Earnings Quality in Privatized Firms : International Evidence on the Role of State and Private Owners

We use a unique dataset of 233 privatized firms from 38 countries between 1985 and 2008 to investigate the relation between shareholder identity and earnings quality. We find strong and robust evidence that (residual) state ownership is associated with lower earnings quality. More specifically, we find that state ownership is associated with higher abnormal accruals and that the adverse effects of state ownership on earnings quality are less pronounced in countries with strong investor protection. Furthermore, we report evidence suggesting that private ownership (i.e., by institutional investors and foreigners) helps to mitigate the adverse effects of state ownership. Finally, we find that government-controlled firms with lower earnings quality are penalized with a higher cost of equity