Professor Robert Bushman

Robert Bushman would never call himself an international accountant. But his research is changing the way that accounting is viewed worldwide. His most recent work sheds light on how politics and law affect financial reporting in different countries, shows how enforcement

Professor Robert Bushman

of insider trading laws increases scrutiny of companies by analysts, and impacts directly what he teaches students.

Bushman, The Forensic Accounting Distinguished Professor at UNC Kenan-Flagler, has conducted several ground-breaking studies of the link between financial accounting and corporate governance, both in the United States and overseas. His well-timed studies, which started in the late 1990s right before the Enron, WorldCom, Tyco, Adelphia and other big financial scandals broke, have shown just how important accounting information is in supporting effective corporate governance.

"I get calls from around the world," he says. "Since Enron, the world has rediscovered accounting." In fact, many calls now come from bankers, lawyers and regulators, not other accountants.

How Politics and Law Affect Financial Reporting in Different Countries
In a recent study, Bushman and two fellow researchers isolate two distinct factors that characterize how different countries structure business financial information. Using data spanning 45 different countries, they find that "corporate transparency," a measure of the information about publicly traded firms that is available to investors, analysts and the general public, can differ greatly across countries because of fundamental differences in legal and political institutions. To their surprise and delight, the researchers discovered that corporate transparency is actually comprised of two basic components - "financial transparency" and "governance transparency."

In other words, the Bushman team found that the financial information structure of a country consists of two distinct pieces, one fundamentally political and one fundamentally legal. They show that financial transparency is driven by political aspects and ranks highest in nations with low government ownership of business, low state ownership of banks and a low risk of government expropriation of private sector wealth. At the same time, they demonstrate that governance transparency is highest in countries with a strong legal code and history and a highly effective judicial system.

"It's never been done before," says Bushman, a Cleveland native who came to UNC Kenan-Flagler from the University of Chicago five years ago after earning his doctorate at the University of Minnesota. "It was actually one of those miraculous research moments. These two things just came out distinct and powerful. It doesn't get much better than that in research."

Enforcement of Insider Trading Laws Increases Analysts' Scrutiny of Firms
A second study by Bushman and his two colleagues looks at the impact of insider trading laws on financial information systems around the world. Studying data from 100 countries over a span of 18 years, they find that analyst coverage of publicly traded firms increases markedly upon the initial enforcement of insider trading laws, particularly in emerging market countries.

In fact, both the intensity of analyst coverage (the average number of analysts covering firms) and the breadth of coverage (the proportion of firms covered by analysts) rise significantly after a country enforces its insider trading restrictions for the first time. Notably, the earlier adoption of insider trading laws does not lead to greater analyst coverage.

"Exploiting cross-country differences allowed us to isolate a pattern that could not be isolated with U.S. data alone," says Bushman. "It was very exciting to discover a systematic pattern underlying the evolution of countries' financial accounting systems. It was poetic."

Research That Enlivens the Classroom Experience
Following up on such pioneering work, Bushman continues to probe deeply into the economic forces connecting financial accounting information and effective corporate governance. His research activities allow Bushman to bring cutting edge ideas into the classroom long before they appear in textbooks.

"The biggest impact is on the future," he says. "The amount I learn from writing papers is tremendous. I come into teaching each fall rejuvenated with fresh ideas. It is an ongoing cycle where learning is followed by idea dissemination and then back to learning, and on it goes."