
R&D expenses signal the cost of monitoring and hence displays a negative relation with firm-level internal governance. Doidge, Karolyi and Stulz (2007) argue that level of a country’s economic development matters for its firms’ choice of governance and transparency.
39 http://www.iasplus.com/en/tag-types/ifrs-in-your-pocket/ifrs-in-your-pocket-1
29

Another robustness test that is related to endogeneity is exclusion of a relevant variables.
Due to lack of theoretical guidance or difficulty in measurement, we could have excluded some important variables which may lead to endogeneity problems. For example, suppose that there is a unobservable variable V that is positively related to both information content of earnings announcements and firm-level corporate governance. In this case, instead of equation (4), the following would be the true model:
RV ar = α
0
+ α
1
CGov + α
2
Disp + α
3
| U E | + α
4
# Ana + α
5
RLag
+ α
6
Loss + α
7
ADR + α
8
Close + α
9
Size + α
10
M B + α
11
V + u
(5)
Then, it can be shown that, if ˆ
1 is the OLS estimate obtained from equation (4), the expected value of ˆ
1 is given by
E ( ˆ
1
) = α
1
+ α
11
θ v
(6) where θ v is the coefficient of firm-level corporate governance ( CGov ) in the regression of
V on the all the exogenous variables in equation (4). It is clear from above equations that the OLS estimate of the coefficient of CGov from equation (4) would be biased. Specifically, if α
11
> 0 and θ v
> 0 , then the OLS estimator will be upward bias. In the extreme, it is possible that ˆ
1 can turn out to be positive and significant even though α
1
= 0 simply because α
11
> 0 and θ v
> 0 . However, if we know V , we can include this variable in the estimation and estimate equation (5). In this case, the OLS coefficient CGov from equation
(5) would be unbiased. It is important to note that the inclusion of V would reduce the OLS coefficient of CGov . We refer such variable like V as confounding variable.
The interesting question is: what should be the characteristics of such a confounding variable, which is excluded from our regression due to being unobservable, that would make
30

a significant OLS coefficient just insignificant? The answer to this question is related to a measurement called impact threshold of a confounding variable ( ITCV ) proposed by Frank
(2000). The ITCV is defined as the minimum product of the partial correlation between the dependent variable and the confounding variable and the partial correlation between the variable of interest ( CGov ) and the confounding variable that would make the OLS coefficient of the variable of interest ( CGov ) statistically just insignificant.
The ITCV for CGov and the OLS estimates of the RHS variables from equation (4) are presented in Table 6. The ITCV is equal to 0.0053 and the OLS coefficient estimate of CGov is equal to 2.158 with t-statistics equal to 3.02. Therefore, if there is a confounding variable that has partial correlation with both information content of earnings announcements and
CGov that is approximately equal to 7.28% ( p
(0 .
0053) = 0 .
0728 ), inclusion of such variable in the regression would make the OLS coefficient of CGov statistically just insignificant.
Since we are referring to a unknown confounding variable, it would be better if we compare this with the included RHS variables. In order to do this, we compute the so called Impact for each of the RHS viables where the Impact is computed as the product of the partial correlation of the RHS variable with both the dependent variable (information content of earnings announcements) and CGov . The Impacts for each of the RHS variables are given in
Table 6. The maximum Impact is associated with the variable Close which is equal to 0.003.
Therefore, for the unobservable confounding variable to make the OLS coefficient of CGov to be insignificant, the confounding variable must be more correlated with information content of earnings announcements and CGov than Close , i.e., the highest Impact RHS variable.
40
Prior literature emphasizes the importance of country-level investor protection to the information content of earnings announcements. Here we perform tests to examine whether the significance of firm-level corporate governance persists after controlling for country-level
40 Please see Larcker and Rusticus (2010) for a good discussion on this issue.
31

corporate governance as stated in hypothesis H2. As mentioned earlier, we consider two separate aspects of country-level corporate governance namely the financial information environment and legal environment.
The financial information environment is proxied by aggregate earnings management ( EMgmt ), country-level disclosure quality ( AQuality ), disclosure requirements index ( DisReq ) and frequency of interim reporting ( Freq ). Similarly, the legal environment is proxied by legal origin ( Origin ), anti-self-dealing index ( Law ) and the security regulation index ( SecReg ).
We empirically investigate the effects of both firm-level and country-level governance by augmenting the baseline regression model with the inclusion of the country-level corporate governance proxies in Table 7. Models (1)-(4) involve the estimation of the baseline regression equation (4) with one of the country-level financial information environment proxies. Then,
Model (5) represents the model with the baseline regression together with inclusion of all four country-level financial information environment proxies. It is important to note that in all five cases, the coefficients of CGov are consistently positive and significant. This evidence clearly supports our second hypothesis H2.
In the second panel of Table 7, we turn to investigate the effect of firm-level corporate governance in the presence of the country-level legal environment on information content of earnings announcements. Again, in models (6)-(8), we augment the baseline regression equation (4) by including one of proxies of country-level legal environment at time. Then, we augment the baseline regression by including all three proxies of country-level legal environment in model (9). As before, all the coefficients of CGov are consistently positive and significant.
Finally, we estimate the baseline regression with the inclusion of all the proxies for country-level financial environment as well as all the proxies for the country-level legal environment represented by model (10). Model (10) is the most comprehensive model given in Table 7. Therefore, rest of our conclusions would be based on Model (10). Consistent with our previous results, the coefficient of CGov is significantly positive which implies a
32

