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The value relevance of earnings in Europe after IFRS implementation: Why do national differences persist?

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Abstract

Since 2005, all European listed companies must comply with IFRS in the preparation of their consolidated financial statements. Several studies have investigated the consequences of this political decision, comparing various dimensions of accounting quality before and after IFRS implementation. But they do not really address the following question: will the adoption of a common set of accounting standards result in a standardisation of accounting quality throughout Europe, or will national differences persist due to the influence of local characteristics? In order to provide evidence on this issue, we measure the value relevance of accounting earnings in 16 European countries over the period 2006-2007. The results show that country differences persist despite the use of common accounting standards, which is consistent with the idea that legal and regulatory country characteristics as well as market forces still impact the association between market returns and accounting data.

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... A proliferação das pesquisas com o foco no value relevance das informações disseminou-se ao redor do mundo nos vários mercados de capitais desenvolvidos (supostamente em maior proporção) e emergentes, com as mais variadas metodologias. Houlthausen e Watts (2001) WEISS, 1997;LO;LYS, 1999;OHLSON, 1995;OHLSON, 1995OHLSON, , 1996BEAVER;LANDSMAN, 2001;LEE;LEE, 2013;FILIP;RAFFOURNIER, 2013;LAM;SAMI;ZHOU, 2013). ...
... A proliferação das pesquisas com o foco no value relevance das informações disseminou-se ao redor do mundo nos vários mercados de capitais desenvolvidos (supostamente em maior proporção) e emergentes, com as mais variadas metodologias. Houlthausen e Watts (2001) WEISS, 1997;LO;LYS, 1999;OHLSON, 1995;OHLSON, 1995OHLSON, , 1996BEAVER;LANDSMAN, 2001;LEE;LEE, 2013;FILIP;RAFFOURNIER, 2013;LAM;SAMI;ZHOU, 2013). ...
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This article aims to assess the additivity of value relevance of the DFC and the DVA to the set of financial statements in the context of the Brazilian stock market. For this, using a sample of non-financial companies publicly traded in the period of 2008 to 2010, was analyzed, initially by linear regression, the relationship between the market value of companies, equity and income, which represented for the purposes of this study the set of financial statements. In the second stage, was inserted, individually, the proxies of the DFC (operating cash flow - FCO, investment cash flow - FCI and financing cash flow - FCF) and then the proxies of DVA (wealth created - RC). Finally, were included the DFC and DVA proxies together to the set of financial statements. The evidence supports that the income, who represented the DRE, did not provide statistical significant in determining the market value of companies. Inserting the DFC, it was found that only the proxy FCF presented significant, improving the coefficient of determination in more than 20%, which implies that the DFC added value relevance to the set of statements. Unlike the DFC, the DVA, represented by the variable RC, failed to provide informational content placed in isolation to the demonstrations, or together with the DFC.. Supposedly, the absence of value relevance can be explained in the sense that the information of DVA don’t add new content, in addition to those already provided by the income statement, which also proved no significant, or investors are not yet familiar with this demonstration.
... As Nobes (1998) notes, prior to the adoption of IFRS, the level of conservatism differs between countries due to cultural (Cieslewicz, 2014) and legal reasons, the financial system structure and other incentives of the companies. Thus, it is expected that the effects of IFRS adoption differ among countries, especially when more recent evidence shows that these effects also depend on previous GAAP (Kvaal and Nobes, 2010;Martínez et al., 2011;Haller and Wehrfritz, 2013;Filip and Raffournier, 2013;and Nobes and Perramon, 2013). ...
