Does Mandatory Adoption of IFRS Improve Accounting Quality? Preliminary Evidence
TL;DR: In this article, the authors provide evidence on the preliminary effects of mandatory adoption of International Financial Reporting Standards (IFRS) on accounting quality for a relatively broad set of firms from 20 countries that adopted IFRS in 2005 relative to a benchmark group of firms that did not adopt IFRS.
Abstract: We provide evidence on the preliminary effects of mandatory adoption of International Financial Reporting Standards (IFRS) on accounting quality for a relatively broad set of firms from 20 countries that adopted IFRS in 2005 relative to a benchmark group of firms from countries that did not adopt IFRS matched on the strength of legal enforcement, industry, size, book-to-market, and accounting performance. Relative to these benchmark firms, we find that IFRS firms exhibit significant increases in income smoothing and aggressive reporting of accruals, and a significant decrease in timeliness of loss recognition; however we do not find significant differences across IFRS and benchmark firms in meeting or beating earnings targets. Our findings contrast with findings in earlier studies which suggest that IFRS adoption leads to increased accounting quality. Our findings primarily hold for firms in strong enforcement countries, which suggests that enforcement mechanisms in these countries were not able to counter the initial effects of greater flexibility in IFRS relative to domestic GAAP.
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TL;DR: The authors discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence, highlighting the challenges with quantifying regulatory costs and benefits, measuring disclosure and reporting outcomes, and drawing causal inferences from regulatory studies.
Abstract: This paper discusses the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. Given the policy relevance of research on regulation, we highlight the challenges with (1) quantifying regulatory costs and benefits, (2) measuring disclosure and reporting outcomes, and (3) drawing causal inferences from regulatory studies. Next, we discuss empirical studies that link disclosure and reporting activities to firm-specific and market-wide economic outcomes. Understanding these links is important when evaluating regulation. We then synthesize the empirical evidence on the economic effects of disclosure regulation and reporting standards, including the evidence on International Financial Reporting Standards (IFRS) adoption. Several important conclusions emerge. We generally lack evidence on market-wide effects and externalities from regulation, yet such evidence is central to the economic justification of regulation. Moreover, evidence on causal effects of disclosure and reporting regulation is still relatively rare. We also lack evidence on the real effects of such regulation. These limitations provide many research opportunities. We conclude with several specific suggestions for future research.
779 citations
TL;DR: In this article, the authors investigated the impact of reporting under International Financial Reporting Standards (IFRS) on the capital market and found that, across all countries, mandatory IFRS reporting had little impact on liquidity.
470 citations
TL;DR: In this article, the authors analyze a procedure common in empirical accounting and finance research where researchers use ordinary least squares to decompose a dependent variable into its predicted and residual components and use the residuals as the dependent variable in a second regression.
Abstract: We analyze a procedure common in empirical accounting and finance research where researchers use ordinary least squares to decompose a dependent variable into its predicted and residual components and use the residuals as the dependent variable in a second regression. This two‐step procedure is used to examine determinants of constructs such as discretionary accruals, real activities management, discretionary book‐tax differences, and abnormal investment. We show that the typical implementation of this procedure generates biased coefficients and standard errors that can lead to incorrect inferences, with both Type I and Type II errors. We further show that the magnitude of the bias in coefficients and standard errors is a function of the correlations between model regressors. We illustrate the potential magnitude of the bias in accounting research in four commonly used settings. Our results indicate significant bias in many of these settings. We offer three solutions to avoid the bias.
280 citations
TL;DR: The authors examine annual report text for over 15,000 non-US companies from 42 countries over the period 1998-2011, focusing on the length of disclosure, presence of boilerplate, comparability with US and nonUS firms, and complexity.
274 citations
Cites background from "Does Mandatory Adoption of IFRS Imp..."
...…notable that, while empirical evidence on the impact of IFRS with respect to quantitative data is mixed (see, for example, Barth et al. (2008) and Ahmed et al. (2013)), the effects on textual characteristics are striking, suggesting that the impact of IFRS on textual disclosure may have been at…...
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...While some papers suggest that accounting quality has improved with IFRS adoption (e.g., Barth et al., 2008), others provide more mixed evidence (e.g., Ahmed et al., 2013)....
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TL;DR: The authors reviewed the literature on the effects of International Financial Reporting Standards (IFRS) adoption and provided 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.
Abstract: 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.
258 citations
References
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TL;DR: In this article, the authors examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common-law countries generally have the strongest, and French civil law countries the weakest, legal protections of investors, with German- and Scandinavian-civil law countries located in the middle.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and Frenchcivil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
13,984 citations
TL;DR: In this article, the authors argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems, and discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform.
6,387 citations
TL;DR: The authors investigated empirically the determinants of the quality of governments in a large cross-section of countries and found that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics or Muslims exhibit inferior government performance.
Abstract: We investigate empirically the determinants of the quality of governments in a large cross-section of countries. We assess government performance using measures of government intervention, public sector efficiency, public good provision, size of government, and political freedom. We find that countries that are poor, close to the equator, ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions of Catholics or Muslims exhibit inferior government performance. We also find that the larger governments tend to be the better performing ones. The importance of (reasonably) exogenous historical factors in explaining the variation in government performance across countries sheds light on the economic, political, and cultural theories of institutions.
5,555 citations
TL;DR: In this paper, the authors interpret conservatism as resulting in earnings reflecting "bad news" more quickly than "good news" and find that negative earnings changes are less persistent than positive earnings changes.
3,874 citations
"Does Mandatory Adoption of IFRS Imp..." refers background or methods or result in this paper
...The Basu 1997 model uses the following equation: Et ¼ aþ b1Dt þ b2Rt þ b3Dt Rt þ et ð5Þ; where: the dependent variable Et is earnings per share before extraordinary items scaled by stock price at the fiscal year-end of t − 1 and Rt is the 12-month cumulative return ending three months after the…...
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...…sample, and both enforcement partitions, the coefficients on D*R are positive and significant, consistent with the findings in prior studies (e.g., Basu 1997; Ball et al. 2000; Ball et al. 2003) that bad news is recognized in earnings in a more timely manner than good news in the pre-adoption…...
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...Our measure of timely loss recognition is the Basu 1997 asymmetric timeliness measure, which indicates whether “bad news” is recognized in earnings in a timelier manner than “good news”....
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...Third, more specifically with respect to our measure of timeliness of loss recognition, prior studies raise a number of econometric concerns about the validity of the Basu 1997 measure....
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TL;DR: In this paper, the authors examine systematic differences in earnings management across 31 countries and 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.
3,662 citations