The Influence of Country- and Firm-Level Governance on Financial Reporting Quality: Revisiting the Evidence

Abstract

Using a large sample of European firms that mandatorily adopted IFRS, this paper assesses how firm-level governance, as proxied by board attributes, and country-level enforcement interplay in affecting financial reporting quality. Financial reporting quality is assumed to have three dimensions: earnings informativeness, accruals management, and real earnings management. Three key findings emerge from our analyses. First, IFRS adoption per se does not seem to affect financial reporting quality. Second, in countries characterized by weak enforcement, strong board-level monitoring appears to enhance financial reporting quality, thus suggesting a substitutive effect between firm- and country-level governance. Third, in countries characterized by strong enforcement, firms with strong board-level monitoring exhibit a higher level of financial reporting quality than firms with weak board-level monitoring, thus suggesting that country- and firm-level governance are complementary. Overall, our findings help bridge the gap in the debate about the effects of country- and firm-level governance on the quality of financial reporting and provide further nuance on prior IFRS adoption research.