Purpose In this paper we analyse the effect on unconditional conservatism of the mandatory adoption of International Financial Reporting Standards (IFRS) by the European listed firms in January 2005. Under the hypothesis that accounting regulation influences the accounting conservatism, we use a non-market-based measure of unconditional conservatism – the accrual-based measure proposed by Givoly and Hayn (2000) – to test this effect, controlling for the other determinants of the unconditional conservatism found in the accounting literature. Design/methodology/approach We use a panel data of 10 years and 96 non-financial listed firms in the Spanish stock market in which the differences between local GAAP and IFRS are more important. A pre-estimation analysis of the data reveals that GLS with random effects is the correct estimation procedure. However, to try to deal with the likely endogeneity in the set of variables, the authors perform an estimate with a dynamic estimator for panels with few periods and many individuals where the independent variables are not strictly exogenous. Findings As expected, results show evidence that support a significant reduction on the unconditional conservatism of firms in the sample due to the adoption of IFRS. This evidence is relevant to equity market, debt market and corporate governance users of the financial information, and also for the policymakers who can assess the effects of their mandate. Research limitations/implications Results shown in this paper have all the limitations of system-, country-, sample- and event-specific studies but, along with many others drawn in alternative contexts, may help to correctly understand both the time-evolution and cross-sectional country differences of firms’ unconditional conservatism. Originality/value The study represents the first analysis of the effect of the adoption of IFRS on unconditional conservatism of the European listed companies using a non-market accrual-based measure. Results are not influenced by the dynamics of the stock market and, by comparison, allow us to analyse this influence in results provided by using market-based measures of the unconditional accounting conservatism provided by previous literature.
... Çalışması sonucunda, ülkelerin yasal kökeninin, yasal sistemlerinin gücünün ve Hofstede'nin kültürel faktör skorlarını kullanarak hesapladığı kültür gizlilik düzeylerinin (Belirsizlikten kaçınma skoru + Güç mesafesi skoru -Bireysellik skoru), UFRS uygulamalarına rağmen muhasebe bilgilerinin değer ilişkisini etkilemeye devam ettiğini ortaya koymuştur. Filip ve Raffournier (2013), aynı muhasebe standartlarını uygulayan ülkeler arasında muhasebe bilgilerinin değer ilişkisi bakımından farklılık olup olmadığını araştırmıştır. 14 AB ülkesi, Norveç ve İsviçre olmak üzere toplam 16 ülkeden oluşan örneklemi 2006-2007 yılları için inceleyen bu çalışma sonucunda, ülkelerin yasa ve mevzuat özelliklerinin (paydaş koruması, hukuki yaptırım gücü gibi) koruması ve piyasa dinamiklerinin (piyasa büyüklüğü gibi) muhasebe bilgilerinin değer ilişkisini, UFRS'ye geçişe rağmen etkilemeye devam ettiği görülmüştür. ...
... 4 Nobes (1998) shows evidence that, prior to the adoption of IFRS, conservatism, both unconditional and conditional, differs between countries for cultural reasons (Cieslewicz, 2013), legal reasons, the financial system structure and other firm-level incentives. 5 Moreover, recent evidence (Kvaal and Nobes, 2010;Martínez et al., 2011;Haller andWehrfritz, 2013, Filip andRaffournier, 2013;and Nobes and Perramon, 2013) shows that the proper application of IFRS differs between countries depending on 2 Ball et al. (2000) refer to conditional conservatism, which is news dependent, as income conservatism versus unconditional conservatism, which is also known as balance-sheet conservatism. 3 In this sense, note that in the accounting literature, unconditional and conditional conservatism are incorporated into empirical models with opposite effects (Beaver and Ryan, 2005;and Roychowdhury and Watts, 2007). ...
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Since 2005 European listed companies have been required to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). We examine whether value relevance increased following the introduction of IFRS, using a sample of 3,721 companies listed on five European stock exchanges: Frankfurt, Madrid, Paris, London and Milan. We find mixed evidence of an increase in value relevance. However, the influence of earnings on share price increased following the introduction of IFRS in Germany, France and the UK, while the influence of book value of equity decreased (except for the UK).
