Are you being fooled? Quality of earnings and quality of government

Abstract

This study investigates empirically the impact of the quality of earnings of major listed firms on the quality of government in a large cross-section of countries. It evaluates government performance using measures of six dimensions of governance, namely, voice and accountability, political stability, government effectiveness, regulatory quality, rule of law and control of corruption. The quality of earnings used is a measure of earnings opacity. The findings show that countries that have a high level of earnings opacity exhibit inferior government performance. The results based on 34 countries persist after controlling separately for market performance, economic freedom, newspaper circulation and emerging vs. developed countries. The importance of the quality of earnings in explaining the variation in government performance across countries sheds light on the strong role of accounting in society.

Key Words:

• Quality of earnings
• Earnings opacity
• Quality of government