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How do International Financial Reporting Standards affect information asymmetry? The importance of the earnings quality channel

Ramzi Benkraiem, Itidel Bensaad and Faten Lakhal

Journal of International Accounting, Auditing and Taxation, 2022, vol. 46, issue C

Abstract: Previous studies have provided evidence of the effect that accounting regulation through the adoption of International Financial Reporting Standards (IFRS) has on the informational environment. However, none have investigated how this effect is driven. This study examines whether earnings quality is an effective channel through which the IFRS can mitigate the level of information asymmetry. Based on a sample of French listed companies, we find that information asymmetry decreases significantly after the adoption of IFRS. Using a path analysis and maximum likelihood estimations, the results show that the faithful representation component of earnings quality is the only channel through which IFRS decrease the level of information asymmetry. This finding suggests that the faithful representation of earnings increased under IFRS regulation, which, in turn, enhanced the quality of the informational environment. Our findings are robust using several sensitivity analyses.

Keywords: IFRS; Information asymmetry; Earnings quality; Faithful representation; Relevance; Path analysis (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.intaccaudtax.2021.100445

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