positive association between the firm-level corporate governance and information content of earnings announcements even in the presence of the country-level corporate governance variables. Regarding the impact of country-level financial information variable, the aggregate earnings management ( EMgmt ) and disclosure quality ( AQuality ) have significant positive coefficients whereas disclosure requirement index ( DisReq ) and frequency of interim reporting ( Freq ) have significant negative coefficients. Our results related to the coefficients of
EMgmt , AQuality and Freq are consistent with the hypotheses and results of DeFond, Hung and Trezevant (2007). However, DeFond, Hung and Trezevant (2007) do not get a significant coefficient for DisReq where as we get a significant negative coefficient. This difference could be due to the fact that we are able to get a more precise results because we control for the firm-level corporate governance variables. Theoretically, the impact of DisReq on information content of earnings announcements is in-determinant because on the one hand, earnings announcements in countries with higher DisReq may be more informative implying a positive coefficient. On the other hand, countries with higher DisReq has less information asymmetry prior to annual earnings announcements implying a negative coefficient (DeFond, Hung and Trezevant (2007)). Our results show that the low-information asymmetry argument has higher impact leading to a significant negative coefficient.
An interesting phenomenon emerges from our results related to the impact of countrylevel financial information environment on the information content of earnings announcements. Even though higher levels of EMgmt , AQuality , DisReq and Freq represent represent higher level of country-level corporate governance, the impacts of EMgmt and AQuality on information content of earnings announcements are opposite to the impacts of DisReq and
Freq . This could be due to the fact that EMgmt and AQuality represent mainly the quality of information disclosure and DisReq and Freq represent the level of pre-announcement information asymmetry. Therefore, in countries with higher level of DisReq and Freq , the level of pre-announcement information asymmetry is low thus lowering the information content of earnings announcements in such countries.
As to the effect of legal environment proxies, only the coefficient of securities regulation
33

index ( SecReg ) is significantly positive at 5 percent or lower. This is consistent with the argument that in countries with stronger enforcement of laws providing protection for minority shareholders, firms disclose better quality financial information leading to a higher information content of earnings announcements.
The results presented so far pertain to the main effects of firm-level and country-level corporate governance on the information content of earnings announcements.
However, as discussed in the hypothesis section, whether the firm-level corporate governance and countrylevel corporate governance are substitutes or complements when it comes to their impact on information content of earnings announcements is an empirical question. This question is related to our third hypothesis. In order to test the hypothesis, we split the sample into two groups based on the median value of each of the seven country-level corporate governance variables in the full sample except for the legal origin, where the full sample is divided into common law and civil law subsamples. Therefore, the above-median subsample consists of firms from countries with higher than or equal to the median value of a given countrylevel corporate governance variable, and the below-median subsample contains firms from countries with lower than median country-level corporate governance.
Table 8 reports the empirical results from split-sample regression where the results related to the country-level financial information environment are presented in Panel A and results related to the country-level legal environment are presented in Panel B. The coefficients of
CGov are all positive and significant at 5 percent or lower level of significance for sub-samples with higher country-level corporate governance. In sharp contrast, the coefficients of CGov , for the lower country-level corporate governance sub-samples, are insignificant with some of the coefficients being even negative. Therefore, we conclude that the firm-level corporate governance and country-level corporate governance are complements when it comes to their
34

effects on information content of earnings announcements (Bergman and Nicolaievsky 2007;
Doidge, Karolyi and Stulz 2007; Aggarwal, Erel, Stulz and Williamson 2008).
It might be possible that our results so far are driven by factors such as event window selection and model specifications. In this section, we conduct a number of robustness tests to rule out these concerns. We first discuss the robustness of the results reported in Table 3 about the effects of firm-level corporate governance on the information content of earnings announcements in Table 9.
First, our concern arises from the question of whether a three-day event window might be too short to capture the full impact of earnings announcements. Considering the potential earnings information leakage before the earnings announcements or the lack of accuracy in announcement dates, we re-compute the information content of earnings announcements using longer event windows, the [-2, 2] event window and the [-5, 5] event window. As shown in models (1) and (2) of Table 9, our previous results are robust to these two event windows.
The coefficients of CGov continue to be significantly positive.
The next issue is about the reliability of earnings announcements when a company delays its annual earnings announcement for too long. Although we have taken this issue into account by filtering out firm-year observations with reporting lags more than 180 days, we further consider to use 100-day as a new cut-off and remove the observations with the reporting lag longer than 100. The results are reported in model (3).
41
Again, our key findings about the effects of firm-level corporate governance are insensitive to the new cutoff.
Instead of using a pooled regression method and adjusting standard errors for firmlevel clustering, we also replicate the previous analysis using the Fama-MacBeth regression
41 In untabulated results we also test our findings on a subset of firms with earnings announcements delayed for longer than 63 days. Results are qualitatively the same.
35

method. The results reported in model (4) of Table 9 show that our conclusions about the effects of firm-level corporate governance are robust to the Fama-MacBeth regression approach.
We also revisit our preliminary analysis without the U.S. firms for two reasons. Our sample is heavily represented by the U.S. observations with U.S. firm-years accounting for
58% of the full sample. It could be possible that our main results could be heavily influenced by the U.S. companies. In addition, non-U.S. firms may have markedly different governance choices from their U.S. peers in that outside the U.S. the agency problem mainly emerges from the conflict of interests between controlling and minority shareholders. The results from the non-U.S. sub-sample in model (5), however, show that CGov continues to be positive and significant at 1% level.
There may also be some concerns about model misspecification. In other words, it may be possible that we ignore some driving factors that affect the informativeness of earnings announcements, and these factors might subsume the significance of the firm-level internal governance. To avoid unnecessary loss of data, we do not include these additional variables in the main analyses. However, we consider the effects of these variables in the robustness tests.
The first additional variable we consider is motivated by the idea that strong market reaction around earnings announcements could be an outcome of either an informative earnings announcement or differential interpretations about earnings information among investors
(Bamber, Barron and Stevens 2011). If our main evidence of corporate governance leading to informative earnings announcement has nothing to do with differential belief revisions among investors, we expect our aggregate governance measure to remain significant after controlling for the event-period differential investor opinions. As indicated in Bamber, Barron and Stevens (2011), we control for differential opinions using abnormal trading volume
( AT urn ), which is defined as the average trading volume in the firm’s earnings announcement window [-1, 1], scaled by the average trading volume in the estimation window [-120,
-21] relative to the announcement day 0. As shown in model (6) of Table 9, the coefficient of
AT urn is 2.37 ( t -value = 33.31) inferring that market reaction around the announcements
36

