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IFRS and accounting quality: legal origin, regional, and disclosure impacts

Ajit Dayanandan (College of Business and Public Policy, University of Alaska Anchorage, Anchorage, Alaska, USA)
Han Donker (College of Business and Public Policy, University of Alaska Anchorage, Anchorage, Alaska, USA)
Mike Ivanof (School of Business, University of the Fraser Valley, Abbotsford, Canada)
Gökhan Karahan (College of Business and Public Policy, University of Alaska Anchorage, Anchorage, Alaska, USA)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Article publication date: 1 August 2016

3490

Abstract

Purpose

The purpose of this study is to examine whether the quality of financial reporting has improved after the adoption of International Financial Reporting Standards (IFRS) in Europe and across the world. The study investigates the impact of IFRS on income smoothing and earnings management in different geographic regions under different legal origins and disclosure environments.

Design/methodology/approach

To measure income smoothing in the pre- and post-IFRS periods, the authors use the coefficient of variation and the panel unit root model proposed by Im et al. (2003) for testing whether net income is stationary throughout the sample period. The study uses a dynamic panel estimation framework, as it captures the dynamics of IFRS on discretionary accruals efficiently. Discretionary accruals are used to measure earnings management.

Findings

The results suggest that the adoption of high quality standards, such as IFRS, reduces income smoothing and earnings management. In addition, the study finds that earnings management has decreased in the post-IFRS period, in particular, for French and Scandinavian civil law countries, but not for German civil law countries and common law countries. The latter can be explained by the fact that common law countries have strong investor protection laws, strict law enforcement and high disclosure levels of financial information. The study also finds empirical evidence that the adoption of IFRS reduces earnings management in countries with high levels of financial disclosure. Overall, the study shows that the adoption of IFRS improved the quality of financial reporting.

Originality/value

This study is useful for accounting standard setters across the world, including those countries that have not yet decided to adopt IFRS. The study contributes to the literature by examining the adoption of IFRS in income smoothing and earnings management under different legal regimes and disclosure environments by using advanced empirical methodologies.

Keywords

Citation

Dayanandan, A., Donker, H., Ivanof, M. and Karahan, G. (2016), "IFRS and accounting quality: legal origin, regional, and disclosure impacts", International Journal of Accounting & Information Management, Vol. 24 No. 3, pp. 296-316. https://doi.org/10.1108/IJAIM-11-2015-0075

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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