The Impact of Financial Statement Comparability on Earnings Management: Evidence from Frontier Markets

Wil Martens, Prem W. S. Yapa and Maryam Safari
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Wil Martens: School of Business and Management, RMIT University, Hanoi 10000, Vietnam
Prem W. S. Yapa: School of Accounting, Information Systems & Supply Chain, RMIT University, Melbourne, VIC 3000, Australia
Maryam Safari: School of Accounting, Information Systems & Supply Chain, RMIT University, Melbourne, VIC 3000, Australia

IJFS, 2020, vol. 8, issue 4, 1-25

Abstract: This paper examined whether financial statement comparability constrains opportunistic earnings management in frontier market countries. Using a large sample of 19 frontier market countries, and an accounting comparability method that maps comparability across several accounting standards, the results show that enhanced financial comparability constrains accruals earnings management (AEM). Contrary to developed markets and novel to this study, a significant relationship between financial comparability and real earnings management (REM) was not found. For greater robustness, AEM and REM were also tested on both International Financial Reporting Standards (IFRS) adopting and non-adopting countries. The results suggest IFRS adoption constrains AEM, yet exhibited no impact on constraining REM. Additionally, the use of BigN auditors failed to conclusively show an ability to moderate EM. When combined, the results suggest that frontier markets engage in less REM than expected. It is also noted that the legal roots (civil vs. common law) play a significant role in constraining earnings management. Common law countries exhibited lower AEM when comparability increased; this significance was not found in countries that were rooted in civil law. Contributions from this study show that findings from developed markets cannot be generalised to frontier markets.

Keywords: accounting comparability; real earnings management; accruals earnings management; frontier markets (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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