Accounting Standards and Earnings Quality–Evidence from U.S. ADRs

• In Event: International Accounting 1

Abstract

The goal of this study is to shed light on the potential impact of IFRS (international financial reporting standards) adoption in the U.S. on earnings quality of U.S. firms. Foreign firms wishing to list their equity on the U.S. major stock exchanges can file their financial reports using IFRS, U.S. GAAP (generally accepted accounting principles), or their domestic GAAP. Using a comprehensive sample of listed ADRs (American Depositary Receipts) as surrogates for U.S. firms, we examine variations in earnings quality as a result of adopting U.S. GAAP, IFRS and domestic GAAP. Four different measures of earnings quality are employed to detect the effect: discretionary accruals, target beating, timely loss recognition, and earnings persistence. After controlling for various firm characteristics, we find evidences in favor of improvement in earnings quality for foreign firms that adopt either U.S. GAAP or IFRS as opposed to their domestic GAAP with reconciliation with U.S. GAAP. However, we fail to document a consistent difference in earnings quality between U.S. GAAP and IFRS. Results from our panel analysis suggest that IFRS adoption in the U.S. is likely not to impact the informational quality of U.S. firms’ financial statements.

Authors

• Leslie Fletcher, Georgia Southern University

• Yaseen Alhaj-Yaseen, University of Findlay

• Kean Wu, Rochester Institute of Technology