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More than 120 countries require or permit the use of International Financial Reporting Standards (‘IFRS’) by publicly listed companies on the basis of higher information quality and accounting comparability from IFRS application. However, the empirical evidence about these presumed benefits are often conflicting and fail to separate between information quality and comparability. In this paper we examine the effect of mandatory IFRS adoption on firms’ information environment. We find that after mandatory IFRS adoption consensus forecast errors decrease for firms that mandatorily adopt IFRS relative to forecast errors of other firms. We also find decreasing forecast errors for voluntary adopters, but this effect is smaller and not robust. Moreover, we show that the magnitude of the forecast errors decrease is associated with the firm-specific differences between local GAAP and IFRS. This finding suggests that it is IFRS adoption rather than a correlated unobservable factor that is causing forecast errors to decrease. Exploiting individual analyst level data and isolating settings where analysts would benefit more from either increased comparability or higher quality information, we document that the improvement in the information environment is driven both by information and comparability effects. These results suggest that mandatory IFRS adoption has improved the quality of information intermediation in capital markets and as a result firms’ information environment by increasing both information quality and accounting comparability.
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Using financial accounting data from manufacturing firms in 16 countries for 1986-1995, we demonstrate that the value relevance of financial reports is lower for countries where the financial systems are bank-oriented rather than market-oriented; where private sector bodies are not involved in standard setting process; where accounting practices follow the Continental model as opposed to the British-American model; where tax rules have a greater influence on financial accounting measurements; and where spending on auditing services is relatively low. Results are robust to alternative measures of value relevance of financial accounting data, including measures based on earnings (using a regression and a hedge-portfolio approach), accruals, and earnings and book value of equity combined. We show that the extent to which earnings information is reflected in leading-period returns as compared to contemporaneous returns is greater for bank-oriented than for market-oriented countries. This feature potentially induces spurious associations between value relevance measures and financial system characteristics. Our results are robust to using value relevance measures adjusted for this confounding effect.
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We consider stock markets in 20 countries to investigate whether the accrual anomaly (Sloan 1996), characterized by U.S. stock prices overweighting the role of accrual persistence, is a local manifestation of a global phenomenon. We explore whether the occurrence of the anomaly is related to country differences in accounting and institutional structures, and examine alternative explanations for its occurrence. We find stock prices overweight accruals in general, with accruals overweighting occurring in countries with a common law relative to a code law tradition. Using firm-level data on a country-by-country basis, we document the occurrence of the anomaly in four countries - Australia, Canada, the U.K., and the U.S. - and also in a sample of ADRs of firms domiciled in countries where we do not detect the anomaly. Using country-level data, we confirm the anomaly is more likely to occur in countries having a common law tradition, and also in countries allowing extensive use of accrual accounting and having a lower concentration of share ownership. Additional analyses reveal that earnings management and barriers to arbitrage best explain the anomaly.
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This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is particularly responsive to firms' reporting incentives. We document that private firms exhibit higher levels of earnings management and that strong legal systems are associated with less earnings management in private and public firms. We also provide evidence that private and public firms respond differentially to institutional factors, such as book-tax alignment, outside investor protection and capital market structure. Moreover, legal institutions and capital market forces often appear to reinforce each other.
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We study the role of borrower accounting quality in debt contracting. Specifically, we examine how accounting quality affects the borrower's choice of private versus public debt market and how the design of debt contracts vary with accounting quality in the two markets. We find that accounting quality affects the choice of the market, with poorer accounting quality borrowers preferring private debt (bank loans). This is consistent with banks possessing superior information access and processing abilities which reduce adverse selection costs for borrowers. We also find that accounting quality has an economically significant but differential impact on contract design in the two markets consistent with differences in recontracting flexibility across the two markets. For private debt (which has greater recontracting flexibility), both the price (interest) and non-price (maturity and collateral) terms are significantly more stringent for poorer accounting quality borrowers, unlike public debt where only the price terms are more stringent. The impact of accounting quality on interest spreads of public debt is 2.5 times that of the private debt, since the price terms alone reflect the variation in accounting quality. Overall, the results are consistent with greater recontracting flexibility of banks enabling them to write more customized contracts relative to dispersed bondholders.
