Countries differ in the way they channel capital to firms and in the way they reduce information asymmetries between firms and the key financing parties. These differences are likely to shape firms’ incentives to report earnings that reflect true economic performance. We illustrate this idea using a stylized characterization of financial systems. In an outsider system, like the ., firms rely heavily on public debt or equity markets in raising capital. Corporate ownership is dispersed. Investors are “at arm’s length” and do not have privileged access to information. Public debt and equity markets play a major role in monitoring corporate insiders. Consequently, public information about the firm is.
