Accounting Quality under IFRS: The Effect of Country Specific Factors
Most prior works focus on the effect of IFRS adoption itself on earnings quality using one dimension of earnings quality, and cover the early years of adoption. The present thesis seeks to investigate how country specific factors shape accounting quality under IFRS across 23 countries between 2007 and 2010, the global financial crisis period. This is the first study to examine the effect of country specific factors, using recent indicators, on both accruals and real earnings management under IFRS. It is also the first to explore the impact of country specific factors on conditional conservatism and value relevance together, which highlights earnings quality from contracting perspective and equity valuation perspective at the same time. The results of the first empirical study indicate that overstating earnings via accruals is less pronounced in countries with strong investor protection, strict enforcement, and large capital markets, and that managing earnings upward utilizing real actions is greater in such countries. Further, the results show that firms engage in both types of earnings management at the same time. The results of the second empirical study show that earnings are more conservative in countries having strong investor protection and rigorous enforcement of accounting standards, and that the value relevance of book values is greater in those countries. Further, the strength of capital markets has no impact on the extent of conservatism, whereas the value relevance of earnings is greater in large capital markets. Overall, the main findings of this thesis suggest that country specific factors still govern accounting quality under IFRS and that they drive different 'quality' earnings. The IASB should emphasise the enforcement mechanisms, not only the mere adoption of IFRS. Auditors and regulators should also consider the possible negative effects of real activities to which managers switch in a bid to escape coming under scrutiny in countries with strong institutions. Additionally, researchers should be cautious when drawing conclusions on earnings quality as quality under contracting perspective may differ from that under equity valuation perspective.