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Secrecy and the Impact of Mandatory IFRS Adoption on Earnings Quality in Europe

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Secrecy and the Impact of Mandatory IFRS Adoption on Earnings Quality in Europe

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Abstract

This study examines how differences in national culture, as indicated by financial secrecy, affect the impact of mandatory adoption of IFRS on earnings quality across the countries of Europe. Using 24,034 firm-year observations from 16 European countries over the period 1998-2014, we find that the higher the level of secrecy in a country the lower the level of earnings quality of firms, as measured by signed abnormal accruals. We find that mandatory adoption of IFRS improves earnings quality in all countries. However, our study indicates that the impact of mandatory adoption of IFRS on earnings quality is stronger the higher the level of secrecy in a country. Our evidence thus helps to explain the different impacts of IFRS adoption on earnings quality across different jurisdictions.

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... Therefore, the adoption of IFRS is a challenge to Nigerian companies because the previous GAAP regime was a rules-based accounting system. (Ikpefan & Akande, 2012;Uche, 2002) Professionalism focuses on the financial preparers' professional judgment in recognition, measurement, and disclosure of financial information (Askary, 2006;Houqe, Monem, Tareq, & van Zijl, 2016;Perera et al., 2012). The professionalism (PROF) coefficient has a positive impact on IFRS adoption at the 1 percent level. ...
... The challenges faced in IFRS adoption by countries classified as highly professional in Hofstede (2001) have minimal impact on IFRS adoption (Chanchani & Willett, 2004;Stent, Bradbury, & Hooks, 2010;van Zijl & Bradbury, 2006). However, the correlation between professionalism and IFRS adoption in the empirical result is consistent with other studies, where professionalism is found to be associated with IFRS adoption (Barth et al., 2008;Hope, Kang, Thomas, & Yoo, 2008;Houqe et al., 2016). For example, Houqe et al. (2016) found a positive relationship between professionalism and IFRS adoption. ...
... However, the correlation between professionalism and IFRS adoption in the empirical result is consistent with other studies, where professionalism is found to be associated with IFRS adoption (Barth et al., 2008;Hope, Kang, Thomas, & Yoo, 2008;Houqe et al., 2016). For example, Houqe et al. (2016) found a positive relationship between professionalism and IFRS adoption. This was attributed to consultancy services by the Big 4 audit firms that exhibit professionalism in determining what constitutes accounting values. ...
Article
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This study investigates the underlying factors contributing to the International Financial Reporting Standards (IFRS) adoption in Nigeria. The diversity of responses to IFRS adoption is a phenomenon that requires empirical investigation to understand the reasons why some companies adopt IFRS other do not. Previous studies have investigated preparers of financial statements’ compliance with IFRS. However, there is a dearth of research on the influence of cultural factors on IFRS adoption. Little has heretofore has been done to examine cultural variables as determinants of IFRS adoption. This study applies a self-administered survey instrument to elicit data from four major cities in Nigeria. The analysis involves applied logistic regression to estimate the relationship between the covariates and the companies’ decisions to adopt IFRS. The results indicate companies’ professionalism, transparency, flexibility, secrecy, uniformity and statutory control are significant factors impacting IFRS adoption at different magnitudes. For example, a company that considers IFRS will increase the level of financial statements transparency is more likely to maintain some levels of secrecy. The study identifies that IFRS adoption can only be successful when accountants develop the relevant technical expertise in IFRS requirements prior to the implementation. Consequently, there is a need for more practical training in IFRS accounting valuation, recognition, measurement and disclosure of financial information to users of financial statements. The diversity in responses to IFRS adoption, where some companies adopt and others show resistance to IFRS requirements has been a phenomenon that requires empirical investigation to understand the rationale. Though some studies have investigated companies’ compliance with accounting regulations in Nigeria, there is limited research on factors influencing IFRS adoption. A consequence is that efforts to come up with effective policies to enhance IFRS adoption and obtain compliance status for Nigerian companies are constrained. The objective is to contribute to initiatives aimed at assuring foreign investors of reliability of IFRS financial statements prepared by Nigerian companies.
... Based on the latest update regarding the adoption of IFRS by jurisdictions, IASB has completed profiles for 166 countries around the world that adopted the IFRS (IFRS Foundation, 2019). Despite of the huge cultural, economic and institutional differences between those countries, the adoptability of IFRS has increased year over year [5]. ...
... Kabir and Laswad [30] examine the accrual quality model using data from three different European countries and indicate that an enhancement is observed in the accruals quality during the period of IFRS adoption. Consistent with the former assertions, Houqe et al. [5] gathered information from 16 European countries and realize the result in which compulsory IFRS adoption enriches the quality of earnings. Perafán Peña and Franco [31] use discretionary accruals on samples from the UK and France and the results show positive effects of the IFRS adoption on the quality of accounting information in the UK, whereas in France, adoption of IFRS has no effect on the quality of accounting information. ...
... The previous results that introduced by [3], [4], [7], [5], [9], and [13] support this result. The previous researchers find a result in which IFRS adoption leads to a less extent of management of earnings and high accounting information quality. ...
Article
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The primary goal of conducting this paper is to investigate the consequences IFRS mandatory adoption has concerning the accounting information quality for Palestinian listed firms. Discretionary accruals and accruals quality measures are utilized to operationalize the quality of accounting information. The sample in the study contains an examination of 378 firm-year observations covering years from 2003 to 2016. The overall result shows mixed evidence suggesting that the IFRS mandatory adoption declines the extent of discretionary accruals, which means a decline in earnings management and manipulation activities. Furthermore, the results of the study show a lower accruals quality in IFRS mandatory adoption time. This paper builds on the current debate about the ramifications relating to the mandatory adoption of IFRS in emerging countries and displays that adopting IFRS affects accounting information quality. However, the effect differs from one accounting quality measure to another.
... Professionalism focuses on the financial preparers' professional judgment in recognition, measurement, and disclosure of financial information [62,64,65]. The professionalism (PROF) coefficient has a positive impact on IFRS adoption at the 1 percent level. ...
... The challenges faced in IFRS adoption by countries classified as highly professional in Hofstede have minimal impact on IFRS adoption [26,66,67]. However, the correlation between professionalism and IFRS adoption in the empirical result is consistent with other studies, where professionalism is found to be associated with IFRS adoption [56,65,68]. For example, Houqe et al. [65] found a positive relationship between professionalism and IFRS adoption. ...
... However, the correlation between professionalism and IFRS adoption in the empirical result is consistent with other studies, where professionalism is found to be associated with IFRS adoption [56,65,68]. For example, Houqe et al. [65] found a positive relationship between professionalism and IFRS adoption. This was attributed to consultancy services by the Big 4 audit firms that exhibit professionalism in determining what constitutes accounting values. ...
Article
This study investigates the underlying factors contributing to the International Financial Reporting Standards (IFRS) adoption in Nigeria. The diversity of responses to IFRS adoption is a phenomenon that requires empirical investigation to understand the reasons why some companies adopt IFRS other do not. Previous studies have investigated preparers of financial statements’ compliance with IFRS. However, there is a dearth of research on the influence of cultural factors on IFRS adoption. Little has heretofore been done to examine cultural variables as determinants of IFRS adoption. This study applies a self-administered survey instrument to elicit data from four major cities in Nigeria. The analysis involves applied logistic regression to estimate the relationship between the covariates and the companies’ decisions to adopt IFRS. The results indicate companies’ professionalism, transparency, flexibility, secrecy, uniformity and statutory control are significant factors impacting IFRS adoption at different magnitudes. For example, a company that considers IFRS will increase the level of financial statements transparency is more likely to maintain some levels of secrecy. The study identifies that IFRS adoption can only be successful when accountants develop the relevant technical expertise in IFRS requirements prior to the implementation. Consequently, there is a need for more practical training in IFRS accounting valuation, recognition, measurement and disclosure of financial information to users of financial statements.
... Our research also examines whether national culture explains variations in earnings management in the Asia-Pacific region. To date, the studies of earnings management under IFRS have focused largely on accounting standards and other formal institutional factors that likely affect the quality of financial information (e.g., Ball et al. 2000Ball et al. , 2003Byard et al. 2011;Houqe et al. 2012Houqe et al. , 2014Landsman et al. 2012;Sun et al. 2011) or on regions other than the Asia-Pacific (e.g., Gray et al. 2015;Houqe et al. 2016). Extending these prior studies, our research examines whether informal institutional factors, such as culturally derived accounting values, significantly affect the earnings management behaviour of listed firms in the Asia-Pacific region. ...
... However, Guan et al. (2005) used samples in the period prior to the 2002 formal process of convergence of accounting standards toward IFRS. In more recent studies, focusing on European countries, Gray et al. (2015) and Houqe et al. (2016) find that cultural factors remain influential post-IFRS in explaining differences in the magnitude of earnings management behaviour and earnings quality. ...
