IFRS Adoption and the Accrual Anomaly

• In Event: Adoption of IFRS

Abstract

Prior research finds that IFRS adoption significantly improved information environment and accounting quality. Prior research also finds that improved information environment and accounting quality reduce the accrual anomaly. This study examines the effect of IFRS adoption on the accrual anomaly. Using German data between 2002 and 2008, we find that German firms that switched from German GAAP to IFRS did not experience the accrual anomaly in the pre-IFRS period. In contrast, German firms that switched from U.S. GAAP to IFRS and voluntarily adopted IFRS earlier experienced the accrual anomaly in the pre-IFRS period. More importantly, we find that IFRS adoption mitigates the accrual anomaly after all German firms switched to IFRS in 2005. Further analyses show that the disappearance of the accrual anomaly may be attributable to the fact that IFRS adoption (1) increases analysts following and forecast accuracy and (2) reduces forecast dispersion and earnings management (i.e., discretionary accruals). Our findings may have some important implications for other capital markets and should be of interest to capital market regulators, accounting regulators, investors, and corporate managers.

Authors

• Stephen Wen-Jen Lin, Florida International University

• Jung Hoon Kim, Florida International University