is in part attributable to differential interpretations about disclosed earnings information.
More important, our previous findings of firm-level corporate governance effect sustains even after the inclusion of this variable.
Finally, we control for market activity before the earnings announcement as Roulstone
(2008) suggests that active liquidity trading provides sufficient “cover” for informed trading and thus affects the market reaction at earnings announcements. Following Roulstone (2008), the pre-announcement trading activity is measured by average daily trading volume over the estimation window scaled by the number of shares outstanding at the fiscal year end.
As shown in model (7), the coefficient of the stock turnover variable is not statistically significant. But, the results from the tests of our main hypotheses remain unchanged, even after including stock turnover.
In Table 10, we run the same sets of robustness tests to examine the substitution and complementary effects of the firm-level and the country-level corporate governance on the information content of earnings announcements for the sub-samples of countries with high and low level of country-level corporate governance. To conserve space, we only report results using the subsamples divided on basis of the earnings management measure, EMgmt . Almost all the robustness tests produce results that are consistent with our preliminary findings reported in Table 8. In particular, the pronounced positive effect of the firm-level corporate governance in countries with less earnings management (highEM) is robust to the choice of event windows and financial reporting lags, regression methodology, non-U.S. subsample and the inclusion of differential investor opinions proxy and pre-announcement market trading activity. It should be noted that, in untabulated results, our main evidence is qualitatively the same when subsamples are split in accordance with the other six country-level corporate governance proxies.
37

In this paper, we empirically examine the effects of firm-level and country-level corporate governance on the information content of earnings announcements using a sample of firms from 23 developed countries. As to the impact of firm-level corporate governance, we present three competing hypotheses, namely monitoring hypothesis, optimal contracting hypothesis and information asymmetry hypothesis which implies a positive, no and negative relationship between the firm-level corporate governance and information content of earnings announcements respectively. We find a significant positive relationship between the firmlevel corporate governance and the information content of earnings announcements which is consistent with the monitoring hypothesis. Therefore, the empirical evidence supports the argument that a better firm-level corporate governance leads to higher disclosure quality and lower insider trading both of which result in higher information content of earnings announcements. Further analysis, as to the source of this relationship, indicates that firms with stronger firm-level corporate governance tend to have less evidence of earnings management, tend to appoint Big 4 auditors and also attract more analyst coverage. Our result also provide potential explanation to the positive relationship between firm-level corporate governance and firm value in that better firm-level corporate governance is associated with higher earnings quality leading to lower cost of equity and, thus, higher firm value.
In order to test if the impact of firm-level corporate governance is subsumed by the country-level corporate governance, we re-estimate our models with presence of country-level corporate governance variables in addition to the firm-level corporate governance variables.
We find that the monitoring hypothesis still holds even in the presence of the country-level corporate governance variables. Furthermore, we also find a significant position relationship between the country-level corporate governance and the information content of earnings announcements.
In this paper, we also present competing hypotheses regarding whether the impacts of
38

firm-level corporate governance and country-level corporate governance on the information content of earnings announcements are substitutes or complements.
We test these hypotheses by analyzing the interactive relationship between firm-level corporate governance and country-level corporate governance. We find that the impact of firm-level corporate governance is significantly related to the information content of earnings announcements only in countries with high country-level corporate governance, supporting a complementary relationship between firm-level corporate governance and country-level corporate governance.
Two caveats of this study are in order. First, due to data availability, we have to restrict our analysis to international firms solely from developed economies and thus may underestimate the substantial cross-country differences in firm-level governance choices and country-level investor protection. Second, the RiskMetrics dataset is likely to be U.S.-centric in that this dataset focuses on governance provisions mainly for companies without a controlling shareholder. However, distinct from the U.S., a larger number of non-U.S. firms have a controlling shareholder, resulting in a new form of agency problem between the controlling shareholder and minority shareholders (Bebchuk and Hamdani (2009)).
With these limitations in mind, our research could have implications for both policymakers and academics. Market efficiency is the ultimate goal in the course of capital market development. One important feature of an efficient market is that stock prices can efficiently reflect all the available new information contained in companies’ public announcements. To develop an informationally efficient equity market, our research suggests that policy-makers should take into consideration the changing role of firm-level corporate governance in different institutional environments when creating rules to regulate firm-specific governance practices.
In addition, given the observed interactions between firm- and country-level corporate governance, future research may explore the potential underlying economic explanations for these interactions.
39

Appendix 1 Earnings Announcement Dates from Bloomberg, I/B/E/S, and
Compustat
This table presents number of annual earnings announcement dates obtained from Bloomberg, Compustat, and I/B/E/S. We compare announcement dates available from Bloomberg and I/B/E/S for non-U.S.
companies, and those from I/B/E/S and Compustat for U.S. companies, by country. Both Available is the number of firm-years with both I/B/E/S announcement dates and Bloomberg (Compustat in the U.S.) dates available. Both Equal is the number of firm-years with the same I/B/E/S dates and Bloomberg dates
(Compustat in the U.S.). I/B/E/S Earlier is the number of firm-years with I/B/E/S dates earlier than
Bloomberg dates in non-U.S. countries (Compustat in the U.S.). Bloomberg (Compustat) Earlier is the number of firm-years with Bloomberg (Compustat) dates earlier than I/B/E/S dates. The percentage values reported in parentheses reflect the proportion of the observations in the entire sample.
Country
Australia
Austria
Belgium
Canada
Denmark
Finland
France
Germany
Greece
Hong Kong
Ireland
Italy
Japan
Netherlands
New Zealand
Norway
Portugal
Singapore
Spain
Sweden
Switzerland
UK
Total (excl. US)
US
No. of Firm-
Year Obs.
125
251
38
158
1,912
188
49
57
25
190
340
35
78
572
62
99
309
309
158
144
226
1,074
6,399
9,019
Both
Available
118
251
38
152
1,911
186
48
52
25
186
336
24
78
571
62
99
307
283
157
144
216
1,057
6,301
8,863
Both I/B/E/S
Equal Earlier
294 (87.5%)
13 (54.2%)
57 (73.1%)
520 (91.1%)
41 (66.1%)
75 (75.8%)
206 (67.1%)
141 (49.8%)
31 (26.3%)
167 (66.5%)
26 (68.4%)
73 (48.0%)
959 (50.2%)
120 (64.5%)
37 (77.1%)
28 (53.8%)
6 (24.0%)
90 (48.4%)
68 (43.3%)
102 (70.8%)
123 (56.9%)
744 (70.4%)
18 (11.5%)
11 (7.6%)
14 (6.5%)
105 (9.9%)
3,921(62.2%%) 370 (5.9%)
8,492 (95.8%) 151 (1.7%)
13 (3.9%)
3 (12.5%)
5 (6.4%)
18 (3.2%)
8 (12.9%)
5 (5.1%)
22 (7.2%)
32 (11.3%)
14 (11.9%)
8 (3.2%)
7 (18.4%)
26 (17.1%)
23 (1.2%)
14 (7.5%)
0 (0.0%)
11 (21.2%)
4 (16.0%)
9 (4.8%)
Bloomberg
(Compustat) Earlier
29 (8.6%)
8 (33.3%)
16 (20.5%)
33 (5.8%)
13 (21.0%)
19 (19.2%)
79 (25.7%)
110 (38.9%)
73 (61.9%)
76 (30.3%)
5 (13.2%)
53 (34.9%)
929 (48.6%)
52 (28.0%)
11 (22.9%)
13 (25.0%)
15 (60.0%)
87 (46.8%)
71 (45.2%)
31 (21.5%)
79 (36.6%)
208 (19.7%)
2,010 (31.9%)
220 (2.5%)
40