... We interpret these results as an indication that IFRS convergence has made a major difference over the period 2009-2016. These results complement prior studies in the context of the European region (Gray et al. 2015;Houqe et al. 2016) and cross-listed firms (Sun et al. 2011). 1 3 ***, **, * denote significance at 1%, 5% and 10% level respectively. Refer to Table 2 for the definition and measurement of variables Content courtesy of Springer Nature, terms of use apply. ...
Article
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We investigate whether variations in earnings management in the Asia-Pacific region countries can be explained by the extent of IFRS adoption having regard to the diversity of cultures across countries in the region and the degree of accounting standards enforcement. Across 17 key countries in the region, we find that IFRS convergence is associated with reduced levels of earnings management, particularly in recent years when IFRS has been increasingly adopted by publicly listed firms in the region. Nevertheless, the influence of cultural values and the degree of accounting standards enforcement remain significant and persistent institutional factors explaining international differences in earnings management.
... Since IFRS were adopted by European countries in 2005, a wide range of theoretical and empirical studies examine its effectiveness in improving earnings quality after adoption (Barth et al., 2008;Jeanjean and Stolowy, 2008;Chen et al., 2010;Lin et al., 2012;Cai et al., 2014;Capkun et al., 2016;Houqe et al., 2016;Zeghal and Lahmar, 2018). However, the findings are not unanimous. ...
... However, the findings are not unanimous. Previous literature shows that the impact of IFRS on earnings quality is associated with institutional factors, such as investors' protection and legal enforcement (Cahan et al., 2009;Houqe et al., 2012Houqe et al., , 2016Landsman et al., 2012;Ahmed et al., 2013;Leuz et al., 2003;Haw et al., 2004;Bassemir, 2018). ...
... Previous studies explain this ambiguity by institutional factors that have a major influence on earnings quality (Cahan et al., 2009;Haw et al., 2012;Houqe et al., 2012;Landsman et al., 2012;Ahmed et al., 2013). Nevertheless, some authors document that the IFRS effect depends on the divergence of local GAAP from international GAAP, regardless of the country's legal enforcement (Chen et al., 2010;Cai et al., 2014;Onali and Ginesti, 2014;Houqe et al., 2016). Furthermore, this mixed evidence for the effect of IFRS can be driven by the various proxies used for earnings quality, that is, earnings management (Jeanjean and Stolowy, 2008;Chen et al., 2010;Houqe et al., 2012;Doukakis, 2014), value relevance (Gast on et al., 2010;Kim, 2013;Elbakry et al., 2017) and conservatism (Chan et al., 2015;Zeghal and Lahmar, 2018). ...
Article
Purpose The purpose of this study is to examine the effect of International Financial Reporting Standards (IFRS) on earnings quality in a continental European context (i.e. France) more than a decade after their mandatory adoption. Furthermore, the authors investigate whether the IFRS effect depends on firm-specific incentives. Design/methodology/approach The authors construct an aggregated measure that considers the main qualitative information characteristics: reliability and relevance. They identify accruals quality, earnings smoothing and the degree of conditional conservatism as attributes of reliability and use earnings persistence, predictability, value relevance and timeliness to measure earnings relevance. To test the hypotheses, the authors use a sample of French listed companies. The analyses are based on ordinary least squares (OLS) fixed effects, the Newey–West estimator and the difference-in-difference approach. The authors also use cluster analysis to identify firms with high incentives for earnings quality. Findings The results reveal a decrease in earnings quality that persisted for a decade after IFRS adoption. This decrease is mainly due to a decline in earnings relevance, suggesting that the fair value principle worsened earnings volatility. However, the results show that there is an improvement in earnings reliability after IFRS adoption, suggesting that the international standards were able to constrain managerial opportunism. Additionally, the findings reveal that firm-specific incentives can enhance the positive effect of IFRS, but the incentives are not able to substitute for such effect. Research limitations/implications The IFRS effect depends on firm-specific incentives. Practical implications The authors prove that firm-specific incentives are important to accentuate the positive effect of IFRS on earnings reliability and to mitigate the impact of IFRS on earnings relevance. Originality/value This paper makes several contributions to the literature. First, it addresses the relative lack of attention to the main qualitative characteristics in measuring earnings quality, that is, earnings reliability and earning relevance, and uses an aggregate earnings quality measure. Second, this paper uses a cluster analysis to highlight the role of firm-specific incentives in shaping the effect of IFRS on earnings quality.
... The finance literature suggests that dissimilarities in nation-states' characteristics such as differences in cultural secrecy may cause variations in information asymmetry in regard to government intervention policies, leading to marked differences in investors' reactions and stock market outcomes from country to country (Gray & Vint 1995;Doupnik & Riccio 2006;Lucey & Zhang 2010;Aggarwal & Goodell 2014;Chang & Lin 2015;Houqe et al. 2016;Farooq & Amin 2017;Nam 2018;Wijayana & Gray 2018;Gö ttsche et al. 2020). For example, research argues that an asymmetric information environment may be established in certain secretive cultures more than others, due to the lack of trust in government policies that increase market uncertainty for investors (Kang & Kim 2010;Li et al. 2013). ...
... Finance research uncovers a strong relationship between the asymmetric information problem in stock markets that are described as having a high level of cultural secrecy (Gray & Vint 1995;Hope et al. 2008;Houqe et al. 2016;Mazboudi & Hasan 2018;Pasiouras et al. 2020). For example, Hope et al. (2008) and Pasiouras et al. (2020) find that investors domiciled in secretive cultures such as China, India, and Russia, tend to suffer from a lack of social trust. ...
... Subsequently, this poor societal trust develops into an information asymmetry problem irrespective of company-level uncertainty characteristics (Houqe et al. 2016;Mazboudi & Hasan 2018). Hooi (2007) and Agyei-Mensah and Buertey (2019) argue that in secretive cultures such as China, India, and Russia, the presence of feeble country governance practices is frequently connected with the creation of a weak social trust between investors. ...
Article
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This paper examines the role of government financial intervention policies and cultural secrecy on equity market returns during the start of the COVID-19 pandemic in developing countries’ stock markets. We employ global data including 939 observations across 32 developing countries (23 emerging and 9 frontier stock markets) from December 1 to April 28, 2020. Our results show that the above-mentioned policies that set out to curb the COVID-19 pandemic succeed in increasing equity returns. It reflects investors’ improved perceptions of governments’ commitment to stabilizing the economy during the pandemic in developing, emerging, and frontier equity markets. Results show that investors in all equity markets discount differences in cultural secrecy in processing market information when investing in stock markets. We find that equity market investors in developing and emerging countries truly react negatively to the rise in the number of confirmed COVID-19 cases reported. Yet, we find that COVID-19 wields no influence on equity market returns in frontier equity markets. This presents frontier equity markets as a safe-haven investment destination during a global health outbreak. Our work helps investors during such events to identify the best and worst investment destinations in developing, emerging, and frontier stock markets. At the same time, it is important to understand the critical roles of: firstly, the introduced government financial intervention policies; and secondly, the daily growth in reported COVID-19 cases on stock market returns.
... IFRS foundations' mission is to develop standards that bring transparency, accountability and efficiency to financial markets around the world. According to accounting literature, mandatory use of IFRS increases the financial reporting quality [1] (Adibah Wan Ismail et al., 2013;Florou and Pope, 2012;Houqe et al., 2016;Landsman et al., 2012) and investment opportunities (Schleicher et al., 2010). On the other hand, desired effects do not happen in the transition year (Iatridis and Rouvolis, 2010;Turki et al., 2017) and they do not solely depend on IFRS, they are also affected by the country's legal enforcement strength (Byard et al., 2011;Oz and Yelkenci, 2018) and national factors (Jeanjean and Stolowy, 2008;Nobes, 2011). ...
... Also, compared with the results reported in Table 6, IFRS resulted in a lower coefficient. The analysis showed consistent Notes: *p < 0.1; **p < 0.05; ***p < 0.01 evidence with the previous literature (Adibah Wan Ismail et al., 2013;Florou and Pope, 2012;Houqe et al., 2016;Landsman et al., 2012). Using the country weights in the regression analysis, ISFIN resulted highly statistically significant with a negative coefficient when equation (2) was run with weighted linear regression. ...
Purpose-Sharia compliance states that the compliant company operates not only under regulations but also to the restrictions and permission of Islam. This study aims to reveal whether Sharia compliance enhances the financial reporting quality. Design/methodology/approach-The sample is constructed from 15 Muslim majority countries, 2,300 companies for the periods between 2005 and 2017 with 23,810 firm*year observations. Financial reporting quality is measured with discretionary accruals and audit aggressiveness. Discretionary accruals is the absolute of Kothari, Leone and Wasley's (2005) "performance matched discretionary accruals model." Audit aggressiveness is calculated with Gul, Wu and Yang's (2013) model. Findings-This study reveals the behavioral differences in financial reporting quality between Sharia-compliant and non-compliant companies. According to the analyzes, Sharia compliance increases the financial reporting quality by decreasing the discretionary accruals and audit aggressiveness. This result is supported by the robustness tests. Practical implications-Sharia compliance is not limited to business activity, financial restrictions and supervisory board for Sharia-compliant companies. It also enhances the companies' financial reporting quality. Robustness analysis also showed that the International Financial Reporting Standards (IFRS) increases the financial reporting quality by reducing discretionary accruals and audit aggressiveness. Originality/value-This study contributes to the accounting literature by providing an insight on the use of Islamic financial instruments. The empirical results also show that the use of IFRS and Islamic financial instruments decreases the discretionary accruals and audit aggressiveness.