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This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to fully reflect information in the accrual and cash flow components of current earnings until it impacts future earnings.
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n recent years, German companies report consolidated financial statements under German GAAP, U.S. GAAP, or International Accounting Standards (IAS). Market observers, researchers, and regulators have argued that financial statements prepared under the shareholder (or investor) model, such as U.S. GAAP or IAS, provide better information than financial statements prepared under the stakeholder model (German GAAP). They further have argued that U.S. GAAP is more rigorously defined and, therefore, provides superior information to IAS. We investigate comparative value relevance, measured as the slope coefficient of the returns/earnings regression. Our results are consistent with expectations. Within our sample of German companies traded on German stock exchanges, value relevance of U.S. GAAP based earnings is higher than that of IAS based earnings, which in turn is more value relevant than earnings produced under German GAAP. A major contribution of this research is that, unlike prior research, we measure stock returns for all sample firms in the German stock market only, and therefore are not reliant on the perhaps strong assumption underlying prior studies of similarity of pricing across markets domiciled in different countries.
Previous studies on the effect of International Financial Reporting Standards (IFRS) on accounting quality often have difficulties to control for confounding factors on accounting quality. As a result, the observed changes in accounting quality could not be attributed mainly to IFRS. We use a unique research setting to address this issue by comparing the accounting quality of publicly listed companies in 15 member states of the European Union (EU) before and after the full adoption of IFRS in 2005. We use five indicators as proxies for accounting quality. We find that the majority of accounting quality indicators improved after IFRS adoption in the EU. That is, there is less of managing earnings toward a target, a lower magnitude of absolute discretionary accruals, and higher accruals quality. But our results also show that firms engage in more earnings smoothing and recognize large losses in a less timely manner in post-IFRS periods. In addition, we examine the effects of institutional variables on financial reporting quality. Our contribution to the literature is that we show the improved accounting quality is attributable to IFRS, rather than changes in managerial incentives, institutional features of capital markets, and general business environment, etc.
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The objective of this study is to investigate if the value relevance of European-listed companies increased after the mandatory application of International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) and how the value relevance of accounting information prepared under IAS/IFRS is shaped by the specific factors of the country in which companies are domiciled. Results show that the value relevance of financial information during the period companies applied mandatory IAS/IFRS is higher than for the period during which they applied local accounting standards. We also found that countries where accounting and tax are clearly separated show more relevant accounting information. Finally, we found that companies from countries with more legal and public enforcement mechanisms disclose less relevant accounting information under IAS/IFRS.
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Investors, regulators, academics, and researchers all emphasize the importance of financial statement comparability. However, an empirical construct of comparability is typically not specified. In addition, little evidence exists on the benefits of comparability to users. This study attempts to fill these gaps by developing a measure of financial statement comparability. Empirically, this measure is positively related to analyst following and forecast accuracy, and negatively related to analysts’ dispersion in earnings forecasts. These results suggest that financial statement comparability lowers the cost of acquiring information, and increases the overall quantity and quality of information available to analysts about the firm.
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The paper develops and analyzes a model of a firm's market value as it relates to contemporaneous and future earnings, book values, and dividends. Two owners' equity accounting constructs provide the underpinnings of the model: the clean surplus relation applies, and dividends reduce current book value but do not affect current earnings. The model satisfies many appealing properties, and it provides a useful benchmark when one conceptualizes how market value relates to accounting data and other information. Résumé. L'auteur élabore et analyse un modèle dans lequel il conceptualise la relation entre la valeur marchande d'une entreprise et ses bénéfices, ses valeurs comptables et ses dividendes actuels et futurs. Deux postulats de la comptabilisation des capitaux propres servent de charpente au modèle: a) la relation du résultat global s'applique et b) les dividendes réduisent la valeur comptable actuelle sans influer, cependant, sur les bénéfices actuels. Le modèle présente de nombreuses propriétés intéressantes et il peut, fort utilement, servir de repère dans la conceptualisation de la relation entre la valeur marchande et les données comptables et autres renseignements.
