The Effect of International Institutional Factors on Properties of Accounting Earnings Abstract International differences in the demand for accounting earnings affect properties of earnings that are predictable and observable. First, we show that earnings are more timely in incorporating value-relevant information in common-law countries (Australia, Canada, U.S., and UK) than in code-law countries (France, Germany, Japan). We attribute this to differences in solving information asymmetry under “shareholder” corporate governance (public disclosure) versus “stakeholder” governance (private communication), and to code-law’s direct linkage of reported earnings to current payouts (to employees, managers, shareholders, and governments). Second, earnings in most countries studied are conservative (tilted toward timely incorporation of bad news), due to information asymmetry. Third, common-law countries’ earnings are more conservative, due to greater: (1) information asymmetry between managers and debt and equity investors; (2) regulation; and (3) expected cost of investor litigation. Fourth, UK earnings are the least conservative among common-law countries, due to private debt, and lower regulation and litigation costs. Fifth, tax laws, legal restrictions on undistributed earnings and code-law institutional links between earnings and dividends reduce the timeliness of earnings, relative to dividends. Sixth, earnings are more timely than cash flows in all countries studied. Seventh, the asymmetric timeliness of earnings has increased substantially over time in most countries. The results have implications for security analysts, accounting standard-setters, regulators, and corporate governance. The properties of earnings we address are timeliness (defined as the extent to which current earnings incorporate current value-relevant information) and conservatism (the extent to which current earnings asymmetrically incorporate current bad news, but not current good news). We study over 40,000 annual earnings reported during 1985-95, under the accounting rules of seven countries. The results are consistent with our general thesis, that properties of accounting earnings around the world are a function of the varying demands that earnings satisfy. Our research design addresses the flow of value-relevant information into accounting earnings, under different international institutions. An important feature of this design is that we observe properties of earnings from the earnings themselves. This has several advantages over simply studying the different accounting rules used to calculate earnings internationally. First, much accounting practice is not determined by rules, for reasons that include: practice is more detailed than rules; rules lag innovations in practice; and companies do not invariably follow the rules. Studying accounting rules per se is incomplete and potentially misleading, because the extent to which accounting practice is determined by formal rules varies internationally. Second, we report evidence that reported earnings are influenced by managers' operating, financing and investment decisions, as well as by accounting rules and practices. For example, managers can reduce the volatility of reported earnings by deferring discretionary expenditures (such as R&D) in bad earnings years. Because the use of reported earnings inThe Effect of International Institutional Factors on Properties of Accounting Earnings Abstract International differences in the demand for accounting earnings affect properties of earnings that are predictable and observable. First, we show that earnings are more timely in incorporating value-relevant information in common-law countries (Australia, Canada, U.S., and UK) than in code-law countries (France, Germany, Japan). We attribute this to differences in solving information asymmetry under “shareholder” corporate governance (public disclosure) versus “stakeholder” governance (private communication), and to code-law’s direct linkage of reported earnings to current payouts (to employees, managers, shareholders, and governments). Second, earnings in most countries studied are conservative (tilted toward timely incorporation of bad news), due to information asymmetry. Third, common-law countries’ earnings are more conservative, due to greater: (1) information asymmetry between managers and debt and equity investors; (2) regulation; and (3) expected cost of investor litigation. Fourth, UK earnings are the least conservative among common-law countries, due to private debt, and lower regulation and litigation costs. Fifth, tax laws, legal restrictions on undistributed earnings and code-law institutional links between earnings and dividends reduce the timeliness of earnings, relative to dividends. Sixth, earnings are more timely than cash flows in all countries studied. Seventh, the asymmetric timeliness of earnings has increased substantially over time in most countries. The results have implications for security analysts, accounting standard-setters, regulators, and corporate governance. The properties of earnings we address are timeliness (defined as the extent to which current earnings incorporate current value-relevant information) and conservatism (the extent to which current earnings asymmetrically incorporate current bad news, but not current good news). We study over 40,000 annual earnings reported during 1985-95, under the accounting rules of seven countries. The results are consistent with our general thesis, that properties of accounting earnings around the world are a function of the varying demands that earnings satisfy. Our research design addresses the flow of value-relevant information into accounting earnings, under different international institutions. An important feature of this design is that we observe properties of earnings from the earnings themselves. This has several advantages over simply studying the different accounting rules used to calculate earnings internationally. First, much accounting practice is not determined by rules, for reasons that include: practice is more detailed than rules; rules lag innovations in practice; and companies do not invariably follow the rules. Studying accounting rules per se is incomplete and potentially misleading, because the extent to which accounting practice is determined by formal rules varies internationally. Second, we report evidence that reported earnings are influenced by managers' operating, financing and investment decisions, as well as by accounting rules and practices. For example, managers can reduce the volatility of reported earnings by deferring discretionary expenditures (such as R&D) in bad earnings years. Because the use of reported earnings in