... Predictive value is a component of relevant information in line with the conceptual framework (IASB 2018; Kieso et al. 2017, 72). Previous literature confirms that uses of fair value higher predictive value (Ehalaiye et al. 2017;Bandyopadhyay et al. 2017;Marton and Runesson 2017;Persakis and Iatridis 2017;Houqe et al. 2016;Ismail et al. 2013;Doukakis 2010;Herrmann et al. 2006). ...
... Relevant accounting information should be able to predict the future operating performance of the firms. Adoption of IFRS as high quality of financial accounting standards has increased predictive value of accounting information (Ehalaiye et al. 2017;Bandyopadhyay et al. 2017;Marton and Runesson 2017;Persakis and Iatridis 2017;Silva and Nardi 2017;Houqe et al. 2016;Ismail et al. 2013;Doukakis 2010;Herrmann et al. 2006). ...
Article
This paper examines the predictive value of other comprehensive income and its disclosure in ASEAN. Unlike value relevance, the predictive value of other comprehensive income has not been extensively addressed in the literature. We conduct the first study examining the predictive value of other comprehensive income and its disclosure to prove that not only fair value as relevant information, but also other comprehensive income reflecting the changes of fair value. We use hand-collected data taken from the financial reports. This study employs a panel regression model to test the ability of other comprehensive income and its disclosure to predict firms’ future performance. The results confirm that as relevant information, other comprehensive income and its disclosure have predictive value. In addition, other comprehensive income which interacted with disclosure of other comprehensive income resulted predictive value only for one year ahead. Furthermore, other comprehensive income components which belongs to fair value level 1 and 2 have predictive value because it uses market-based input. Meanwhile, other comprehensive components which belong to fair value level 3 only have predictive value for one year ahead because it uses unobservable input that can ­­lead to higher subjectivity.
... 15 Using a sample based on 1,574 in European countries between 2001 and 2008, Zeghal et al. (2012) find that mandatory adopters show less earnings management, higher quality of accounting accruals, less loss avoidance (the improvement of earnings quality). 16 Houqe et al. (2016), using a sample of 24,034 firm-years in 16 EU countries, report similar results. However, based on a sample of 15,206 firm-years from EU 22 countries between 2000 and 2010, Doukakis (2014) finds that IFRS mandatory adoption does not have a significant effect on real earnings management nor accrual-based earnings management. ...
... 19 They report that positive effects on earnings quality are confined to firms in countries with stronger investor protection. Houqe et al. (2016) find that the improvement of earnings quality of mandatory adopters is more pronounced in countries with a stronger culture 15 However, they show stronger income smoothing and less timely recognition of economic losses. 16 Timeliness, conservatism, and value relevance are not improved. ...
Article
Over the last two decades, a growing body of literature has investigated the factors influencing the differences in financial reporting, especially earnings quality, in an international setting. The purpose of this paper is to provide an overview of the crosscountry research that focuses on earnings quality and to offer suggestions for future topics in the field. In this study, I first discuss the relationship between earnings quality and the following institutional and cultural factors that have been examined in prior literature: legal tradition, investor protection (outside investor rights and legal enforcement), tax system, regulations, financial development, market competition, accounting standards (divergence from IAS), enforcement of accounting standards, culture, religiosity, and language. Second, the relationship between the improvement of earnings quality and International Financial Reporting Standards (IFRS) adoption is described. The results are mixed and suggest that a single set of accounting standards that are generally viewed as high quality does not always improve earnings quality. In addition, the relationship varies with the institutional and cultural factors of a country. It means that improvement through IFRS adoption would require the development of an institutional environment. Finally, as a prospect for future research, this paper discusses the extension from a single-country to cross-country study, the impact of IFRS adoption on the contracting role of accounting through the change in earnings quality, and earnings quality of non-listed firms in an international setting. These topics have become a more fruitful avenue of research with the recent increase in the availability of data.
... Houqe et al. (2012) analizzano gli effetti dell'adozione obbligatoria degli IAS/IFRS e della protezione degli investitori sulla qualità dei dati contabili in 46 paesi, europei e non, verificando come la qualità sia aumentata in tutti quei paesi in cui sono presenti forti meccanismi a protezione degli investitori. Houqe et al. (2016) invece verificano in che modo le differenze culturali tra i diversi paesi europei, espresse in termini di livello di "segretezza finanziaria" degli stessi, influenzino l'impatto della adozione obbligatoria degli IFRS sulla qualità degli earnings. Gli autori, lavorando ben 24.034 osservazioni relative al periodo 1998-2014 e provenienti da aziende dislocate in 16 diversi paesi europei, concludono che in linea generale l'introduzione degli standard internazionali emanati dallo IASB abbia migliorato il livello di qualità degli utili in tutti i paesi analizzati, laddove però tale miglioramento è più marcato in tutti quei paesi in cui il livello di "segretezza finanziaria" è più elevato. ...
... The numbers of IFRS study on the quality of financial statements proves that many researchers want to provide evidence about the benefits of IFRS implementation as stated by Barth (2008) that the purpose of IFRS adoption is to improve the quality of financial statement information. The IFRS influence on the quality of financial statements is also widely researched abroad (e.g Houqe et al., 2016;Jeanjean & Stolowy, 2008;Wan Ismail et al., 2013;Zeghal et al., 2012). ...
Article
Full-text available
This study aims to provide empirical evidence about the development of International Financial Reporting Standards (IFRS) study in Indonesia. This study analyzes thirty one IFRS articles derived from eight accredited national journals with observation period 2008-2017. We classify articles based on topics and research methods used, and then do mapping approach (charting the field). This study found financial statements quality is the most frequently researched topics. In addition, we also found research gaps on IFRS adoption and financial statement quality that were proxied by earning management and relevance. Evidently, the result of previous study is still not consistent. In addition, the previous research of IFRS adoption and the quality of financial reporting were carried out at the early phase of IFRS adoption so that it still needs to be examined how about the impact of IFRS adoption on the quality of financial reports in the next phase.
... A possible explanation for the mixed results reported by scholars in connection with IFRS adoption is that accounting harmonisation is a complex topic requiring consideration from different perspectives and in various settings (Alexander, 2010;Alexander and Albu, 2011). Researchers have argued that convergence is influenced by political, cultural, and regulatory differences among the countries (Rezaee et al., 2010;Nurul Houqe et al., 2016;Urgin et al., 2017). As accounting is the product of its environment , one possible approach might be to complement the narrative views on the consequences of IFRS adoption through expanding benefits to a broader range of social and economic variables. ...
Article
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This study investigates whether the adoption of International Financial Reporting Standards (IFRS) by a country increases Foreign Direct Investments (FDIs) and impacts the profitability of investments conducted by Multi-National Enterprises (MNEs). The proposed regression models are tested on a data set containing 493 observations of Swedish companies’ FDIs in 73 countries made during 2007 - 2014. Empirical evidence is provided for a significant impact of IFRS adoption on FDIs and earnings generated by foreign investments, depending upon the extent of IFRS implementation and the level of convergence. This study also suggests that IFRS adoption is significant both for FDIs and reported profits obtained through FDIs for developed countries, contrasting with emerging markets. Finally, this is one of the first papers to empirically test and confirm that several significant underlying variables (including IFRS), which can explain both FDIs and profits reported by MNEs, are identical.
... In illustration, Landsman et al. (2012) found that the information content of earnings announcements increased in 16 countries that mandated IFRS relative to 11 countries that did not. Hoque et al. (2016) established that gains in transparency resulting from mandatory IFRS adoption were greatest in countries where financial secrecy was culturally imbedded. Several before-and-after studies (Gebhardt and Novotny-Farkas, 2011;Leventis et al., 2011;Ahmed et al., 2019;and Paanamen and Lin, 2009) reported mixed results on income smoothing under IFRS. ...
... In addition to the officially expected benefits from IFRS adoption, there is a line of research empirically proved that IFRS adoption improved the quality of financial reporting. The IFRS adoption lowers the earnings management practices (Ismail et al., 2013) with less smoothed earnings and higher quality of accruals (Houqe, Monem, Tareq, & van Zijl, 2016;Zeghal, Chtourou, & Fourati, 2012), leads more timely loss recognition (Barth, Landsman, & Lang, 2008), increases the financial market efficiency (Daske et al.2008;Li, 2010;Florou & Pope, 2012;Schleicher, Tahoun, and Walker 2010;Chen, Young, and Zhuang 2013), decreases the audit lag (Landsman, Maydew, Thornock, 2012), attracts equity investments of institutional investors (Florou and Pope 2012), decreases cost of public debt (Florou and Kosi 2015) and lowers cost of auditing in the country, and by strong reporting incentives that may lead firms to publish high quality financial reports (Ball, Robin, and Wu 2003;Houqe et al., 2012;Soderstrom and Sun, 2007;Daske et al. 2008;Jeanjean and Stolowy 2008;Byard, Li, and Yu 2011;Christensen, Hail, and Leuz 2013;Ahmed, Neel, & Wang, 2013;Christensen et al. 2015). ...
