Do wealthy economies have better accounting quality? International evidence

Abstract

AbstractPurposeThe purpose of this article is to empirically test whether wealthy economies have better accounting quality (AQ) compared to their “poor” counterparts.Design/methodology/approachTo test the formulated hypothesis, this article examines accounting and market data of 40 countries' capital markets, obtained from Compustat Global and Compustat North America, and spanned throughout the last quarter of century, from 1992 to 2016. Country wealth and controlling‐ and valuation‐usefulness of accounting information are proxied by gross domestic product per capita, conditional accounting conservatism and value relevance of earnings and book values, respectively.FindingsDescriptive analysis, consistent with the prior literature, reveals that controlling‐usefulness and valuation‐usefulness of accounting information significantly negatively correlate with each other, putting them as alternative (rather than compatible) objectives of the accounting system. The major finding shows that wealthy economies report significantly more controlling‐useful but about equally valuation‐useful accounting information compared to their poor counterparts.Practical implicationsThe findings are interesting from investors as well as standard setters' perspective.Originality/valueAccording to Ball (Journal of International Accounting Research (2016), 15(2), 1–6), wealthy economies are likely to invest more in the establishment and development of a country‐level reporting infrastructure such as accounting, financial, legal and political systems, which should ultimately lead to better AQ. This article argues that wealthy economies are likely to report more controlling‐useful, but not necessarily more valuation‐useful accounting information compared to the poor ones. This argument is based on the fact that on the one hand decision makers within the wealthy economies' capital markets are likely to intensively utilize various alternative sources of information, implying a lower demand on accounting information as a source of valuation decisions. On the other hand, demand for controlling‐useful accounting information would exist even while utilizing other (external) sources of information as the inside (managerial) information helps the management to efficiently control and plan the firm activities.