Appendix 2 Composition of Corporate Governance Attributes
This table presents the composition of the overall corporate governance index ( CGov ), alongside with several governance subindexes including board subindex ( Board ), board committee subindex ( Comm ), audit subindex, executives’ and directors’ compensation subindex ( Comp ) and ownership subindex ( Own ). For each attribute, we report the percentage of firms meeting the minimally acceptable standard, and the percentage is computed over the total number of non-missing observations for each attribute. The full sample includes 15,418 firm-year observations across 23 developed countries for the period 2002-2006. The non-U.S. sample includes 6,399 firm-year observations, and the U.S. sample includes 9,019 firm-year observations.
Corporate Governance Index ( CGov )
Minimally acceptable corporate governance standard
1.
2.
3.
4.
5.
6.
7.
No interlocks among compensation committee members
Does not ignore shareholder proposal
All directors attend 75% of board meetings or had a valid excuse
CEO serves on the boards of two or fewer public companies
Single class, common
Board size is greater than five but less than 16
CEO is not listed as having a related-party transaction in the proxy statement
All stock-incentive plans adopted with shareholder approval
Consulting (audit related and other) fees are less than audit fees
8.
9.
10.
All directors with more than one year of service own stock
11.
No former CEO on the board
12.
Directors receive all or a portion of their fees in stock
13.
Company either has no poison pill or a pill that is shareholder approved
14.
Board is controlled by more than 50% independent outside directors
15.
Repricing is prohibited
16.
Audit committee comprised solely of independent outsiders
17.
Shareholders may call special meetings
18.
Auditors ratified at most recent annual meeting
19.
Board has the express authority to hire its own advisors
20.
Chairman and CEO are separated
21.
Officers’ and directors’ stock ownership is at least 1% but not over
30% of total shares outstanding
22.
Compensation committee consists solely of independent outsiders
23.
Shareholders vote on directors selected to fill vacancies
24.
Options grants align with company performance and the burn rate is reasonable
25.
Governance guidelines are publicly disclosed
26.
Performance of the board is reviewed regularly
27.
Nominating committee consists solely of independent outside directors
28.
Majority vote requirement to approve mergers
29.
Governance committee exists and met in the past year
30.
Company is not authorized to issue blank check preferred
31.
Board cannot amend bylaws without shareholder approval or can only do so under limited circumstances
32.
Board approved succession plan in place for the CEO
33.
Annually elected board
34.
Outside directors meet without the CEO and disclose the number of times they met
35.
Shareholder approval is required to increase/decrease the size of the board
36.
Majority vote requirement to amend charter/bylaws
37.
Company expenses options
38.
Executives are subject to stock ownership guidelines
39.
Shareholder may act by written consent
40.
Directors are subject to stock ownership requirements
41.
Directors are required to submit resignation upon a change in job
42.
There is a policy that limits outside directorships
43.
Shareholders have cumulative voting rights
44.
Qualifies for proxy contest defenses combination points
Board Comm Audit Comp Own
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
69.8%
69.3%
67.0%
66.5%
66.0%
65.7%
65.5%
62.4%
61.7%
61.5%
61.0%
58.3%
57.9%
99.7%
99.6%
94.8%
94.8%
92.2%
89.7%
87.4%
84.7%
81.9%
77.5%
75.9%
74.3%
73.6%
50.5%
47.9%
47.5%
44.3%
42.4%
42.3%
38.6%
34.4%
32.5%
25.7%
23.7%
20.8%
20.8%
20.6%
19.9%
9.4%
4.0%
3.3%
41

