Abstract
This study examines the impact of investor protection, market monitoring, and stock liquidity on the degree of earnings management using a sample of 430 firms from 34 countries cross-listed as American Depository Receipts (ADRs). Our primary findings are that ADR firms from countries with strong legal system, strong outside investor rights, more institutional shareholders, and more financial analysts following are less likely to engage in earnings management. Auditor quality is not a significant factor. Further, firms with low stock liquidity tend to manipulate earnings relative to those with high liquidity. Legal factors, institutional holdings, and stock liquidity are particularly significant factors, suggesting that threats of lawsuits and monitoring by investors are effective mechanism to reduce earnings manipulation. Results also indicate that cross-listed firms exercise more earnings management in the pre-listing period than in the post-listing period and that stocks listed in the OTC market tend to have more earnings management than those in major exchanges.
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