The Informativeness of Current Return about Future Earnings and Extra-Legal Institutions: International Evidence

Eric Li-Luan Chu, and Wu, W. 2011. The Informativeness of Current Return about Future Earnings and Extra-Legal Institutions: International Evidence. NTU Management Review, 22 (1): 67-96

Eric Li-Luan Chu, Adjunct Professor, Department of Accounting, National Taiwan University
Woody Wu, Professor, School of Accounting, Chinese University of Hong Kong

Abstract

This study examines the impact of extra-legal institutional factors on the informativeness of current return about future earnings. Using a sample of firm-level observations during the period from 1989 to 1999 in eight East Asian and eleven Western European countries that exhibit different levels of extra-legal institutions, we find evidence that the informativeness of current return about future earnings: (1) decreases with stronger product market competition for good news firms, (2) increases with stronger product market competition for bad news firms; and (3) is more pronounced in countries where there is strong pressure from public opinion. Furthermore, multiple regression results show that country-specific extralegal and legal institutional features add the incremental contribution above and beyond the others. This study provides empirical support for the role of extra-legal institutions in corporate governance. While changing legal institutions, such as the legal tradition, the judicial system, or the rule of law, may be costly for historical or political reasons, or both, improving the extra-legal institutions is likely to be well within the range of feasible reforms.  


Keywords

corporate governance extra-legal institution earnings informativeness


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