Conference Paper
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This paper investigates the direct and moderating effects of IFRS adoption on the firms' cash holdings in Turkey for the period of 1992-2016. We found a significant and negative relationship between IFRS adoption and cash holdings. We further incorporated an accounting quality variable, earnings variability, in our models to investigate the moderating effect of IFRS. We found significant negative relationship between earnings variability and cash holdings in post-IFRS period, whereas the relationship is significant and positive in the pre-IFRS period. This reveals that higher levels of earnings variability imply lower accounting quality in pre-IFRS, but imply higher accounting quality in the post-IFRS periods.
... In illustration, Landsman et al. (2012) found that the information content of earnings announcements increased in 16 countries that mandated IFRS relative to 11 countries that did not. Hoque et al. (2016) established that gains in transparency resulting from mandatory IFRS adoption were greatest in countries where financial secrecy was culturally imbedded. Several before-and-after studies (Gebhardt and Novotny-Farkas, 2011;Leventis et al., 2011;Ahmed et al., 2019;and Paanamen and Lin, 2009) reported mixed results on income smoothing under IFRS. ...
Article
Purpose This study aims to identify a taxonomy of financial ratios derived from financial statements prepared using International Financial Reporting Standards (IFRS). The work first empirically establishes and then statistically validates the taxonomy of financial attributes captured in financial ratios. In 2005, the European Commission required that publicly traded companies in the European Union use IFRS as the basis for financial reporting. In the same year, Australia adopted IFRS as a basis for financial reporting. Since then, 120 countries and reporting jurisdictions have adopted IFRS as the basis for financial reporting. Given that IFRS predominate in the financial reporting world, it seems essential to establish and validate IFRS-based ratio attributes. Only then can reliance upon and comparability of these ratios be warranted (Altman and Eisenbeis, 1978). Using principle component analysis, the authors empirically identify nine stable attributes (factors) for ratios drawn from IFRS-based financial statements from 84 counties. The findings provides an empirical basis to formulate testable hypotheses regarding the predictive and descriptive utility of financial ratios draw from IFRS-based financial statements. Design/methodology/approach The paper begins with a broad category of IFRS-based financial ratios, 50, found in practice and research, including income statement, balance sheet, cash flow, profitability and liquidity measures. Then, a sample of companies from the manufacturing sector is segmented using IFRS as a basis of financial statement reporting. Next, principal component analysis, a method of factor analysis, is applied to empirically identify factors and financial attributes captured in financial ratios used in research inquiry and financial analysis. Findings The authors find that the financial attributes captured by IFRS-based ratios go well beyond the traditional measures of profitability, liquidity and solvency. The authors identify nine factors that are interpretable and stable over the period, 2011-2015: asset relationship, asset turnover, capital structure, expense insight, fixed asset usage, inventory turnover, liquidity, profitability margin and performance return. Interestingly, the authors did not find a separate cash flow factor. Most importantly, the results corroborate that IFRS-based ratios are consistent and comparable, despite innate country differences that have been shown to influence the application, interpretation and use of IFRS. Research limitations/implications The efforts are limited to the manufacturing sector. The financial attributes may be different in service, distribution and retail sectors. Also, limiting the effort are the ratios selected in this study. A broader range of ratios may widen the identification of unique stable factors over time. Practical implications The findings provide a basis for research and analysis efforts regarding the validity, comparability and stability of IFRS-based financial ratios. Most importantly, the results corroborate that IFRS-based ratios are consistent and comparable, despite innate country differences that have been shown to influence the application, interpretation and use of IFRS. The findings should be of interest to international and national financial reporting standard setters, investors and analysts. Originality/value An empirically evidenced classification system for IFRS-based financial ratios has yet to be determined based on a financial statements across a wide breadth of countries and reporting jurisdictions. Identification of stable interpretable factors, financial attributes, has been limited. The first is that inquiry has been limited to domestic-based, such as US Generally Accepted Accounting Principles, financial ratios. The second is inquiry has been limited to IFRS-based financial ratios within a specific country.
... To date, no such study has been attempted for Indian companies. Most prior studies in this domain were for EU countries (Capkun et al., 2008;Munteanu et al., 2014;Callao et al., 2007;Paananen and Lin, 2009;Armstrong et al., 2010;Ball, 2006;Nouri and Abaoub, 2016;Bartov et al., 2005;Gassen and Sellhorn, 2006;Van Tendeloo and Vanstraelen, 2005;Zeghal et al., 2012;Houqe et al., 2016;Hung and Subramanyam, 2007;Karampinis and Hevas, 2011;Li, 2010;Dimitropoulos et al., 2013). A few studies were for Australia (Jeanjean and Stolowy, 2008;Farooque, 2016), Canada (Liu and Sun, 2015) and Asian (Liu et al., 2011;Cho et al., 2015;Ghani et al., 2017) countries. ...
... The final decision for adoption was always controversial, so we distinct two schools of thought. The first school supports the adoption of international standards because it enhances the quality of financial information, improves the comparability of financial information in the international milieu, facilitates financial operations on a global scale (Houqe et al., 2016;Taylor et al., 1986), and contributes efficient integration for developing countries in financial markets (Peavy and Webster, 1990). According to Wolk et al. (1989), the harmonisation of international accounting standards is significant, especially for developing countries and their economic development. ...
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Purpose: This study aims to investigate the influence of applying IFRS on European companies' profitability. The research focuses on adopting the new IFRS 16, specifically the accounting treatment of leases. The new standard introduces revolutionary changes in the treatment of leasing contracts. Many companies have moved away from IFRS, so it is essential to check the impact of IFRS on other companies. Design/Methodology/Approach: The study includes an analysis of two periods, before and after implementing IFRS 16 (leasing). In the study, we focus on specific sectors of economic activity. We examine the distributions of individual variables and compare the medians using parametric and non-parametric tests. The survey results indicate whether the implementation of IFRS 16 negatively affected the results of the companies. Findings: The study proves that adopting new IAS 16 related to leases does not negatively influence companies' profitability than the previous treatment of this financial position within financial statements. This study confirms that European companies improve profitability by adopting new modifications of the IAS 16. Practical Implications: The study represents a motive for managers to accept new accounting treatments of leases that will create tangible value and generate further economic benefits. Originality/Value: We examined companies implementing new assumptions for the recognition of leasing. Contrary to the numerous voices of practitioners pointing to the negative effects of the implementation of IFRS 16, we showed that the implementation of IFRS 16 did not significantly change the profitability of companies. Thus, it can be indicated that the primary objective of introducing IFRS 16, to organize the recognition of company assets, has been met.
... Nevertheless, (Bryce, Ali, & Mather, 2015) concluded that the implementation of IFRS in Australia did not substantially enhance accounting quality, with their analysis focusing solely on the audit committee. (Houqe et al., 2016) reported that the implementation of IFRS in Europe increases earnings quality, and they suggested that the IFRS impact is higher in countries with a higher level of financial secrecy. It is considered that a firm's accounting quality will be influenced by the political and legal background, history, culture, beliefs, and traditions (Scagnelli, Hellmann, & Tsunogaya, 2015). ...
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This study aims to investigate the effect of the financial crisis on the value relevance of published financial reports of listed real estate companies in Australia. Based on the earlier research, the study uses three accounting quality timely loss recognition and value relevance price model and value relevance return model to evaluate the value relevance of financial reports. The results of the study show that the financial crisis has not made any significant effect on the value relevance of financial reports of real estate companies. The result of timely loss recognition shows an increase in the frequency of reporting large losses in the postfinancial crisis period, but the improvement is not statistically significant to suggest a change in accounting quality. Value relevance measures that are founded on market information, on the other hand, show opposing results. Value relevance price modal shows a statistically significant decrease in value relevance and the return model shows a significant increase in value relevance and accounting quality. A close look into the result suggests that the measures based on the accounting information of the real estate sector show no change in the value relevance of financial reports, while the market based measures show a mixed result. The market value and related information are influenced by a number of factors other than the accounting standards and accounting policies like the economic, legal, and political environment of companies. This can be the reason for the mixed result shown in value relevance measures. Australian regulatory bodies are always vigilant in maintaining the quality of financial reports. Moreover, the findings that the financial crisis has not affected the value relevance of Australian listed real estate companies can be because of the quality financial standard used and a good regulatory system in Australia. The findings of the study that Australian real estate companies have maintained accounting quality even in periods of economic distress like financial crisis increases investors' confidence and can attract more foreign investors to Australian listed companies. The study also emphasises the importance of regulatory bodies in maintaining the quality of financial reports in bad economic periods.
