Are Reporting Incentives and Accounting Standards Substitutes or Complements in Achieving Accounting Comparability?

40 Pages Posted: 25 Apr 2014

See all articles by Sudarshan Jayaraman

Sudarshan Jayaraman

University of Rochester - Simon Business School; Simon Business School, University of Rochester

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT)

Date Written: April 23, 2014

Abstract

We find that they are complements. We subject our sample of 15 European Union (EU) countries to two regulatory changes: (i) the adoption of the common euro currency in 1999 that resulted in a convergence in reporting incentives and (ii) the subsequent adoption of International Financial Reporting Standards (IFRS) in 2005 that resulted in a convergence in accounting standards. We first document that the convergence in reporting incentives brought about by euro adoption increased financial reporting convergence, and that this convergence is driven by capital market integration rather than product market integration. To examine the interaction between reporting incentives and accounting standards, we condition the effect of IFRS adoption in 2005 on euro membership. We find greater financial reporting convergence after IFRS adoption but only in euro countries, suggesting that the convergence in reporting incentives and the convergence in accounting standards act as complements. We also find that both capital market and product market integration contribute to the complementarity between incentives and standards at the adoption of IFRS. Our findings are relevant to academics as well as regulators evaluating the implications of convergence in accounting standards around the world.

Keywords: Reporting incentives, accounting standards, IFRS, comparability, Euro, EU

JEL Classification: M41

Suggested Citation

Jayaraman, Sudarshan and Jayaraman, Sudarshan and Verdi, Rodrigo S., Are Reporting Incentives and Accounting Standards Substitutes or Complements in Achieving Accounting Comparability? (April 23, 2014). Available at SSRN: https://ssrn.com/abstract=2428263 or http://dx.doi.org/10.2139/ssrn.2428263

Sudarshan Jayaraman (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3491 (Phone)

Simon Business School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3491 (Phone)

Rodrigo S. Verdi

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
100 Main Street E62-666
Cambridge, MA 02142
United States
(617) 253 2956 (Phone)

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