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51

52

53

54

55

Table 3
This table presents estimated coefficients of the OLS regression of information content of earnings announcements measure, abnormal stock return variance ratio ( RVar ), on several firm-level internal governance indexes and control variables shown in the first column. Industry, country, and year fixed effects are included in most of the regression models.
CGov denotes the aggregate corporate governance while Board , Comm ,
Audit , Comp and Own respectively represent board subindex, board committee subindex, audit subindex, executives’ and directors’ compensation and ownership subindexes. The composition of these governance indexes are detailed in Appendix 2. All the variables are defined in Appendix 3.
t − statistics shown in parentheses are computed based on the standard errors adjusted for the firm-level clustering.
‡
,
† and * indicate statistical significance at the 1%, 5% and 10% levels (two-tailed), respectively.
R
2
.
2 is the adjusted
Aggregate Corporate Governance Governance Subindexes
Model
Intercept
CGov
(1) (2)
0.629
‡
(2.71)
6.168
‡
2.526
‡
(6.17)
5.567
‡
(14.21) (11.74)
(3)
4.312
‡
(7.70)
2.158
‡
(3.02)
(4)
4.512
‡
(9.45)
(5) (6) (7) (8)
4.988
‡
5.616
‡
5.241
‡
5.567
‡
(11.84) (12.91) (11.01) (13.25)
(9)
4.511
‡
(8.08)
Board
Comm
Audit
Comp
Own
Disp
| U E |
# Ana
RLag
Loss
ADR
Close
Size
M B
-6.286
(-1.13)
7.057
‡
(3.92)
0.039
‡
(3.67)
-0.001
(-0.48)
-1.246
‡
(-9.34)
-0.381
†
(-2.18)
-0.580
†
(-2.22)
-0.201
‡
(-5.46)
-0.024
(-0.65)
-0.086
(-0.02)
6.357
‡
(3.43)
0.021*
(1.75)
-0.001
(-0.13)
-1.112
‡
(-7.82)
-0.090
(-0.51)
-0.519*
(-1.91)
-0.029
(-0.65)
-0.061
(-1.40)
2.001
‡
(3.63)
0.739
‡
(3.26)
-0.043
(-0.17) 0.416
(1.32)
0.018
(0.07)
-0.104
-0.039
(-0.02) (-0.01)
6.315
‡
6.322
‡
(3.41) (3.41)
0.021*
(1.75)
0.000
0.021*
(1.76)
-0.001
0.333
(0.06)
6.256
‡
(3.38)
0.023*
(1.92)
-0.001
0.266
(0.05)
6.280
‡
(3.39)
0.023*
(1.90)
-0.001
0.345
(0.06)
6.261
‡
(3.38)
0.023*
(1.91)
-0.001
(-0.08) (-0.16) (-0.23) (-0.24) (-0.22)
-1.121
‡
-1.123
‡
-1.119
‡
-1.112
‡
-1.119
‡
(-7.87) (-7.88) (-7.83) (-7.81) (-7.83)
-0.088
-0.104
-0.117
-0.118
-0.116
(-0.50) (-0.59) (-0.66) (-0.67) (-0.65)
-0.507* -0.478* -0.647
†
-0.644
†
-0.640
†
(-1.87) (-1.74) (-2.42) (-2.41) (-2.31)
-0.036
-0.013
(-0.79) (-0.29)
-0.060
-0.059
0.001
(0.02)
-0.054
-0.004
(-0.09)
-0.056
0.000
(0.00)
-0.054
(-1.38) (-1.37) (-1.24) (-1.29) (-1.25)
0.021*
(1.71)
-0.001
(-0.16)
-1.113
‡
(-7.80)
-0.101
(-0.57)
-0.484*
(-1.71)
1.491
†
(2.19)
0.536*
(1.81)
-0.329
(-1.22)
0.291
(0.92)
-0.180
(-0.70)
-0.425
(-0.08)
6.323
‡
(3.42)
-0.031
(-0.68)
-0.060
(-1.39)
Industry&Country dummies
Year dummies
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
R
2
N
0.015
15418
0.022
15418
0.044
15418
0.044
15418
0.044
15418
0.044
15418
0.044
15418
0.044
15418
0.044
15418
56

Table 4
This table presents estimated coefficients of the regressions of several financial reporting quality proxies on firm-level internal governance score ( CGov ), together with control variables shown in the first column. Industry, country and year fixed effects are also included in all the regression models (not shown). Models (1), (3) and (4) estimate the OLS regression while model (2) runs probit regression. Four financial reporting quality proxies considered are magnitude of accounting accruals ( Accrual ), appointment of a Big 4 auditing firm
( Big 4 ), number of analyst forecasts ( # Ana ) and aggregate earnings quality variable ( F Quality ).
Accrual is computed as absolute value of a firm’s total accruals scaled by a firm’s cash flows from operations.
Big 4 is a dummy variable which equals one if the firm appoints as its auditor one of the four accounting firms:
Ernst&Young, Deloitte&Touche, KPMG and PricewaterhouseCoopers as their auditor.
# Ana is equal to the most recent number of analyst forecasts prior to earnings announcements.
F Quality aggregates the three alternative financial reporting quality measures by taking the average of percentile ranks of the three variables. All other variables are defined in Appendix 3.
t − statistics shown in parentheses are computed based on the standard errors adjusted for the firm-level clustering.
‡
,
† and * indicate statistical significance at the 1%, 5% and 10% levels (two-tailed), respectively.
and is pseudo R 2 in model (2).
R 2 is the adjusted R 2 in models (1), (3) and (4)
Model
Accrual
(1)
Big 4
(2)
# Ana F Quality
(3) (4)
Intercept -0.907
‡
CGov
RLag
Loss
ADR
Close
Size
M B
(-4.40)
0.572
†
(2.24)
-0.007
‡
(-5.10)
-0.772
‡
-1.561
‡
-5.255
‡
(-8.01) (-8.61)
4.452
‡
3.296
‡
29.914
‡
(17.96)
10.370
‡
(20.42) (4.31)
-0.012
‡
-0.044
‡
(4.91)
-0.134
‡
(-9.92) (-10.53) (-11.95)
-0.060
-0.713
‡
-5.630
‡
(-11.48) (-1.36) (-5.50)
0.181
‡
(-1.46)
-0.758
-0.026* -0.062
‡
(-1.71)
0.010
(0.73)
(0.20)
‡
(-15.89)
1.350
‡
(3.34) (-10.88) (5.02)
-0.149
0.018
-2.160
‡
(-7.52)
2.182
‡
(-4.23) (40.77)
-0.269
‡
0.310
‡
(5.59)
(-14.15)
1.528
‡
(2.64)
-4.606
‡
(-5.65)
3.420
‡
(26.75)
0.548
‡
(3.80)
R 2
N
0.029
13906
0.239
15418
0.509
15418
0.332
13906
57

