Keys to reduce earnings management in emerging markets

Abstract

This paper examines earnings quality adapted to International Financial Reporting Standards in Mexican emerging capital market and how investor protection and audit quality to override managers’ incentives to engage in earnings management. We evidence that the new accounting regulation could be considered of high quality financial reporting standard because it is associated with lower earnings management. The analyses also suggest that cross-listed firms have higher quality local generally accepted accounting principles accounting information as measured by earnings management. There is also evidence that earnings of Mexican companies with Big 4 auditors are of higher quality. The results contribute to the ongoing debate on whether high standards are sufficient and effective in countries with weaker investor protection rights.