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The Effect of Economic Conditions on Accounting Conservatism under IFRS in Europe

Author

Listed:
  • Cerqueira Antonio

    (University of Porto, School of Economics and Management, Porto, Portugal)

  • Pereira Claudia

    (Polytechnic of Porto, CEOS.PP - Center for Organisational and Social Studies of P. Porto, S. Mamede de Infesta, Portugal)

Abstract

We analyse in detail conservative accounting practices in seventeen European countries, taking into account institutional factors. In addition, we examine the impact of IFRS adoption and the influence of changes in economic conditions on conditional conservatism. Specifically, we study the level of accounting conservatism before and after IFRS adoption detailing for the pre and crisis period and post-crisis period surrounding the 2007/2008 financial crisis. Our findings are consistent with a conservative accounting practice in Europe as a whole and in each country individually. Besides, opposite to that expected, the results provide evidence of more conservative accounting practice in Anglo-Saxon countries, but we find no significant differences in conservatism in Nordic countries. Another finding is a significant decrease in the level of conservatism after IFRS adoption. Regarding the joint impact of IFRS adoption and economic conditions, we find a decrease in conservatism in the pre and crisis period, followed by a substantial increase in the post-crisis period. Our results seem to be in line with the positive accounting theory when suggesting that conservatism plays a fundamental role as corporate governance and efficient contracting mechanism between managers and other stakeholders of the firm. Furthermore, the results suggest that the flexibility provided by IFRS allows adjusting the level of conservatism when economic conditions change.

Suggested Citation

  • Cerqueira Antonio & Pereira Claudia, 2020. "The Effect of Economic Conditions on Accounting Conservatism under IFRS in Europe," Review of Economic Perspectives, Sciendo, vol. 20(2), pages 137-169, June.
    • Handle: RePEc:vrs:reoecp:v:20:y:2020:i:2:p:137-169:n:2
    DOI: 10.2478/revecp-2020-0007
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    More about this item

    Keywords

    Conditional Conservatism; Economic Conditions; IFRS; Institutional Factors;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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