Table 5
This table addresses the endogeneity problem and presents estimated coefficients of variations of the regression of the information content of earnings announcements proxy, RVar , on firm-level internal governance ( CGov ) and control variables as shown in the first column of the table. Unreported industry, country, and year fixed effects are also included. Models (1) and (2), respectively introduce into the baseline regression model firm fixed effects and lagged dependent variable ( LagLHS ). In model
(3), the change in RVar is regressed on the change in each independent variable. Models (4) and (5) presents the results from two-stage least squares (2SLS) regression analysis. In the first-stage estimation associated with model (4), we regress CGov on the following instrumental variables: dependence on external finance ( ExtF in ), financial leverage ( Lev ), R&D expenses ( R & D ) and GDP per capita ( GDP C ).
ExtF in is defined as capital expenditures minus cash flows from operations divided by capital expenditures; Lev equals total liabilities scaled by total assets; R & D is computed as R & D expenses scaled by total assets; and
GDP C equals the natural log of GDP per capita in the country that the firm belongs to. In the second-stage regression, we estimate the baseline specification by replacing the actual CGov with the fitted value of CGov from the first-stage regression.
The mandatory adoption of IFRS is utilized as an exogenous event for firm-level governance reform on a sample of firms from countries that mandated IFRS adoption in model (6) and on the full sample in model (7). In models (6) and (7), we regress
RVar on the P ostIF RS variable excluding country fixed effects, where P ostIF RS is a dummy variable which takes the value of one if the country that a firm belongs to mandatorily adopted IFRS on and after 12/31/2005 and zero otherwise. All other variables are defined in Appendix 3.
t − statistics shown in parentheses are computed based on the standard errors adjusted for the firm-level clustering.
‡
,
† and * indicate statistical significance at the 1%, 5% and 10% levels (two-tailed), respectively.
Model
Intercept
CGov
P ostIF RS
Disp
| U E |
# Ana
RLag
Loss
ADR
Close
Size
M B
LagLHS
ExtF in
Lev
R & D
GDP C
R
N
2
RVar 2SLS Regression Exogenous Event
Firm-fixed effects LagLHS ∆ RV ar CGov (Stage 1) RVar (Stage 2) IFRS Adopters Full Sample
(1) (2) (3) (4) (5) (6) (7)
-6.696
†
(-2.01)
4.123
‡
(2.91)
4.355
‡
(6.41)
2.235
†
(2.52)
-0.090
(-0.39)
3.163
†
(1.96)
-1.427
‡
(-3.57)
-9.391
(-1.32)
25.349
†
(2.09)
2.798
‡
(3.02)
4.565
‡
(12.51)
2.907
(0.36)
6.461
†
(2.20)
0.059
†
(2.26)
0.001
(0.16)
-0.370
(-1.49)
-0.078
(-0.09)
-0.610
(-0.96)
0.583
†
(2.14)
-0.245
†
(-2.05)
1.770
(0.22)
8.980
‡
(3.12)
0.014
(1.00)
-0.004
(-0.88)
-1.151
‡
(-6.49)
0.037
(0.19)
-0.428
(-1.31)
-0.034
(-0.64)
-0.059
(-1.19)
0.066
‡
(5.06)
3.931
(0.52)
5.524*
(1.82)
0.036
(1.23)
0.005
(0.55)
-0.330
(-1.29)
0.099
(0.19)
-0.973
(-1.41)
0.904
‡
(2.93)
-0.180
(-1.35)
0.176
-0.054
0.001
†
(2.37)
‡
(4.97)
0.000
‡
(3.22)
†
(-2.12)
(-3.52)
-0.001
(-0.48)
-0.011
‡
(-3.84)
-0.056
‡
(-11.74)
0.012
‡
(11.74)
0.002
‡
-1.366
(-0.21)
6.090
‡
(2.98)
-0.001
(-0.03)
0.003
(0.70)
-0.908
‡
(-5.38)
0.097
(0.42)
0.842
(1.12)
-0.330*
(-1.87)
-0.097*
(-1.68)
0.654
‡
(3.14)
7.602
(0.88)
4.720
(1.64)
0.018
(0.87)
0.004
(0.70)
-1.093
‡
(-3.56)
0.126
(0.44)
0.396
(0.86)
0.054
(0.58)
0.079
(1.29)
1.149
‡
(10.63)
-4.050
(-0.73)
5.948
‡
(3.20)
0.016
(1.35)
0.001
(0.15)
-1.208
‡
(-8.48)
-0.099
(-0.56)
-0.715
‡
(-2.68)
0.019
(0.44)
-0.053
(-1.22)
0.000
(0.26)
0.008
(1.40)
-0.071
‡
(-3.58)
0.190
‡
(5.06)
0.087
15418
0.044
11657
0.004
11013 14076 14076
0.032
3866
0.039
15418
58

Table 6
This table presents the effect of firm-level corporate governance on information content of earnings announcements together with the impact of unobservable confounding variable based on Frank (2000). The impact threshold for a confounding variable ( IT CV ) is defined as the minimum product of the partial correlation between the dependent variable
(information content of earnings announcements) and the confounding variable and the partial correlation between the variable of interest ( CGov ) and the confounding variable that makes the coefficient of the variable of interest ( CGov ) statistically just insignificant, (i.e., t-statistics equal to 1.96). The measure Impact for other exogenous variable is equal to the product of the partial correlation between the dependent variable (information content of earnings announcements) and the exogenous variable and the partial correlation between the exogenous variable and the CGov . The Impact measures the impact of the inclusion of the exogenous variable, other than CGov , on the coefficient of CGov . A positive Impact for a exogenous variable means the inclusion of this variable makes the coefficient of CGov lower and a negative Impact has the opposite effect. For easy reference, the table presents the coefficient and t-Statistics taken from Table 3 model (3). As before,
‡
,
† and * indicate statistical significance at the 1%, 5% and 10% levels (two-tailed), respectively.
Intercept
CGov
Disp
|UE|
#Ana
Rlag
Loss
ADR
Close
Size
MB
Coefficient t-Statistics
4 .
312
‡
2 .
158
‡
− 0 .
086
6 .
357
‡
0 .
021
∗
− 0 .
001
− 1 .
112
‡
− 0 .
090
− 0 .
519
∗
− 0 .
029
− 0 .
061
7 .
70
3 .
02
− 0 .
02
3 .
43
1 .
75
− 0 .
13
− 7 .
82
− 0 .
51
− 1 .
91
− 0 .
65
− 1 .
40
ITCV
0 .
0053
Impact
0 .
0000
− 0 .
0005
0 .
0009
0 .
0001
0 .
0010
0 .
0002
0 .
0030
0 .
0000
− 0 .
0005
59