... Another aspect that interferes with a country's accounting system is the national culture (Houqe, Monem, Tareq & Van Zijl, 2017). The New Public Administration movement aimed at reforms in the public sector, including international harmonization. ...
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Objective: This study aims to analyze institutional, political, and cultural factors related to countries' propensity to adopt IPSAS. Method: Data from 73 countries were collected, and a multinomial logistic regression was performed, with the stage of adoption of the IPSAS as the outcome variable and as explanatory variables the index of democracy, country development, government effectiveness, economic freedom, financial secrecy, and access to information. Originality/Relevance: The relevance of this study is to analyze the cultural and political-institutional factors that influence the adoption of IPSAS by countries, discussing aspects of accounting reforms in the public sector from the perspective of Soft Power. Results: The results showed a new adoption trend by developed countries, with greater financial resources and public policy investments. However, the variable economic freedom is negatively related to the norms, demonstrating a direction of adoption aimed at the internal sphere, not having repercussions in transactions or negotiations in the external sphere. Theoretical/Methodological contributions: It is believed that the study contributes to the national and international literature by highlighting new trends in the adoption of IPSAS by countries and demonstrating the benefits of these accounting reforms for public policymakers.
... There is ongoing debate as to whether International Financial Reporting Standards (IFRS) adoption necessarily improves accounting quality through a uniform framework for accounting and reporting across countries, or if due to specific country characteristics, disparity remains an issue (Ball, 2006;Ball, Robin, & Wu, 2003;Lehman, 2005;Nobes, 2006;Weetman, 2006). In this context, Houqe, Monem, Tareq, and van Zijl (2016) positively argue that mandatory adoption of IFRS improves earnings quality in adopting countries as inter alia IFRS are designed to reduce managerial discretion to manage or smooth earnings (and see Ball, 2006;Shah, Liang, & Akbar, 2013). In contrast, 'the inherent flexibility in principles-based standards could provide greater opportunity for firms to manage earnings' (Barth, Landsman, & Lang, 2008, p. 468). ...
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International Accounting Standard 38 Intangible Assets mandates that development costs must be capitalized if certain conditions specified in the standard are met. However, this requires managerial judgement and hence may be subject to opportunism. Corruption is a permeable informal country characteristic that penetrates firms’ behaviour, influencing corporate misconduct. We conjecture that an environment with high corruption facilitates management in their justification of meeting the capitalization criteria of assets that should have been expensed, either partly or entirely. Effectively, these capitalized assets will not generate the future economic benefits implicitly conveyed by their recognition. This recognition, however, sends positive (albeit distorted) market signals for future earnings and increases current year reported earnings. We find that there is a positive relation between country-level corruption and the amount of development costs capitalized in a given year. Moreover, the higher the levels of country corruption, the lower the contribution of capitalized development costs in a given year to future profitability. Finally, this association is moderated by companies’ levels of internationalization.
... This implies that companies that have a culture of applying professional judgment in determining accounting values are more likely to adopt IFRS in comparison with companies that practice accounting on a statutory control basis. The relationship between professionalism and IFRS adoption in the empirical results is consistent with other studies, where professionalism is found to be associated with IFRS adoption (Barth et al. 2008;Hope et al. 2008;Houqe et al. 2016). The significance of professionalism indicates a unit change in the level of the company's professionalism will increase the likelihood of IFRS adoption by 50 percent. ...
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This study investigates whether earnings quality affects to asymmetric cost behavior, i.e., sticky cost of listed firms of Jakarta Stock Exchange (JKSE). This study analyzes 1032 year-firms observations during 2012-2019 periods. This study investigates earnings quality on listed firms of JKSE during the period of IFRS adoption in 2012 and implementation of sustainability reporting voluntarily. This study finds that earnings quality influence to cost stickiness is supported. However, earnings quality negatively influences cost stickiness. The result of this study indicates that there is likely the effect of IFRS adoption in 2012 and implementation of sustainability reporting voluntarily since 2010 from listed firms on the JKSE on its earnings quality. This result is consistent with study of Banker, Basu, Byzalov, &Chen (2016). So higher earnings quality, lower cost stickiness. This study contributes theoretically to the literature on financial accounting, management accounting and cost management related to the topic of asymmetric cost behavior on earnings characteristics. This research also contributes practically to the ability of earnings quality in listed firms of the JKSE to reflect information on their financial performance related to the earnings quality by investors and financial analysts.
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Purpose This paper aims to investigate the joint effect of product market competition (PMC) and institutional environment on accrual quality. Design/methodology/approach The sample covers a large data set of 52,138 firm-year observations from 35 countries over the period of 2011-2015. Using the weighted least square regression, the study estimates PMC and institutional environment on accrual quality. The study measures PMC based on Herfindahl-Hirschman index, anti-director rights index (ADRI) based on the revised and updated La Porta et al. 's (1998) and accrual quality using the modified Dechow and Dichev (2002) model proposed by McNichols (2002). The study also uses a series of specification tests using alternative measures for each variable. Findings The study finds that highly intensified PMC relates to a lower quality of accruals. The results also show that accrual quality is better in countries with stronger institutional environment, specifically countries with higher ADRI, investor protection, judicial independence, protection of minority shareholders’ interests, protection of property rights, strength of the auditing and reporting standards, efficacy of corporate boards and corporate ethics. The findings suggest that institutional factors weaken the negative impact of PMC intensity on accrual quality, hence suggesting that institutional environment has a significant role to enhance accrual quality among firms in highly intensified industries. Practical implications The findings provide additional insights to policymakers and regulators on the importance of strong institutional and industry environment that can provide incentives and extra governance mechanisms besides the conventional firm-level corporate governance. Originality/value This study contributes in understanding the impact of intensity of PMC on accrual quality internationally and subsequently highlights the role of institutional environment as significant country-level governance in determining financial reporting quality, particularly accrual quality.
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We examine how societal secrecy affects the underpricing of initial public offerings (IPOs). Using a large sample of 18,304 IPOs across 38 countries, we find robust evidence that IPO underpricing is positively related to societal secrecy. Additional analyses reveal that investor protection, market openness, and third-party certification moderate the effect of societal secrecy on IPO underpricing. We find that societal secrecy influences IPO underpricing through the information asymmetry, demand for control, and information cascade channels. Collectively, we show that societal secrecy exerts a strong influence on IPO underpricing globally.
Thesis
ABSTRACT I have developed a Financial Reporting Quality (FRQ) measurement index within the scope of the 2018 Conceptual Framework for Financial Reporting of the International Accounting Standards Board (IASB), and I used it to measure FRQ of annual reports from Sri Lankan listed companies. My study is motivated by i) the seminal work of Beest, Braam, & Boelens (2009) who used Qualitative Characteristics (QCs) to measure FRQ, ii) the lack of a comprehensive measurement tool from which to quantitatively derive the degree an annual report complies with the postulated (by the IASB) characteristics of decision-useful information, and iii) the different classification interpretations of QCs and the inconclusive results about the perceived importance user groups ascribe to the QCs within decision usefulness theory: useful to whom and useful to make what decisions. A first important realisation is that QCs and FRQ are latent constructs, which immediately suggest that the relationship between QCs and FRQ may be complex, non-linear and hierarchical. The process of developing the FRQ measurement index is then formulated through Research Question (RQ) 1, in which I use three steps. In Step 1, I searched the literature to identify measures for the QCs, and I obtained 54 so-called sub-information items under 17 information dimensions. In Step 2, I surveyed Sri Lankan investment (N=235) and lending (N=214) decision-makers on the usefulness of the identified sub-information items to their particular decision roles, and the respondents validated the selection identified in Step 1. In Step 3, the structural relationships between the 54 sub-information items, the 17 information dimensions, the 6 QCs and FRQ were tested by confirmatory factor analysis using SmartPLS. The factor analysis results revealed that the 54 sub-information items are measures of the 17 information dimensions and that they each factorise statistically satisfactorily with one of the 6 QCs. The 2018 Conceptual Framework postulates a particular 2-group (fundamental and enhancing) classification the 6 QCs belong to. Thus, I tested the postulated classification and formed and tested 2 alternative models of how the 6 QCs affect FRQ. The results revealed that enhancing QCs affect FRQ indirectly through fundamental QCs, as postulated by the Conceptual Framework, but importantly they also make strong and significant direct contributions to FRQ. In particular, understandability has the highest direct contribution to FRQ from all 6 QCs. This finding challenges the IASB 2-group classification. A further utility of the 3 models, which in essence are variants of an FRQ measurement index, is the explicit relative contributions obtained that each of the QCs makes towards FRQ. In supporting the development and validation of the FRQ measurement index, in RQ2, I also investigated several secondary research questions. I surveyed Sri Lankan investing (N=235) and lending (N=214) decision-makers to examine their use of annual reports, their perceived importance of QCs, and their perceived impact of International Financial Reporting Standards (IFRS) on FRQ. My results revealed that on average and ahead of ‘annual reports’, lending decision-makers rate highest ‘the direct communication with clients’, and investment decision-makers rank ‘stock market publications’ as the prime source for investment decisions; within annual reports, both types of decision-makers identified financial statements as the most useful sections and both groups stated that the main factor that restricts the usefulness of annual reports is the delay in publishing annual reports after year-end. When asked directly, both groups challenged the IASB’s current classification of QCs into ‘fundamental’ and ‘enhancing’, and both groups identified understandability as the most important QC, followed by timeliness. Relevance ranked sixth and last, surprisingly. These results complement the findings from RQ1. With respect to the impact of IFRS adoption in Sri Lanka in 2012, both groups believe that FRQ improved compared to the earlier Sri Lanka Accounting Standards (SLAS) reporting regime. In RQ3, I also put in practice the derived FRQ measurement index by assessing the FRQ of annual reports of 53 listed Sri Lankan companies for the years 2010, 2014 and 2018. I find that Sri Lankan companies recorded on average an FRQ of 56% in 2010, rising to 61% in 2014 and to 66% in 2018. These differences are statistically significant, which allows me to conclude that the FRQ of Sri Lankan entities improved after IFRS adoption in 2012 compared to the period before adopting IFRS. This result complements the finding in RQ2. I identified that the total number of pages, the size of the firm as measured by total assets, and her market capitalization all positively correlate with the level of FRQ. Through my work, I have made several useful contributions: I challenge the classification of QCs as fundamental and enhancing, which should also lead to a re-examination of the interpretation various authors of accounting textbooks give to this issue in the corresponding ‘IFRS and Conceptual Framework’ chapters; my results further challenge the widely held assumption that relevance and faithful representation rank supreme in the importance ranking among the 6 QCs; next, I provide numerical equations with which i) users can measure, i.e. calculate, FRQ and the change in FRQ over time, and ii) the IASB can measure to which degree their objective has been achieved of setting standards intended to improve the quality of decision-useful information for investors and lenders. While the processes for the derivation of an FRQ measurement index apply generally, the data have been collected and obtain within the Sri Lankan context. Thus, I invite other researchers to use, test and validate the measurement of FRQ in jurisdictions of their interest.
