Incentives or Standards: What Determines Accounting Quality Changes around IFRS Adoption?
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This paper examined the impact of managerial financial reporting incentives on accounting quality changes around International Financial Reporting Standards (IFRS) adoption and found that firms that resist IFRS adoption have closer connections with banks and inside shareholders, consistent with lower incentives for more compr...Abstract:
We examine the impact of managerial financial reporting incentives on accounting quality changes around International Financial Reporting Standards (IFRS) adoption. A novel feature of our single-country setting based on Germany is that voluntary IFRS adoption was allowed and common before IFRS became mandatory. We exploit the revealed preferences in the choice to (not) adopt IFRS voluntarily to determine whether the management of individual firms had incentives to adopt IFRS. For comparability with previous studies, we assess accounting quality through multiple constructs such as earnings management, timely loss recognition, and value relevance. While most existing literature documents accounting quality improvements following IFRS adoption, we find that improvements are confined to firms with incentives to adopt, that is, voluntary adopters. We also find that firms that resist IFRS adoption have closer connections with banks and inside shareholders, consistent with lower incentives for more compr...read more
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