Table 7
This table presents estimated coefficients of the regression of the information content of earnings announcements proxy, RVar , on aggregate corporate governance score ( CGov ) and country-level governance measures, together with control variables as shown in the first column. Industry and year fixed effects are also included
(not shown). Two aspects of country-level governance are considered: information environment and legal environment. The information environment proxies include the aggregate earnings management score
( EM gmt ), financial accruals quality score ( AQuality ), the disclosure requirements index ( DisReq ) and frequency of interim financial reporting ( F req ). The selected legal environment proxies are legal origin of the country ( Origin ), the anti-self-dealing index ( Law ) and the securities regulation index ( SecReg ). All the variables are defined in Appendix 3.
t − statistics shown in parentheses are computed based on the standard errors adjusted for the firm-level clustering.
‡
,
† and * indicate statistical significance at the 1%, 5% and 10% levels (two-tailed), respectively.
2 is the adjusted R 2 .
Panel A: Financial Information Environment Panel B: Legal Environment
Model (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
|
Intercept 4.817
‡
CGov
(8.90)
1.397
†
Disp
U E
#
|
Ana
RLag
(2.08)
3.844
(0.68)
6.905
‡
(3.73)
0.039
‡
(3.44)
0.000
Loss
ADR
Close
Size
M B
EM gmt
AQuality
DisReq
F req
Origin
Law
SecReg
2.812
‡ 3.989
‡ 3.550
‡ 7.319
‡ 3.936
‡ 4.020
‡ 3.450
‡ 3.702
‡ 6.881
‡
(5.06) (6.60) (6.47) (7.79) (7.78) (7.57) (6.47) (4.79) (5.90)
2.243
‡ 3.347
‡ 2.795
‡ 2.099
‡ 2.887
‡ 3.372
‡ 2.372
‡ 2.134
‡ 2.045
‡
(3.95) (5.53) (4.31) (3.06) (4.48) (6.19) (3.63) (3.06) (2.89)
2.977
-2.346
-0.723
1.875
-0.980
-2.483
0.746
0.826
1.601
(0.53) (-0.42) (-0.13) (0.33) (-0.18) (-0.45) (0.13) (0.15) (0.28)
7.143
‡
7.357
‡
7.225
‡
7.003
‡
7.305
‡
7.352
‡
7.216
‡
7.118
‡
6.882
‡
(3.94) (4.05) (3.97) (3.79) (4.02) (4.05) (3.97) (3.92) (3.73)
0.037
‡
0.035
‡
0.035
‡
0.035
‡
0.036
‡
0.035
‡
0.037
‡
0.034
‡
0.032
‡
(3.29) (3.10) (3.12) (3.09) (3.19) (3.08) (3.23) (2.99) (2.79)
0.002
-0.002
-0.001
0.000
-0.002
-0.002
-0.002
-0.001
0.001
(0.07)
-1.129
‡
(0.57) (-0.73) (-0.36) (0.05) (-0.75) (-0.69) (-0.46) (-0.18) (0.17)
-1.139
‡
-1.056
‡
-1.074
‡
-1.145
‡
-1.064
‡
-1.057
‡
-1.084
‡
-1.100
‡
-1.145
‡
(-7.92) (-7.96) (-7.42) (-7.57) (-7.98) (-7.49) (-7.44) (-7.62) (-7.72) (-7.97)
-0.336* -0.200
-0.449
‡
-0.423
†
-0.102
-0.447
‡
-0.444
‡
-0.431
†
-0.395
†
-0.107
(-1.97) (-1.12) (-2.61) (-2.45) (-0.57) (-2.60) (-2.58) (-2.51) (-2.28) (-0.60)
-0.550
†
-0.718
‡
-0.761
‡
-0.740
‡
-0.400
-0.753
‡
-0.762
‡
-0.754
‡
-0.743
‡
-0.424
(-2.05) (-2.69) (-2.84) (-2.76) (-1.48) (-2.81) (-2.85) (-2.82) (-2.78) (-1.59)
-0.046
-0.069* -0.109
‡
-0.086* -0.063
-0.094
†
-0.110
‡
-0.078* -0.066
-0.057
(-1.07) (-1.65) (-2.59) (-1.94) (-1.42) (-2.17) (-2.63) (-1.79) (-1.47) (-1.27)
-0.034
0.017
-0.088
†
-0.063
-0.043
-0.078
†
-0.085
†
-0.053
-0.032
-0.044
(-0.85) (0.38) (-2.23) (-1.55) (-0.97) (-2.03) (-2.23) (-1.35) (-0.78) (-0.98)
0.056
‡
0.092
‡
0.095
‡
(5.63)
0.379
‡
(4.87)
-0.052
(-0.11)
(5.91)
0.384
‡
(3.87)
-2.674
‡
(-4.41)
0.141
-0.384
‡
(4.72)
0.334
-5.004
‡
(3.06)
‡
(-4.32)
-0.558
‡
(1.62) (-3.55)
0.211
(1.28)
-0.151
(-0.42)
(-3.16)
0.120
-1.476*
(0.24) (-1.87)
-0.974
0.679
0.932
‡
(-1.49) (0.55)
1.294* 4.878
‡
(2.69) (1.70) (3.47)
R
2
N
0.038
15369
0.038
15418
0.036
15418
0.036
15418
0.04
0.036
0.036
15369 15418 15418
60
0.037
15418
0.037
15418
0.041
15369

