Convergence to IFRS, Accounting Quality, and Role of Regional Institutions—Evidence from China

• In Event: IFRS and Regional GAAP Comparisons

Abstract

Through the transition from a regulated economy to a market-oriented economy, China has pursued a gradual approach in its institutional reform. This approach, however, leads to an uneven institutional development across regions. In this study, we examine how this unevenness in regional institution development affects firms’ accounting quality after China converges with the International Financial Reporting Standards. We find that, in general, the convergence to IFRS is associated with an increase in aggressive reporting of accruals for Chinese firms. The further analysis on the regional institution development level reveals that there is an incremental increase in accrual aggressiveness for firms located in regions with lower degree of legal environment development. Notwithstanding the insignificant change in the trend of timely loss recognition after the convergence to IFRS in general, the piecewise analysis suggests a significant decrease in the likelihood of reporting large negative net income for firms located in regions with lower degree of legal environment development.

Authors

• Maggie Hao, Lamar University

• Qin Jennifer Yin, The University of Texas at San Antonio