The Impact of the Issuance of a Revised Set of Accounting Standards on Earnings Management in Mexico

• In Event: International Accounting

Abstract

Following the issuance of a revised set of Mexican GAAP designed to begin convergence toward International Financial Reporting Standards (IFRS), this study examines its impact on earnings management of companies listed in the Mexican Stock Market (Bolsa Mexicana de Valores, or BMV). Results indicate that the financial information reported by companies listed in the BMV shows less earnings management after Mexico’s revised set of GAAP in our tests of earnings smoothing, but not on the test on the propensity of reporting small positive earnings. These results are relevant because we find a decrease of earnings smoothing in Mexico, which is a country with low investor protection and a general lack of enforcement in corporate governance rules. It appears that since the new set of Mexican GAAP implies enforcement via the auditing process, companies have an economic incentive to increase their accounting quality. Additionally, it was also found that when performing the analyses on two separate subsamples, one with companies listed only on the BMV and companies cross-listed on U.S. Markets, both sub-samples have increases in accounting quality for the two earnings smoothing measures used, but cross-listed companies do show less earnings management than Bolsa companies both on the Pre-revised GAAP and Post- revised GAAP.

Authors

• Jose E. Miranda-Lopez, California State University, Fullerton

• Ivan A Valdovinos-Hernandez, Tecnologico de Monterrey, Campus Guadalajara