Discussion of Ultimate Ownership, Income Management, and Legal and Extra-Legal Institutions

摘要

HHHW extend the literature on the institutional determinants of earnings management by examining the interaction between country-level institutional factors and firm-level measures of the separation of insiders' cash flow and ownership rights. Their empirical results are both potentially new and interesting. However, my empirical analysis suggests that one must exercise great care in interpreting their findings. First, HHHW's single proxy for earnings management appears to have limited empirical validity because it exhibits no association with previously validated earnings management and accounting quality measures. In addition, the HHHW proxy is not associated with measures of private control benefits, and it exhibits contradictory correlations with other important economic factors. Second, my results raise questions about HHHW's claim that tax compliance is a primary determinant of earnings management. I present evidence that suggests that tax compliance is an endogenous outcome of other institutional factors. Using a simultaneous equations framework, I show that lower earnings management, as influenced by strong investor protection and higher quality accounting standards, can potentially lead to greater tax compliance. This finding suggests that better legal protection of outside investors and stronger accounting rules may reduce insiders' incentives and ability to divert funds from both outside investors and tax authorities. On the other hand, after controlling for the endogeneity of tax compliance, I find that tax compliance is not a significant determinant of earnings management.