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The Role of International Financial Reporting Standards in Accounting Quality: Evidence from the European Union

59 Pages Posted: 10 Aug 2010  

Huifa Chen

Shanghai Maritime University

Qingliang Tang

University of Western Sydney

Yihong Jiang

affiliation not provided to SSRN

Zhijun Lin

Hong Kong Baptist University

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Abstract

Previous studies on the effect of International Financial Reporting Standards (IFRS) on accounting quality often have difficulties to control for confounding factors on accounting quality. As a result, the observed changes in accounting quality could not be attributed mainly to IFRS. We use a unique research setting to address this issue by comparing the accounting quality of publicly listed companies in 15 member states of the European Union (EU) before and after the full adoption of IFRS in 2005. We use five indicators as proxies for accounting quality. We find that the majority of accounting quality indicators improved after IFRS adoption in the EU. That is, there is less of managing earnings toward a target, a lower magnitude of absolute discretionary accruals, and higher accruals quality. But our results also show that firms engage in more earnings smoothing and recognize large losses in a less timely manner in post-IFRS periods. In addition, we examine the effects of institutional variables on financial reporting quality. Our contribution to the literature is that we show the improved accounting quality is attributable to IFRS, rather than changes in managerial incentives, institutional features of capital markets, and general business environment, etc.

Suggested Citation

Chen, Huifa and Tang, Qingliang and Jiang, Yihong and Lin, Zhijun, The Role of International Financial Reporting Standards in Accounting Quality: Evidence from the European Union. Journal of International Financial Management & Accounting, Vol. 21, No. 3, pp. 220-278, Autumn 2010. Available at SSRN: https://ssrn.com/abstract=1654654 or http://dx.doi.org/10.1111/j.1467-646X.2010.01041.x

Huifa Chen (Contact Author)

Shanghai Maritime University ( email )

School of Economics & Management
1550 Harbour Avenue
Shanghai, 201306
China

Qingliang Tang

University of Western Sydney ( email )

School of Accounting
Locked Bag 1797, Penrith South DC
Sydney, NSW 1797
Australia
+61 2 9685 9465 (Phone)
+61 2 9685 9339 (Fax)

Yihong Jiang

affiliation not provided to SSRN ( email )

Zhijun Lin

Hong Kong Baptist University ( email )

Department of Accountancy & Law
School of Business
Kowloon Tong, Kowloon
Hong Kong

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