AN EMPIRICAL STUDY OF THE RELATIONSHIP BETWEEN ACCOUNTING INFORMATION, INSTITUTIONAL QUALITY AND STOCK MARKET RETURNS.

Abstract

The quality of accounting information has been extensively researched in the accounting literature, with some studies investigating the relationship between accounting information and institutional quality. Institutional quality encompasses factors such as the quality of accounting standards, corporate governance structures, transparency, law, and investor protection. Prior research indicates that institutional quality affects accounting information quality, which, in turn, affects stock returns. However, the joint effect of accounting information quality and institutional quality on stock returns remains an empirical question in the literature.

This paper aims to contribute to the literature by examining the joint effect of accounting information quality and institutional quality on stock returns. Specifically, we evaluate two related hypotheses: First, institutional quality improves accounting information quality. Second, improved accounting information quality and institutional quality increases stock returns. The System Generalized Method of Moments estimator (System GMM) is used to simultaneously analyze the sensitivity of stock returns to accounting information and institutional quality using earnings persistence, accounting conservatism, and earnings management as measures of accounting information quality.

Our empirical analysis covers selected countries and uses various indices to assess their institutional and political environment. The results suggest that accounting information quality and institutional quality jointly affect stock returns. Our findings support the first hypothesis, indicating that institutional quality improves accounting information quality. The second hypothesis also receives support, indicating that improved accounting information quality and institutional quality increase stock returns.

This paper contributes to the literature by shedding light on the joint effect of accounting information quality and institutional quality on