Legal Regime and Financial Reporting Quality

This article uses the Canadian environment, where French civil law in the province of Quebec coexists with common law in the rest of Canada (denoted as bijural), to test the thesis of the neutrality of the legal system with regard to financial reporting quality. This single-country design allows for a better control over other factors that influence financial reporting quality. The French civil law environment appears to encourage firms to publish accounting data of better quality due to the greater liability risk faced by auditors and corporate directors under that regime. These findings, based on ten years of data and seven attributes of financial reporting quality, are robust to different matching procedures and model specifications. This research contributes to the current debates in Canada as to whether financial market regulation under French civil law and common law jurisdictions should be unified under a single common law national securities regulator. At the broader level, the results support claims that a more in-depth understanding of the implementation of civil law and common law is needed rather than gross generalization about the two systems. These results especially call into question that common law regimes are unambiguously superior to civil law regimes in encouraging high quality financial reports