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We study how the information conveyed by fair value (FV) reporting is considered during an initial public offering (IPO). By examining how pre-IPO FV earnings are perceived by underwriters and investors, we document numerous original findings. First, IPOs with higher FV earnings have higher initial valuations and subsequent price revisions, indicating that underwriters and institutional investors value the information conveyed by FV reporting. Second, there is a significantly negative relation between FV earnings and post-IPO initial returns, whereas no such relation exists between non-FV earnings and initial returns. Third, we document robust positive associations between FV earnings and various measures of post-issue long-run stock performance. Fourth, we confirm the informational content of FV earnings by showing their predictive power for future earnings. We interpret these findings as supportive of the underreaction hypotheses, whereby aftermarket investors underreact to the information contained in FV reporting in the short run and gradually recognize the value of such information in the long run. We perform numerous tests to confirm the robustness of our results, including a test to address potential sample selection bias using the adoption of IFRS for small- and medium-sized entities (SMEs) as an exogenous determinant of FV reporting. Taken together, our findings advance our understanding of how fair value information is considered during an IPO issuance.
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The existence of comprehensive income as the adoption of IFRS, which has been carried out in Indonesia since 2012, has resulted in this figure information as one of the important information used by investors. Company policies originating from operating and non-operating activities can affect financial information quality. This study deals with the effect of tax avoidance and derivative instruments on the value relevance of comprehensive income. Research data is derived from the financial data of non-financial companies listed on the Indonesia Stock Exchange (IDX) from 2012 to 2019, sourced from www.idx.co.id and finance.yahoo.com. This study’s total number of samples is 202 observations through purposive sampling with several criteria. Data in this research is included cross-section data so that the hypothesis testing employed in this research is ordinary least square regression analysis. This study finds that tax avoidance and derivative instruments are not associated with the value relevance of comprehensive income. This study suggests that investors’ investment decisions are not influenced by information on tax avoidance and ownership of derivative instruments. However, tax avoidance is positively associated with value relevance using the book value of equity basis, while derivative instruments ownership is negatively associated with value relevance with the comparable basis.
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Purpose This paper aims to examine the association between the adoption experience of the International Financial Reporting Standards (IFRS) and the quality of reported earnings in the Gulf Cooperation Council (GCC) region – a region that exhibits several features of emerging economies. Design/methodology/approach The authors analyse a hand-collected dataset of 222 firms across 4 countries in the GCC region over the period 2012–2017 and measure “IFRS experience” as the number of years since a country has mandatorily adopted the IFRS. In measuring earnings quality, the authors focus on two properties of reported earnings: persistence and accruals quality and employ multivariate regression models based on two-way cluster-robust standard errors and fixed-effects. Findings This study’s findings suggest that earnings persistence is decreasing, and discretionary accruals are increasing in IFRS experience in the GCC region over the period 2012–2017. The authors conclude that reported earnings quality has declined following IFRS adoption in this sample. Research limitations/implications The authors contribute to the IFRS literature in the GCC region, which is in its infancy. Practical implications This study’s findings have important policy implications for countries that are about to adopt or are in the early implementation stage of IFRS and suggest that strong enforcement of accounting standards along with improvement in the institutional environments might be needed for improving financial reporting quality. Originality/value The authors provide the first cross-country evidence on the relation between IFRS adoption in the GCC region and earnings quality. Moreover, unlike most prior studies, the authors employ a continuous measure that is superior to a binary measure in capturing the effect of IFRS adoption.
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This study aims to find the influential factors of adopting International Accounting Standards (IAS) in the banking industries of Bangladesh. This study is based on two-stage least-squares method for 561 unbalanced panel observations of 32 commercial banks in Bangladesh over the period from 2000 to 2018. To analyze the study, it uses macroeconomic and bank-level variables in which probability of IAS adoption, economic growth, and profitability are the main variables. The findings of the study indicate that economic growth has a significant relationship with IAS adoption in the banking industries of Bangladesh, as well as all variables relating to profitability affect IAS adoption excluding return on equity (ROE). SIZE and CAR do not influence IAS adoption from the bank-level variables, liquidity has a significant and negative relationship with IAS adoption and assets growth and total loan and advances (TLAs) have a significant impact on the IAS in banking industries of Bangladesh. The result of the study will be supportive to deliver precious information and unfathomable understanding as regards IAS and factors influencing IAS in banking sector. This is worthwhile to the researchers, students, and policy-makers while making critical decision about the adoption and implementation of IAS. Based on this study, it was suggested among others that adoption of IAS should to be a dynamic part of bank’s strategy because it upturns quality of reporting by increasing transparency, comparability, and acceptability.
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This paper reviews the literature on the effects of International Financial Reporting Standards (IFRS) adoption. It aims to provide a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing. In addition, we also present discussion of studies that focus on specific attributes of IFRS, and also provide detailed discussion of research design choices and empirical issues researchers face when evaluating IFRS adoption effects. We broadly summarize the development of the IFRS literature as follows: The majority of early studies paint IFRS as bringing significant benefits to adopting firms and countries in terms of (i) improved transparency, (ii) lower costs of capital, (iii) improved cross-country investments, (iv) better comparability of financial reports, and (v) increased following by foreign analysts. However, these documented benefits tended to vary significantly across firms and countries. More recent studies now attribute at least some of the earlier documented benefits to factors other than adoption of new accounting standards per se, such as enforcement changes. Other recent studies examining the effects of IFRS on the inclusion of accounting numbers in formal contracts point out that IFRS has lowered the contractibility of accounting numbers. Finally, we observe substantial variation in empirical designs across papers which makes it difficult to reconcile differences in their conclusions.
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The mandatory adoption of IFRS has been encouraged worldwide, with the objective to enhance the quality of accounting information. However, this effort is challenged by the argument that several factors affecting financial reporting incentives still vary across countries. Also, Gaio (2010) indicates that firm-level factors also have significant explanatory power on earning quality. Therefore, it is doubtful whether the mandatory adoption of IFRS can always lead to better quality of accounting information. This paper examines the effect of country-level and firm-level factors on value relevance of earnings and book value of equity. Among several country-level factors, this paper focuses on investor protection - proxied by anti-director right index (La Porta et al., 1998). In this study, firm-level factors refer to firm characteristics which allow or induce high use of managerial discretion. These characteristics are proxied by firm size, cash flow volatility, sales volatility, and incidence of negative earnings. Different from prior literatures which focus on level of value relevance, this paper examines the effect of country-level and firm-level factors on change in value relevance of earnings and book value of equity, arisen from the mandatory adoption of IFRS in the year 2005. By comparing value relevance of earnings and book value of equity among European Union countries during the years 1999-2007, the results indicate that the adoption of IFRS leads to improvement in value relevance. In addition, both country-level and firm-level factors have significant influence on the degree of improvement in value relevance from the IFRS adoption. In particular, the firms which operate in a weak investor protection environment and have firm characteristics which induce or allow the managers to use high managerial discretion (i.e., small size, high cash flow volatility, high sales volatility, and frequent incidences of loss) do not experience significant improvement in value relevance from IFRS adoption. The results imply that the IFRS adoption does not ensure better quality of accounting information. The improvement of the quality of accounting information depends on both country and firm characteristics, which influence financial reporting incentives.
