Does the Adoption of IFRS Influence Earnings Management towards Small Positive Profits? Evidence from Emerging Markets

Authors: Sawcen Chebaane, Hakim Ben Othman

Abstract:

This paper investigates the effect of International Financial Reporting Standards (IFRS) adoption on the frequency of earnings managements towards small positive profits. We focus on two emerging markets IFRS adopters: South Africa and Turkey. We tested our logistic regression using appropriate panelestimation techniques over a sample of 330 South African and 210 Turkish firm-year observations over the period 2002-2008. Our results document that mandatory adoption of IFRS is not associated with a reduction in earnings management towards small positive profits in emerging markets. These results contradict most of the previous findings of the studies conducted in developed countries. Based on the legal system factor, we compare the intensity of earnings management between a code law country (Turkey) and a common law country (South Africa) over the pre and post-adoption periods. Our findings show that the frequency of such earnings management practice increases significantly for the code law country.

Keywords: Civil law, common law, emerging markets, Mandatory IFRS adoption, small positive profits.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1071332

References:

[1] Barth, M., Landsman, W. and Lang, M., "International Accounting Standards and Accounting Quality"Journal of Accounting Research,46, pp. 467-728, 2008.
[2] Ben Othman,H et Zeghal,D., "A study of earnings management motives in the Anglo-American and Euro-Continental accounting models: The Canadian and French cases",The International Journal of Accounting, 41, pp. 406-435, 2006.
[3] Burgstahler, D., Dichev, I., " Earnings management to avoid earnings decreases and losses", Journal of Accounting and Economics,24, pp. 99- 126,1997.
[4] Callao,S. andJarne, J.I., " Have IFRS Affected Earnings Management in the European Union?", Accounting in Europe,7, pp. 159-189, 2010.
[5] Callao,S.,Jarne,J. et La'─▒nez,A., "Adoption of IFRS in Spain: Effect on the comparability and relevance of financial reporting", Journal of International Accounting, Auditing and Taxation ,16, pp.148-178, 2007.
[6] Capkun, A., Jeny, C., Jeanjean, T. and Weissc, L.A., "Earnings Management and Value Relevance during the Mandatory Transition from Local GAAPs to IFRS in Europe", 2008, Working paper, available on http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1125716.
[7] Chamisa, E.E., "The Relevance and Observance of the IASC Standards in Developing Countries and the Particular Case of Zimbabwe", The International Journal of Accounting, 35(2), pp. 267-286, 2000.
[8] Christensen, H. B, Lee, E. et Walker, M., " Incentives or standards: What Determine Accounting Quality Changes Around IFRS Adoption?", 2008, Financial Accounting and Reporting Section (FARS) Paper. Available on http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1013054.
[9] Clarkson ,P., Hanna J.D., Richardson ,G. and Thompson,R., " The impact of IFRS adoption on the value relevance of book value and earnings", Journal of Contemporary Accounting & Economics, 7, pp. 1- 17,2011
[10] Degeorge, F., Patel, J., Zeckhauser, R., "Earnings management to exceed thresholds", Journal of Business ,72, pp. 1-33, 1999.
[11] Healy P.M. and Wahlen J.M., "A review of the earnings management literature and its implications for standard setting", Accounting Horizons, 13, pp. 365-383, 1999.
[12] Jeanjean T. and Stolowy H., "Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption", Journal Accounting Public Policy, 27, pp.480-494, 2008.
[13] La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. W., "Law and finance",Journal of Political Economy, 106,pp. 1113-1155, 1998.
[14] Lang, M., J. Raedy and M. Yetman, "How Representative Are Firms That Are Cross Listed in the United States? An Analysis of Accounting Quality", Journal of Accounting Research, 41, pp. 363-86, 2003.
[15] Lang,M.; J. Raedy; and W. Wilson, " Earnings Management and Cross Listing: Are Reconciled Earnings Comparable to US Earnings?" Journal of Accounting and Economics, 42, pp. 255-83, 2006.
[16] Latridis,G. "International Financial Reporting Standards and the quality of financial statement information", International Review of Financial Analysis ,19, pp.193-204, 2010.
[17] LEUZ, C., "IAS versus U.S. GAAP: Information Asymmetry-Based Evidence from Germany-s New Market." Journal of Accounting Research, 41 , pp. 445-27, 2003.
[18] Leuz, C., Nanda, D., Wysocki, P.D., " Earnings management and investor protection: an international comparison", Journal of Financial Economics, 69, 505-527,2003.
[19] Paananen, M. et Lin, C., "The Development of Accounting Quality of IAS and IFRS Over Time: The Case of Germany", Journal of International Accounting Research, 8, pp. 31-55, 2009.
[20] Peasnell, K., "Accounting in developing countries: A search for appropriate technologies" , Research in Third World Accounting, 2, pp.1-16 ,1993.
[21] Perera H. and Baydoun N., "Convergence with international financial reporting standards: the case of Indonesia", Advances in International Accounting, 20, pp. 201-224, 2007.
[22] Perera MHB, "Accounting in developing countries: a case for localized uniformity", British Accounting Review, 21, pp. 141-158, 1989.
[23] Samuels, J.M. , J.C. Oliga, "Accounting Standards in Developing Countries", International Journal of Accounting Education and Research, pp. 69-88, 1989.
[24] Schiebel, A., "Empirical Value Relevance of German GAAP and IFRS", Journal of Economic and Financial Sciences, 1 (2), pp. 141-170, 2007.
[25] Soderstrom,N.S. and Sun,K.J., " IFRS adoption and accounting quality: a review", European Accounting Review,16(4), pp. 675-702, 2007.
[26] Tyrrall, D., Woodward, D., Rakhimbekova, A., "The relevance of International Financial Reporting Standards to a developing country: Evidence from Kazakhstan", The International Journal of Accounting, 42, pp. 82-110, 2007.
[27] Van tendeloo, B. and Vanstraelen, A., "Earnings management under German GAAP versus IFRS", European Accounting Review, 14(1), pp.155-180, 2005.
[28] Wallace RSO, " Accounting in developing countries. A review of literature". Research in Third World Accounting , pp. 1,3-54, 1990.
[29] Zeghal D., Chtourou S. and Y. Mnif, "An analysis of the effect of mandatory adoption of IAS/IFRS on earnings management", Journal of International Accounting, Auditing and Taxation ,20 , pp.61-72, 2011.