Incentives or Standards: What Determines Accounting Quality Changes Around IFRS Adoption?
Hans Bonde Christensen
University of Chicago - Booth School of Business
University of Manchester - Alliance Manchester Business School
University of Manchester - Manchester Business School
Manchester Business School
January 30, 2015
European Accounting Review Forthcoming
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.
Number of Pages in PDF File: 50
Keywords: IFRS, IAS, accounting quality, international accounting
JEL Classification: K22, M41, M48
Date posted: September 10, 2007 ; Last revised: February 23, 2015