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

50 Pages Posted: 10 Sep 2007 Last revised: 23 Feb 2015

Hans Bonde Christensen

University of Chicago - Booth School of Business

Edward Lee

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Cheng Zeng

Alliance Manchester Business School

Date Written: January 30, 2015

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.

Keywords: IFRS, IAS, accounting quality, international accounting

JEL Classification: K22, M41, M48

Suggested Citation

Christensen, Hans Bonde and Lee, Edward and Walker, Martin and Zeng, Cheng, Incentives or Standards: What Determines Accounting Quality Changes Around IFRS Adoption? (January 30, 2015). European Accounting Review Forthcoming. Available at SSRN: https://ssrn.com/abstract=1013054 or http://dx.doi.org/10.2139/ssrn.1013054

Hans Bonde Christensen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Cheng Zeng

Alliance Manchester Business School ( email )

Oxford Road
Manchester, M13 9SS
United Kingdom

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