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As more countries consider the adoption of International Financial Reporting Standards (IFRS) that are based on practices prevalent in the English-speaking countries with free markets, it’s increasingly important to understand the impact of IFRS on countries of different institutional, economic, and political environments. This article reports a study that examines the impact of IFRS on accounting quality in a regulated market, China, where new substantially IFRS-convergent accounting standards became mandatory for listed firms in 2007. Accounting quality is examined for the period 2005 to 2008 with only firms mandated to follow the new standards. The empirical results generally indicate that accounting quality improved with decreased earnings management and increased value relevance of accounting measures in China since 2007. Firms audited by the Big Four are expected to have higher quality before the standard change evidenced quality improvement to a smaller extent. Further analysis shows that such changes are less likely to result from changes in economic conditions but from the changes of the standards. Through the analysis of China’s adoption of the new substantially IFRS-convergent standards, the study provides direct evidence on the question of whether IFRS can be relevant to markets that are still disciplined mainly by regulators rather than by market mechanisms.
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This paper examines the impact of investor protection and national culture on earnings management for a sample of 30 countries. The results indicate that earnings management is negatively associated with outside investor rights, consistent with Leuz et al. (2003). We also find that earnings management is relatively high in countries with high uncertainty avoidance scores and relatively low in countries where the primary language is English. Supplementary analysis of earnings management components indicates that uncertainty avoidance and masculinity are associated with earnings discretion but not with earnings smoothing. We conclude that culture is an important determinant of accounting choice and should be considered by standard setters enacting and enforcing international financial reporting rules.
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This paper addresses certain methodological issues that arise in estimating abnormal (or discretionary) accruals for detection of event-specific earnings management. Unlike prior studies (e.g., Dechow, Sloan, and Sweeney, 1995; Guay, Kothari, and Watts, 1996) that rely primarily on time-series models, we focus on the specification of cross-sectional models of expected accruals using quarterly as well as annual data. Perhaps more importantly, we present a variation of the Jones model that is shown to be well specified for all cash flow levels. We show that the cross-sectional Jones model yields systematically positive (negative) estimates of abnormal accruals for firms whose cash flows are below (above) their industry median. Using mean squared prediction errors as well as simulation analysis, we show that our model is more powerful than the cross-sectional Jones model in detecting earnings management. In addition, we examine differences in the power of current accrual models in detecting earnings management across audited and unaudited quarters.
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This study builds on the work of Tsakumis et al. [Tsakumis, G. T., Curatola, A. P,. & Porcano, T. M. (2007). The relation between national cultural dimensions and tax evasion. Journal of International Accounting, Auditing and Taxation, 16, 131–147] by conducting further empirical analysis of the relationship between Hofstede's [Hofstede, G. H. (1980). Cultures consequences: International differences in work-related values. Beverly Hills, CA: Sage Publications] cultural dimensions and tax evasion across countries using multiple measures of tax evasion to gain additional evidence on the subject. Moreover, this study extends the preliminary international tax evasion model developed by Tsakumis et al. [Tsakumis, G. T., Curatola, A. P,. & Porcano, T. M. (2007). The relation between national cultural dimensions and tax evasion. Journal of International Accounting, Auditing and Taxation, 16, 131–147] to examine, along with culture, the impact of legal, political, and religious variables on tax evasion across countries. Based on data from 47 countries, and after controlling for economic development, the regression results indicate that the higher the level of uncertainty avoidance and the lower the level of individualism, legal enforcement, trust in government, and religiosity, the higher is the level of tax evasion across countries. These findings remain robust to multiple measures of tax evasion. Government policymakers should find the results of this study useful in assessing the likelihood of tax evasion from cultural, legal, political, and religious perspectives, and in developing tax reform policies to reduce tax evasion.
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This paper reports on the results of empirical tests of the relationship between culture and accounting disclosures in an international context. Using a comprehensive data base of disclosure practices covering 27 countries, and applying linear regression analysis, the results support the hypothesis proposed by Gray (1988) that secrecy and its impact on disclosure behaviour is a function of the cultural (societal) values identified by Hofstede (1980). However, it was found that this relationship was more significant in respect of the values of “uncertainty avoidance” and “individualism” as compared to those of “power distance” and “masculinity”.
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This paper examines the implications of mandatory IFRS adoption on the accounting quality of banks in twelve EU countries. Specifically, we analyse how the change in the recognition and measurement of banks’ main operating accrual item, the loan loss provision, affects income smoothing behaviour and timely loss recognition. We find that the restriction to recognize only incurred losses under IAS 39 significantly reduces income smoothing. This effect is less pronounced in countries with stricter bank supervision, widely dispersed bank ownership and for EU banks cross-listed in the US. This provides additional evidence that institutions matter in shaping financial reporting outcomes. Further, the application of the incurred loss approach results in less timely loan loss recognition implying delayed recognition of future expected losses. In the light of the ongoing financial crises it is questionable whether this is a desirable financial reporting outcome of mandatory IFRS adoption.
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For a sample of 31 countries we document that financial disclosures are more transparent and national accounting standards require timelier (accrual-based) reporting in countries with stronger investor protection. These countries also spend more on auditing enforcement and the Big Five accounting firms audit proportionately more companies in these countries. These results indicate that higher quality accounting standards and the enforcement of such standards through higher quality auditing are more likely to exist in corporate governance in countries with strong investor protection. Higher quality accounting and auditing are also positively associated with financial market development in countries whose legal systems are conducive to the protection of investors. However, we are unable to find systematic evidence that higher quality accounting and auditing alone - independent of a country's underlying investor protection regime - affects the development of financial markets.
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This study examines the effects of mandatory IFRS adoption and investor protection on the quality of accounting earnings in forty-six countries (around the globe). The results suggest that earnings quality increases for mandatory IFRS adoption when a country’s investor protection regime provides stronger protection. This study extends the current literature that shows that accounting practices are influenced by country level macro settings. The results highlight the importance of investor protection for financial reporting quality and the need for regulators to design mechanisms that limit managers’ earnings management practices.
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Using theory and empirical data from social psychology to measure for cultural differences between countries, we study the effect of individualism as defined by Hofstede (1980) and egalitarianism as defined by Schwartz (1994, 1999, 2004) on earnings management. We find a significant influence of both cultural measures. In line with Licht et al. (2004), who argue that individualistic societies may be less susceptible to corruption, we found that countries scoring high on individualism tend to have lower levels of earnings management. In addition, we find that egalitarianism, defined as a society's cultural orientation with respect to intolerance for abuses of market and political power, is negatively related with earnings management. Our results are robust to different specifications and controls. The main message of this paper is that besides formal institutions, cultural differences are relevant to explain earnings management behaviour. We think that our work adds to the understanding of the importance of cultural values in managerial behaviour across countries contributing to the literature on earnings management and law and institutions.
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Accounting in shaped by economic and political forces. It follows that increased worldwide integration of both markets and politics (driven by reductions in communications and information processing costs) makes increased integration of financial reporting standards and practice almost inevitable. But most market and political forces will remain local for the foreseeable future, so it is unclear how much convergence in actual financial reporting practice will (or should) occur. Furthermore, there is little settled theory or evidence on which to build an assessment of the advantages and disadvantages of uniform accounting rules within a country, let alone internationally. The pros and cons of IFRS therefore are somewhat conjectural, the unbridled enthusiasm of allegedly altruistic proponents notwithstanding. On the "pro" side of the ledger, I conclude that extraordinary success has been achieved in developing a comprehensive set of "high quality" IFRS standards, in persuading almost 100 countries to adopt them, and in obtaining convergence in standards with important non-adopters (notably, the U.S.). On the "con" side, I envisage problems with the current fascination of the IASB (and the FASB) with "fair value accounting." A deeper concern is that there inevitably will be substantial differences among countries in implementation of IFRS, which now risk being concealed by a veneer of uniformity. The notion that uniform standards alone will produce uniform financial reporting seems naive. In addition, I express several longer run concerns. Time will tell.
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The association of a country's investor protection regime with the quality of reported earnings is examined for a large sample of firms from 42 countries. Three attributes of earnings are evaluated: the magnitude of abnormal accruals, the likelihood of reporting losses, and earnings conservatism (timely loss recognition). We find that earnings quality increases for firms with Big 4 auditors when a country's investor protection regime gives stronger protection to investors; specifically, abnormal accruals are smaller, there is a greater likelihood of reporting losses, and earnings conservatism is greater. In contrast, earnings of firms with non-Big 4 auditors are largely unaffected by different investor protection regimes. The study adds to a growing body of research showing that accounting practices are influenced by a country's institutions. However, our results differ from prior studies by demonstrating that country-level effects are mediated by audit enforcement, and in particular the incentives of Big 4 auditors to perform higher quality audits in countries with stricter investor protection regimes.