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An interesting question in assessing value relevance of accounting variables is whether measures of value relevance are materially affected by market inefficiencies. We explore this question in two steps: First, we analytically examine the impact of market inefficiencies on the estimation of coefficients in value relevance regressions and derive a procedure that corrects potential biases caused by such inefficiencies. The procedure adjusts contemporaneous stock prices for future risk adjusted price changes, and yields value relevance coefficient estimates that capture both contemporaneous and delayed market reactions. Second, we apply this procedure to three types of studies that have attracted much attention in the accounting literature: 1) the value relevance of earnings and book values; 2) the value relevance of residual income value estimates; and 3) the value relevance of accruals and cash flows. We compare coefficient estimates obtained from conventional value relevance regressions with those from regressions employing our adjustment procedure, and find statistically significant differences in both level and return regression coefficient estimates. The magnitude of differences in coefficient estimates for return regressions is large enough to affect economic inferences. We find that coefficients of lagged price deflated residual income value estimates move significantly closer toward a predicted value of one implying a meaningful reduction of bias. Last, we find that cash flows now have significantly larger coefficient estimates than accruals consistent with their greater persistence.
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This paper describes several implementation effects associated with the mandated adoption of international financial reporting standards promulgated by the International Accounting Standards Board in the European Union, including a possible increased demand for detailed implementation guidance and for a single European securities regulator. The paper also discusses the mandated adoption as a research setting for considering the relative influences of standards versus incentives as determinants of financial reporting outcomes, and describes two standard setting challenges that may become more pronounced as a result of the mandated adoption.
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We investigate (1) whether the variation in accounting standards across national boundaries relative to International Accounting Standards (IAS) has an impact on the ability of financial analysts to forecast non-U.S. firms’ earnings accurately, and (2) whether analyst forecast accuracy changes after firms adopt IAS. IAS are a set of financial reporting policies that typically require increased disclosure and restrict management’s choices of measurement methods relative to the accounting standards of our sample firms’ countries of domicile. We develop indexes of differences in countries’ accounting disclosure and measurement policies relative to IAS, and document that greater differences in accounting standards relative to IAS are significantly and positively associated with the absolute value of analyst earnings forecast errors. Further, we show that analyst forecast accuracy improves after firms adopt IAS. More specifically, after controlling for changes in the market value of equity, changes in analyst following, and changes in the number of news reports, we find that the convergence in firms’ accounting policies brought about by adopting IAS is positively associated with the reduction in analyst forecast errors.
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In this paper, I draw parallels between the literatures on the effects of law on the financial development of countries and on the effects of accounting standards on financial reporting outcomes. My central thesis is that these literatures are complementary in terms of what they have to say about understanding the effects of law, regulations and accounting standards on economic and financial reporting outcomes. Moreover, both literatures suggest that U.S. securities laws and financial reporting standards have taken a more regulatory direction over time. I then take these themes and draw implications for the effects of the adoption of International Financial Reporting Standards (IFRS) around the world at the time of adoption and over time.
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This study examines whether audit committee and board characteristics are related to earnings management by the firm. A negative relation is found between audit committee independence and abnormal accruals. A negative relation is also found between board independence and abnormal accruals. Reductions in board or audit committee independence are accompanied by large increases in abnormal accruals. The most pronounced effects occur when either the board or the audit committee is comprised of a minority of outside directors. These results suggest that boards structured to be more independent of the CEO are more effective in monitoring the corporate financial accounting process.
