Setting the Bar: Earnings Management During a Change in Accounting Standards

54 Pages Posted: 15 Jul 2011

See all articles by Vedran Capkun

Vedran Capkun

HEC Paris

Anne Jeny

IESEG School of Management

Thomas Jeanjean

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

Lawrence A. Weiss

MIT

Date Written: June 22, 2011

Abstract

This paper examines the impact of the accounting flexibility offered by IFRS 1 during the 2005 mandatory adoption of IFRS in the European Union. Same year reconciliations between local GAAP and IFRS are used on a sample of 1,635 European firms to determine the nature and extent of their use in managing earnings and earnings changes under IFRS. We posit and find that firms with negative Local GAAP earnings were more likely to report positive Local GAAP-to-IFRS earnings reconciliations, while firms with large positive earnings under Local GAAP were more likely to report negative Local GAAP-to-IFRS earnings reconciliations. Subsequently, in reporting periods following the adoption of IFRS, firms that reported positive (negative) reconciliations were more likely to show a decrease (an increase) in earnings. Finally, while we find no evidence of stock markets reacting to earnings management during the IFRS transition, we find strong evidence in support of CEOs managing earnings reconciliations to increase their compensation.

Keywords: IFRS, Earnings Quality, Earnings Management, Compensation

Suggested Citation

Capkun, Vedran and Jeny, Anne and Jeanjean, Thomas and Jeanjean, Thomas and Weiss, Lawrence A., Setting the Bar: Earnings Management During a Change in Accounting Standards (June 22, 2011). Available at SSRN: https://ssrn.com/abstract=1870007 or http://dx.doi.org/10.2139/ssrn.1870007

Vedran Capkun

HEC Paris ( email )

Jouy-en-Josas Cedex
France

Anne Jeny

IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

Thomas Jeanjean (Contact Author)

ESSEC Business School ( email )

Accounting and Management Control Department
Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France

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

Av Bernard Hirsch
Cergy-Pontoise 95021
France

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