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Journal of Accounting and Economics 29 (2000) 1}51

The e!ect of international institutional factors on properties of accounting earnings Ray Ball , S.P. Kothari *, Ashok Robin
Graduate School of Business, University of Chicago, Chicago, IL 60637, USA Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02142, USA College of Business, Rochester Institute of Technology, Rochester, NY 14623, USA Received 3 August 1998; received in revised form 9 June 2000

Abstract International di!erences in the demand for accounting income predictably a!ect the way it incorporates economic income (change in market value) over time. We characterize the &shareholder' and &stakeholder' corporate governance models of common and code law countries respectively as resolving information asymmetry by public disclosure and private communication. Also, code law directly links accounting income to current

We gratefully acknowledge the helpful comments of David Alexander, Eli Bartov, Sudipta Basu, Gary Biddle, Sir Bryan Carsberg, Dan Collins, Peter Easton, Bob Holthausen (the editor), Scott Keating, Christian Leuz, Gerhard Mueller, Christopher Nobes, the late Dieter Ordelheide, Peter Pope, Abbie Smith, Peter Taylor, Ross Watts, Greg Waymire, Steve Ze!, Jerry Zimmerman, the referee, and seminar participants at: Carnegie Mellon University, University of California at Berkeley, University of California at Los Angeles, CUNY Baruch College, EIASM Workshop in European Accounting in Krakow, 1999 Financial Accounting and Auditing Conference of the Institute of Chartered Accountants in England & Wales, Universitat Frankfurt am Main, Hong K Kong University of Science and Technology 1998 Summer Symposium, IAAER/CIERA 1998 Conference, Inquire Europe Autumn 1998 Seminar, University of Iowa, Harvard Business School, KPMG-AAA International 1999 Accounting Conference, London Business School, London School of Economics, Massachusetts Institute of Technology, Melbourne Business School, New York University, Ohio State University, University of New South Wales, University of Technology in Sydney, and Washington University in St Louis. The paper has received a Vernon K. Zimmerman Award and an Inquire Europe Prize. Ball and Kothari received "nancial assistance from the John M. Olin Foundation and the Bradley Policy Research Center, and Kothari acknowledges "nancial assistance from the New Economy Value Research Lab at the MIT Sloan School of Management. * Corresponding author. Tel.: #(617) 253-0994; fax: #(617) 253-0603. E-mail address: (S.P. Kothari).

0165-4101/00/$ - see front matter 2000 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 5 - 4 1 0 1 ( 0 0 ) 0 0 0 1 2 - 4


R. Ball et al. / Journal of Accounting and Economics 29 (2000) 1}51

payouts (to employees, managers, shareholders and governments). Consequently, code law accounting income is less timely, particularly in incorporating economic losses. Regulation, taxation and litigation cause variation among common law countries. The results have implications for security analysts, standard-setters, regulators, and corporate governance. 2000 Elsevier Science B.V. All rights reserved. JEL classixcation: F00; F30; G15; M41 Keywords: International accounting; Standard setting; Regulation; Conservatism

1. Introduction We show that di!erences in the demand for accounting income in di!erent institutional contexts cause its properties to vary internationally. The properties of accounting income we study are timeliness and conservatism. Timeliness is de"ned as the extent to which current-period accounting income incorporates current-period economic income, our proxy for which is change in market value of stockholders' equity. Conservatism is de"ned in the Basu (1997) sense as the extent to which current-period accounting income asymmetrically incorporates economic losses, relative to economic gains. A central result is that accounting income in...
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