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This paper examines systematic differences in earnings management across 31 countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong protection limits insiders’ ability to acquire private control benefits, which reduces their incentives to mask firm performance. Our findings are consistent with this prediction and suggest an endogenous link between corporate governance and the quality of reported earnings.
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This study analyzes determinants and effects of differences between Domestic Accounting Standards (DAS) and International Accounting Standards (IAS). We use an extensive list of differences between DAS and IAS to create two indices, absence and divergence. Absence measures the extent to which the rules regarding certain accounting issues are missing in DAS but are covered in IAS. Divergence applies in circumstances where the rules regarding the same accounting issue differ in DAS and IAS. It measures the extent of differences between DAS-based rules and IAS-based rules.Using a sample of 30 countries for 2001, we show that absence is (mainly) determined by the importance of the equity market and ownership concentration, while divergence is positively associated with the level of economic development and the importance of the accounting profession, but is constrained by the importance of equity markets. Our analysis suggests that a higher level of absence implies more opportunities for earnings management and for decreases in firm-specific information to investors. A larger divergence from IAS is associated with richer firm-specific information in capital markets.
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We draw on the investor protection literature to identify structural factors in the financial reporting environment that are likely to explain cross-country differences in the information content of annual earnings announcements. Using data from over 50,000 annual earnings announcements in 26 countries, we find that annual earnings announcements are more informative in countries with higher quality earnings or better enforced insider trading laws, and that annual earnings announcements are less informative in countries with more frequent interim financial reporting. We also find that, on average, earnings announcements are more informative in countries with strong investor protection institutions.
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The East Asian countries Hong Kong, Malaysia, Singapore and Thailand provide rare insight into the interaction between accounting standards and the incentives of managers and auditors. Their standards derive from common law sources (UK, US, and IAS) that are widely viewed as higher quality than code law standards. However, their preparers’ incentives imply low quality. We show their financial reporting quality is not higher than under code law, with quality operationalized as timely recognition of economic income (particularly losses). It is misleading to classify countries by standards, ignoring incentives, as is common in international accounting texts, transparency indexes, and IAS advocacy.
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We derive and use easily computable expressions for the mean and variance of R2 in the standard linear regression model with fixed regressors. In respect to its probability limit R2 is seriously biased upward in small samples; the0 ‘adjusted’ R̄2 does much better. But at sample sizes where these distinctions matter both measures are thoroughly unreliable because of their large dispersion. R2 should not be quoted for samples of less than fifty observations.
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This study hypothesizes that because shareholders have a liquidation option, losses are not expected to perpetuate. They are thus less informative than profits about the firm's future prospects. The results are consistent with the hypothesis. They also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses. The liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive. Alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests.
Article
International differences in the demand for accounting earnings affect properties of earnings that are predictable and observable. First, we show that earnings are more timely in incorporating value-relevant information in common-law countries (we study Australia, Canada, U.S. and UK) than in code-law countries (France, Germany, Japan). We attribute this to differences in solving information asymmetry under "shareholder" corporate governance (public disclosure) versus "stakeholder" governance (private communication), and to code-law's direct linkage of reported earnings to current payouts (to employees, managers, shareholders and governments). Second, earnings in most countries studied are conservative (tilted toward timely incorporation of bad news), due to information asymmetry. Third, common-law countries' earnings are more conservative, due to greater: (1) information asymmetry between managers and debt and equity investors; (2) regulation; and (3) expected cost of investor litigation. Fourth, UK earnings are the least conservative among common-law countries, due to private debt, and lower regulation and litigation costs. Fifth, tax laws, legal restrictions on undistributed earnings and code-law institutional links between earnings and dividends reduce the timeliness of earnings, relative to dividends. Sixth, earnings are more timely than cash flows in all countries studied. Seventh, the asymmetric timeliness of earnings has increased substantially over time in most countries. The results have implications for security analysts, accounting standard-setters, regulators, and corporate governance.