Abstract
German accounting regulations have experienced dramatic changes in the last ten years. One of the most important new laws, which is the Law for Control and Transparency (KonTraG), was enacted in 1998. This law has led to big changes in corporate governance and has improved internal control systems for German firms. The research question behind this paper is whether KonTraG has actually led to an improvement in earnings quality. I find less earnings management, more conservatism and more value relevance after implementation of KonTraG. Furthermore, I find a stronger improvement in earnings quality for small than for large firms and a better development in earnings quality metrics for firms with negative business development than for firms with positive development. Moreover, the data show a systematic link, i.e. positive correlation between firm size and share return, the proxy for business development. Controlling for this systematic link, the better development of earnings quality metrics for small firms and those with a negative business development diminishes.
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