Earnings quality in privatized firms: The role of state and foreign owners

We use a unique dataset of 350 privatized firms from 45 countries to investigate the relationship between shareholder identity and earnings quality. We find robust evidence that state ownership is associated with lower earnings quality while foreign ownership is associated with higher earnings quality. Furthermore, we report evidence suggesting that the impact of foreign ownership on earnings quality varies with the country’s institutional environment. Specifically, we find that foreign ownership is associated with higher earnings quality in countries with higher government stability and lower risk of government expropriation.