Earnings Quality in Eastern Europe after Communism

• In Event: International Accounting 1

Abstract

In the past two decades, the 11 countries in the eastern EU have left behind authoritarian communist rule and become free democracies. Among the many momentous changes (for instance, improved human rights) they have adopted free markets, with the associated need for quality financial reports to investors.
This study analyzes the changes in the quality of corporate governance in the form of financial reports. It develops hypotheses about reporting quality rooted in national legal systems, which began the period as communist, and gradually developed toward western, capitalist standards. The study traces the development of the legal systems, as a means to develop hypotheses.
It uses the method of “small gains and small losses,” which are not subject to differences in accounting standards, as the measure of quality. We find that earnings quality in the eastern EU countries, taken as a whole, has not achieved western EU standards. Exploratory evidence suggests that within the eastern EU, where legal quality is lower, earnings quality is lower, as we hypothesize

Authors

• Frederick W Lindahl, George Washington University

• Hannu Schadéwitz, University of Turku