Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management

Elisabetta Ipino and Antonio Parbonetti

Accounting and Business Research, 2017, vol. 47, issue 1, 91-121

Abstract: This paper examines whether firms substituted real earnings management for accrual-based earnings management after the International Financial Reporting Standards (IFRS) became mandatory. Using a sample of 101,331 firm-year observations from 33 countries between 2000 and 2010, we show that IFRS adoption came with the unintended consequence of certain firms substituting real earnings management for accrual-based earnings management, especially among firms in countries with strict enforcement regimes. Furthermore, we document that the trade-off is confined to EU countries in which strong firm-level characteristics (i.e. the firm-level mechanism of control, the market’s level of scrutiny, and firm-specific incentives to provide transparency) are coupled with strong enforcement. We also show that IFRS had an effect in countries outside the EU, albeit at a different time. Overall, the results suggest that accounting regulators’ efforts to increase earnings quality might have had the unintended consequence of increasing real earnings management activities.

Date: 2017
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Citations: View citations in EconPapers (22)

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DOI: 10.1080/00014788.2016.1238293

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