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This paper evaluates alternative models for detecting earnings management. The paper restricts itself to models that assume the construct being managed is discretionary accruals, since such models are commonly used in the extant accounting literature. Existing models range from simple models in which discretionary accruals are measured as total accruals, to more sophisticated models that separate total accruals into a discretionary and a non-discretionary component. Prior to this paper, there had been no systematic evidence bearing on the relative performance of these alternative models at detecting earnings management. This paper evaluates the relative performance of the competing models by comparing the specification and power of commonly used test statistics across the measures of discretionary accruals generated by each model. The specification of the test statistics is evaluated by examining the frequency with which they generate type I errors for a random sample of firm-years and for samples of firm-years with extreme financial performance. We focus on samples with extreme financial performance because the stimuli investigated in previous research are frequently correlated with financial performance. The first sample of firms are targeted by the Securities and Exchange Commission for allegedly overstating annual earnings and the second sample is created by artificially introducing earnings management into a random sample of firms.
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This study investigates whether culture in general and religion in particular mitigate earnings management. Using a cross-country data set, empirical tests based on rank regressions indicate that earnings management is unrelated to both religious affiliation and the degree of religiosity. In contrast, earnings management is found to be negatively related to the updated Hofstede (1980) cultural variable of individualism and positively related to uncertainty avoidance. Our results also indicate that the positive impact of the legal environment in mitigating earnings management, documented by Leuz et al. (2003), can no longer be demonstrated after controlling for culture.
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This study investigates the differences in earnings quality of Malaysian companies after the adoption of IFRS-based accounting standards named FRS. We hypothesize that under the new set of accounting standards, the quality of earnings reported by these companies is relatively higher. We measure earnings quality using two different proxies; the absolute value of abnormal accruals and the value relevance of earnings. Using 4010 observations over a three-year period before and a three-year period after the adoption of the new set of accounting standards, our study finds that the adoption of FRS is relatively related to higher reported earnings quality. Specifically, the results shows that (1) the absolute value of abnormal accrual is significantly lower and (2) the value-relevance of firms earnings is significantly higher, after the adoption of the new set of accounting standards.
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Research has shown that accounting follows different patterns in different parts of the world. There have been claims that national systems are determined by environmental factors. In this context, cultural factors have not been fully considered. This paper proposes four hypotheses on the relationship between identified cultural characteristics and the development of accounting systems, the regulation of the accounting profession and attitudes towards financial management and disclosure. The hypotheses are not operationalized, and empirical tests have not been carried out. They are proposed here as a first step in the development of a theory of cultural influence on the development of accounting systems.
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We examine whether application of International Accounting Standards (IAS) is associated with higher accounting quality. The application of IAS reflects combined effects of features of the financial reporting system, including standards, their interpretation, enforcement, and litigation. We find that firms applying IAS from 21 countries generally evidence less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do matched sample firms applying non-U.S. domestic standards. Differences in accounting quality between the two groups of firms in the period before the IAS firms adopt IAS do not account for the postadoption differences. Firms applying IAS generally evidence an improvement in accounting quality between the pre- and postadoption periods. Although we cannot be sure our findings are attributable to the change in the financial reporting system rather than to changes in firms' incentives and the economic environment, we include research design features to mitigate effects of both.
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We document in this study that the institutional factor of securities regulations is positively associated with audit fees in low investor-protection countries. Strict securities regulations in these countries are likely to be associated with higher audit effort and risk, which result in higher audit fees. On the other hand, we do not find any significant association between audit fees and securities regulations in high investor-protection countries. Auditors in these countries generally expend higher audit effort to reduce risk irrespective of the strictness of securities regulations. Consequently, strict securities regulations do not have a significant impact on audit fees in these countries. Our findings suggest that strict securities regulations in weak investor-protection countries play an important role in audit pricing.
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This study examines whether audit committee and board characteristics are related to earnings management by the firm. A negative relation is found between audit committee independence and abnormal accruals. A negative relation is also found between board independence and abnormal accruals. Reductions in board or audit committee independence are accompanied by large increases in abnormal accruals. The most pronounced effects occur when either the board or the audit committee is comprised of a minority of outside directors. These results suggest that boards structured to be more independent of the CEO are more effective in monitoring the corporate financial accounting process.
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We investigate whether investors price accruals quality, our proxy for the information risk associated with earnings. Measuring accruals quality (AQ) as the standard deviation of residuals from regressions relating current accruals to cash flows, we find that poorer AQ is associated with larger costs of debt and equity. This result is consistent across several alternative specifications of the AQ metric. We also distinguish between accruals quality driven by economic fundamentals (innate AQ) versus management choices (discretionary AQ). Both components have significant cost of capital effects, but innate AQ effects are significantly larger than discretionary AQ effects.
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This study examines the impact of legal systems (LSs) on financial disclosures by firms from different countries. The results indicate that firms from common law countries are associated with higher financial disclosures compared to firms from code law countries. The findings also reveal that cultural values have an insignificant impact on financial disclosures by firms from common law countries, and the results on firms from code law countries provide mixed signals. The results for multinationals are similar to the results for the total sample. The cultural values have no impact on financial disclosures of multinationals from common law countries, and there are mixed signals for multinationals from code law countries.
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We use Gray's [Gray, S.J. (1988). Towards a theory of cultural influence on the development of accounting systems internationally. Abacus, 24 (1), 1–15.] theory of the influence of culture on accounting to develop hypotheses about the effect the interaction of the accounting values of conservatism and secrecy and the context in which probability expressions are used in accounting standards will have on accountants' interpretations of those expressions. Specifically, we expect accountants in a high conservatism country to assign a higher (lower) numerical probability to verbal probability expressions that determine the threshold for the recognition of items that increase (decrease) income than accountants in a low conservatism country. We expect accountants in a high secrecy country to assign higher numerical probabilities to verbal probability expressions that establish the probability threshold for the disclosure of information than accountants in a low secrecy country. We survey professional accountants in Brazil (higher conservatism and higher secrecy) and in the United States (lower conservatism and lower secrecy) to test our hypotheses. We obtain some support for the first conservatism hypothesis related to the recognition of income-increasing items, but no support for the second conservatism hypothesis related to income-decreasing items. We obtain stronger results in support of our hypothesis related to secrecy and disclosure. This study contributes to the literature by investigating the impact of culture on interpretation of verbal probability expressions in the Latin cultural area and by testing Gray's theory, especially the secrecy hypothesis, at the individual-accountant level.
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This paper examines systematic differences in earnings management across 31 countries. We propose an explanation for these differences based on the notion that insiders, in an attempt to protect their private control benefits, use earnings management to conceal firm performance from outsiders. Thus, earnings management is expected to decrease in investor protection because strong protection limits insiders’ ability to acquire private control benefits, which reduces their incentives to mask firm performance. Our findings are consistent with this prediction and suggest an endogenous link between corporate governance and the quality of reported earnings.
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The purpose of this study is to investigate whether firms’ auditor choice relates to national culture. We construct a novel measure of secretiveness based on Hofstede [Hofstede, G., 1980. Culture’s Consequences: International Differences in Work Related Values. Sage Publications, Beverly Hills, CA] cultural factors. Using a very large sample of firms from 37 countries and controlling for a number of firm- and country-level factors, we find that firms in “more secretive” countries are less likely to hire a Big 4 auditor. We also document that the relation between secrecy dimension of national culture and auditor choice is mitigated by the firms’ degree of internationalization. These results establish a link between national culture and financial reporting quality through the firm’s choice of auditor.
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The East Asian countries Hong Kong, Malaysia, Singapore and Thailand provide rare insight into the interaction between accounting standards and the incentives of managers and auditors. Their standards derive from common law sources (UK, US, and IAS) that are widely viewed as higher quality than code law standards. However, their preparers’ incentives imply low quality. We show their financial reporting quality is not higher than under code law, with quality operationalized as timely recognition of economic income (particularly losses). It is misleading to classify countries by standards, ignoring incentives, as is common in international accounting texts, transparency indexes, and IAS advocacy.
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In this paper, we analyze the effect of the mandatory introduction of IFRS standards on earnings quality, and more precisely on earnings management. We concentrate on three IFRS first-time adopter countries, namely Australia, France, and the UK. We find that the pervasiveness of earnings management did not decline after the introduction of IFRS, and in fact increased in France. Our findings confirm that sharing rules is not a sufficient condition to create a common business language, and that management incentives and national institutional factors play an important role in framing financial reporting characteristics. We suggest that the IASB, the SEC and the European Commission should now devote their efforts to harmonizing incentives and institutional factors rather than harmonizing accounting standards.
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Researchers have used various measures as indications of “earnings quality” including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because “quality” is contingent on the decision context. We also point out that the “quality” of earnings is a function of the firm’s fundamental performance. The contribution of a firm’s fundamental performance to its earnings quality is suggested as one area for future work.
Article
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 (we study 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.