Mandatory IFRS Adoption: The Trade-Off between Accrual and Real-Based Earnings Management

Abstract

This paper examines whether firms substitute accrual and real-based earnings management once the International Financial Reporting System (IFRS) becomes mandatory. Using a sample of 53,853 firm-year observations from 37 countries between 2000 and 2008, we document a decrease (increase) in accrual (real-based) earnings management activities for mandatory IFRS adopters only in countries with strict enforcement regimes. Moreover, we show that the switch from accrual to real-based earnings management activities leads to a much larger decline in performance. Taken together the results document that the accounting regulators' efforts to increase earnings quality by reducing managerial discretion may have the unintended consequence of increasing real-based earnings management and reducing firms' performance.

Keywords: IFRS adoption, accrual earnings management, real earnings management

JEL Classification: M40, M41