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Financial Reporting Quality in Emerging Economies

Empirical Evidence from Brazil and South Africa


Gregor Hagemann

Contrary to their increasingly important role in the global economy, little is known so far about the financial reporting practices in emerging economies. This study therefore analyses the financial reporting practices of listed firms in Brazil and South Africa. It also investigates the determinants of financial reporting quality and its effect on information asymmetries. In addition, the author compares the results for the two emerging economies to those for Germany representing a developed economy. The empirical findings have several implications for researchers and lecturers as well as for practitioners, such as preparers and users of financial reports, legislators, standard setters and auditors.

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1 Introduction


1   Introduction

1.1   Motivation and research questions

“High quality, transparent financial statements facilitate investing in the same way that maps facilitate sailing - by clarifying the environment and therefore reducing risk of the unknown.”1

This statement by Lynn E. Turner, Chief Accountant of the U.S. Securities & Exchange Commission (SEC), illustrates the importance of high quality information in a company’s financial statements. Capital market participants depend on high quality corporate information as a basis for capital allocation decisions.2 However, it is questionable, as to what extent companies indeed clarify the environment for the users of financial statements through reporting activities.

In particular, the quality of corporate information provided in emerging economies is deemed to be lower than in developed countries, not only in financial statements, but also other financial reporting instruments, such as the companies’ entire annual reports. Reporting differences between companies from emerging economies and developed countries are frequently explained by less favorable institutional and cultural environments in emerging economies.3 Fülbier/Klein (2013) summarize reasons for such cross-country differences:

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