The Effects of Mandatory IFRS Adoption on Financial Reporting Quality: Evidence from non-E.U. Countries

• In Event: IFRS Adoption

Abstract

This study investigates the effects of mandatory IFRS adoption on financial reporting quality and finds that the reporting incentives related to institutional factors are more relevant than accounting standards in determining the quality of financial reporting. I exploit a sample of 15 non-European Union countries that did not substantially change their enforcement mechanisms and other institutional factors, providing a better identification strategy. I use four measures of accrual quality to assess the financial reporting quality construct. Moreover, I use several institutional factors that have the potential to affect reporting incentives as mediating variables. The results show that mandatory IFRS adoption decreases financial reporting quality. However, these findings depend on the institutional features of the country that adopted the IFRS mandatorily. The effects of IFRS are significantly more positive (or less negative) for countries with a common law legal system, a more developed capital market, stronger legal enforcement, lower perceived corruption, greater economic freedom, and better institutional infrastructure in general. I perform robustness tests to check the results’ sensitivity. The results remain qualitatively the same after changing sample criteria, controlling for the 2008 financial crisis, and considering the financial reporting preparers’ learning curve in the first-year of IFRS adoption.

Author

• Josué Braga, Federal University of Bahia