Table 8
This table presents estimated coefficients of the regression of the information content of earnings announcements proxy, RVar , on firm-level corporate governance ( CGov ) and control variables in subsamples of countries with high and low level of macro-level governance as shown in the first column. Unreported industry, country, and year fixed effects are also included. The sample is divided into high and low country-level corporate governance in accordance with the median value of each of the seven country-level corporate governance variables. Panel A presents analyses of the information environment ( IEnv ) proxies including the aggregate earnings management score ( EM gmt ), financial accruals quality score ( AQuality ), the disclosure requirements index ( DisReq ) and frequency of interim financial reporting ( F req ). Panel B reports regression results from examining legal environment proxies including legal origin of the country ( Origin ), the anti-self-dealing index ( Law ) and the securities regulation index ( SecReg ). All the variables are defined in
Appendix 3.
t − statistics shown in parentheses are computed based on the standard errors adjusted for the firm-level clustering.
‡
,
† and * indicate statistical significance at the 1%, 5% and 10% levels (two-tailed), respectively.
R 2 is the adjusted R 2 .
Panel A: Effects of CGov and IEnv on RVar
Information Environment Proxies ≥ Median Information Environment Proxies < Median
IEnv = EM gmt AQuality DisReg F req EM gmt AQuality DisReg F req
Model (1)
|
Intercept 4.525
‡
CGov
(7.20)
2.156
‡
Disp
U E |
(2.73)
-11.754
(-1.40)
6.003
‡
# Ana
RLag
Loss
(2.58)
0.015
(0.99)
-0.003
(-0.67)
-1.167
‡
ADR
Close
Size
M B
(-7.15)
-0.112
(-0.39)
-0.400
(-1.23)
-0.003
(-0.05)
-0.086
(-1.59)
(2)
4.809
‡
(7.88)
1.844
†
(2.32)
1.214
(0.18)
5.271
†
(2.41)
0.017
(1.22)
-0.002
(-0.55)
-1.149
‡
(-7.63)
-0.015
(-0.06)
-0.805
‡
(-2.60)
-0.039
(-0.75)
-0.091
(-1.56)
(4)
4.990
‡
(7.55)
1.766
†
(2.15)
-26.472
‡
(-3.05)
6.716
‡
(2.70)
0.013
(0.77)
-0.005
(-1.06)
-1.124
‡
(-6.50)
-0.128
(-0.34)
-0.560
(-1.63)
0.003
(0.06)
-0.086
(-1.20)
(3)
4.546
‡
(7.86)
2.042
‡
(2.77)
0.988
(0.16)
7.064
‡
(3.49)
0.011
(0.84)
-0.002
(-0.46)
-1.123
‡
(-7.54)
-0.190
(-1.07)
-0.672
†
(-2.32)
-0.021
(-0.44)
-0.120
‡
(-2.78)
(5)
6.451
‡
(4.10)
-1.130
(-0.61)
1.008
(0.13)
7.514
†
(2.46)
0.013
(0.65)
0.001
(0.13)
-0.565*
(-1.95)
0.131
(0.56)
-0.722
(-1.57)
-0.101
(-1.20)
0.048
(0.65)
(6)
0.599
(0.39)
2.394
(1.49)
-4.053
(-0.43)
10.078
‡
(2.87)
0.037
(1.33)
0.005
(0.70)
-0.470
(-1.12)
-0.314
(-1.12)
1.033*
(1.81)
0.079
(0.74)
0.007
(0.10)
(7)
(2.14)
0.011
(1.05)
-0.814*
(-1.68)
0.160
(0.24)
0.667
(0.84)
0.042
(0.22)
0.091
(0.64)
2.994
(1.38)
3.061
(0.96)
1.218
(0.10)
3.989
(0.88)
0.085
†
(8)
3.134
‡
(2.73)
2.369
(1.49)
8.870
(1.22)
6.787
†
(2.45)
0.014
(0.78)
0.008
(1.39)
-0.779
‡
(-3.10)
0.127
(0.59)
-0.225
(-0.51)
-0.089
(-1.14)
0.022
(0.39)
R 2
N
0.039
11902
0.043
13193
0.043
14138
0.045
10356
0.026
3467
0.037
2225
0.066
1280
0.034
5062
61

Table 8 - Continued
Substitution and Complementary Effects of Firm-level and Country-level
Corporate Governance
Panel B: Effects of CGov and LEnv on RVar
Legal Environment Proxies ≥ Median Legal Environment Proxies < Median
|
LEnv = CommonLaw
Model
Intercept
CGov
Disp
U E
#
Size
M B
|
Ana
RLag
Loss
ADR
Close
(1)
4.713
‡
(7.48)
1.951
†
(2.49)
-8.341
(-1.06)
8.062
‡
(3.46)
0.008
(0.50)
-0.004
(-0.80)
-1.176
‡
(-7.06)
-0.126
(-0.46)
-0.577*
(-1.77)
-0.006
(-0.11)
-0.127
†
(-2.38)
Law
(2)
4.321
‡
(7.25)
2.426
‡
(3.23)
-2.080
(-0.33)
7.333
‡
(3.42)
0.011
(0.84)
0.000
(0.06)
-1.158
‡
(-7.66)
-0.144
(-0.77)
-0.516*
(-1.71)
-0.034
(-0.70)
-0.131
‡
(-2.80)
SecReg
(3)
4.498
‡
(7.29)
2.237
‡
(2.90)
-7.773
(-1.03)
8.247
‡
(3.70)
0.014
(0.97)
-0.004
(-0.79)
-1.201
‡
(-7.38)
-0.138
(-0.55)
-0.335
(-1.07)
-0.015
(-0.29)
-0.097
†
(-1.99)
CivilLaw
(4)
3.242
†
(2.12)
3.041
(1.53)
5.810
(0.73)
3.327
(1.10)
0.036*
(1.80)
0.008
(1.07)
-0.686
†
(-2.41)
-0.049
(-0.20)
-0.247
(-0.50)
-0.035
(-0.37)
0.050
(0.64)
Law
(5)
2.909
(1.56)
-0.015
(-0.01)
6.964
(0.63)
4.337
(1.19)
0.032
(1.03)
-0.007
(-0.84)
-0.875
†
(-2.00)
-0.011
(-0.02)
-0.437
(-0.66)
0.234
(1.58)
0.112
(1.03)
SecReg
(6)
5.429
‡
(3.01)
-0.239
(-0.10)
6.490
(0.79)
0.946
(0.30)
0.030
(1.45)
0.006
(0.80)
-0.542*
(-1.86)
-0.073
(-0.29)
-1.273
†
(-2.43)
-0.068
(-0.68)
0.067
(0.71)
R
2
N
0.037
11533
0.044
13684
0.038
12287
0.059
3885
0.056
1734
0.05
3131
62

63

64