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The Effect of IFRS Adoption Conditional Upon the Level of Pre-adoption Divergence

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  • Cai, Lei
  • Rahman, Asheq
  • Courtenay, Stephen

Abstract

Prior studies on whether or not International Financial Reporting Standards (IFRS) adoption improves earnings quality have found mixed results. We note that some of the countries that have adopted IFRS had national accounting standards similar to IFRS prior to adopting IFRS, while others had national accounting standards divergent from IFRS. We examine the effects of IFRS adoption by taking into account the level of divergence prior to the adoption of IFRS. We find that countries experience a greater drop in earnings management when they have a higher level of divergence from IFRS prior to IFRS adoption. More specifically, high divergence countries with higher levels of enforcement benefit the most followed by high divergence countries with lower levels of enforcement. Lower divergence countries with higher levels of enforcement do not significantly benefit from IFRS adoption. Lower divergence countries with lower levels of enforcement do not benefit from IFRS adoption at all. Our results support the contention that countries with lower quality local accounting standards prior to IFRS adoption benefit more from IFRS adoption.

Suggested Citation

  • Cai, Lei & Rahman, Asheq & Courtenay, Stephen, 2014. "The Effect of IFRS Adoption Conditional Upon the Level of Pre-adoption Divergence," The International Journal of Accounting, Elsevier, vol. 49(2), pages 147-178.
    • Handle: RePEc:eee:accoun:v:49:y:2014:i:2:p:147-178
    DOI: 10.1016/j.intacc.2014.04.004
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    5. Kim, Oksana, 2016. "The IFRS Adoption Reform through the Lens of Neoinstitutionalism: The Case of the Russian Federation," The International Journal of Accounting, Elsevier, vol. 51(3), pages 345-362.
    6. Kabir, Humayun & Su, Li & Rahman, Asheq, 2020. "Firm life cycle and the disclosure of estimates and judgments in goodwill impairment tests: Evidence from Australia," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    7. Masahiro Enomoto, 2018. "Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities," Discussion Paper Series DP2018-06, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2020.
    8. Rahman, Asheq R., 2016. "Discussion on “IFRS Adoption, Extent of Disclosure, and Perceived Corruption: A Cross-country Study”," The International Journal of Accounting, Elsevier, vol. 51(3), pages 379-381.
    9. Houqe, Muhammad Nurul & Monem, Reza M., 2016. "Reply to the Discussion of “IFRS Adoption, Extent of Disclosure, and Perceived Corruption: A Cross-Country Study”," The International Journal of Accounting, Elsevier, vol. 51(3), pages 382-384.
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    More about this item

    Keywords

    IFRS adoption; Pre-adoption divergence; Earnings quality; Enforcement;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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