Incentives or Standards: What Determines Accounting Quality Changes around IFRS Adoption?

By Hans B. Christensen, Edward Lee, Martin Walker, Cheng (Colin) Zeng. 2015

547 citations recorded by the source corpus.

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 comprehensive accounting standards. The overall results indicate that reporting incentives dominate accounting standards in determining accounting quality. We conclude that it is unwarranted to infer from evidence on accounting quality changes around voluntary adoption that IFRS per se improves accounting quality.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/cd605af96c25b3c56a67696aeb6f246bf08b9c30

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Citations in the corpus

Compliance with IFRS 3- and IAS 36-required disclosures across 17 European countries: company- and country-level determinants (2013, background): “…that reside in countries where early adoption was allowed but decided to wait until IFRS became mandatory (‘resisters’), and (iii) mandatory adopters, i.e. companies domiciled in countries not allowing early adoption (e.g. Christensen et al. 2008, Daske et al. 2008, 2011, Capkun et al. 2012).”
The Effect of IAS/IFRS Adoption on Earnings Management (Smoothing): A Closer Look at Competing Explanations (2013, unknown): “More precisely, excluded are firms from Finland, Germany, Iceland, the Netherlands, Norway, and the UK. Panel A1 shows results for Late Adopters, while Panel A2 shows results for Mandatory Adopters. Panel B shows results using observations from countries with a change in enforcement concurrent with ”
A review of the IFRS adoption literature (2016, background): “39 Recognizing that firms have discretion in how they implement new accounting standards, Daske, Hail, Leuz, and Verdi (2013) re-examine the observed liquidity and cost of capital effects around voluntary (and mandatory) adoption. Their analysis incorporates changes in firm-level reporting incentive”
Does Mandatory Adoption of IFRS improve Accounting Quality? Preliminary Evidence (2013, background): “…(or delayed recognition of losses) as compromising faithful representation of the underlying economics and therefore reducing accounting quality (see, among others, Leuz, Nanda, and Wysocki 2003; Barth, Landsman, and Lang 2008; Christensen, Lee, and Walker 2008; Chen, Tang, Jiang, and Lin 2010).”
Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management (2017, background): “Christensen et al. (2015) analyze the impact of incentives on the effect of IFRS adoption, suggesting that incentives (i.e. the need for external finance) dominate standards in determining accounting quality.”
IFRS – 10 years later (2016, background): “From a study of German IFRS adopting firms, Christensen et al. (2015) conclude that when higher quality accounting standards are mandated, accounting quality improvements are only observed in firms with incentives to comply.”
Does a common set of accounting standards affect tax-motivated income shifting for multinational firms? (2016, result): “…some papers find evidence that IFRS does not increase financial statement comparability (Lang et al., 2010) or that results are more consistent with increases in financial reporting quality (e.g., Beneish et al., 2014; Christensen et al., 2013) or self-selection (e.g., Christensen et al., 2015).”
Mandatory IFRS Reporting and Changes in Enforcement (2013, unknown): “…mixed with several studies finding improvements in ‘accounting quality’ (e.g., Gordon et al., 2009; Gebhardt and Novotny-Farkas, 2011; Barth et al., 2012), while others find no or the opposite effects (e.g., Christensen et al., 2008; Atwood et al., 2011; Capkun et al., 2011; Ahmed et al., 2013).”