Earnings Management and Value Relevance During the Mandatory Transition from Local GAAPs to IFRS in Europe

63 Pages Posted: 29 Apr 2008 Last revised: 12 Mar 2013

Vedran Capkun

HEC Paris - Accounting and Management Control Department

Anne JENY-CAZAVAN

ESSEC Business School; ESSEC Business School - Department of Accounting and Management Control

Thomas Jeanjean

ESSEC Business School - Department of Accounting and Management Control

Lawrence A. Weiss

Tufts University - The Fletcher School

Date Written: April 25, 2008

Abstract

This paper analyzes a sample of 1,722 European firms during their mandatory transition from local country accounting rules (Local GAAP) to International Financial Reporting Standards (IFRS) in 2004 and 2005 using the same set of firm-year observations. We use this unique transition period to examine the impact of a change in accounting standards on the quality of firms' financial statements. The transition to IFRS appears to have a small but significant impact on firms' reported total assets and book equity, as well as on their reported goodwill, intangible assets, property plant and equipment, long term debt and current assets and liabilities. For the same reporting period, Return on Assets (ROA) is significantly higher under IFRS than under Local GAAP with the greater increase occurring in those firms with lower levels of ROA under Local GAAP. This transition earnings management is present in all countries, but its level is highest in those countries with weaker legal institutions and higher levels of pre-transition earnings management. These results are consistent with managers using the transition to improve their reported earnings and ROA. IFRS earnings reconciliation disclosures are value relevant even with the noted transition earnings management. The value relevance of the book value of equity is limited to the Local GAAP reports. Both, partial and full IFRS earnings reconciliations are associated with market value and returns.

Keywords: IFRS, Earnings Management, Value Relevance

JEL Classification: M41, G10

Suggested Citation

Capkun, Vedran and JENY-CAZAVAN, Anne and Jeanjean, Thomas and Weiss, Lawrence A., Earnings Management and Value Relevance During the Mandatory Transition from Local GAAPs to IFRS in Europe (April 25, 2008). Available at SSRN: https://ssrn.com/abstract=1125716 or http://dx.doi.org/10.2139/ssrn.1125716

Vedran Capkun

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France

Anne JENY-CAZAVAN

ESSEC Business School ( email )

Av Bernard Hirsch
BP 50105
Cergy-Pontoise, 95021
France

ESSEC Business School - Department of Accounting and Management Control ( email )

Av Bernard Hirsch
BP 50105
Cergy-Pontoise, 95021
France

Thomas Jeanjean (Contact Author)

ESSEC Business School - Department of Accounting and Management Control ( email )

Av Bernard Hirsch
Cergy-Pontoise 95021
France

Lawrence A. Weiss

Tufts University - The Fletcher School ( email )

160 Packard Ave
Medford, MA 02155
United States
6176272735 (Phone)
6176273712 (Fax)

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