Investor protection may lead to increased real earnings management, risking firm value.
Investor protection affects how companies manage their earnings. When investor protection is strong, companies use less accrual-based earnings management but may switch to real earnings management, which can harm the company's value. A study comparing U.K. and French companies found that U.K. companies use more of both types of earnings management compared to French companies, contrary to expectations. This difference could be due to other factors unique to each country.