Does the Adoption of IFRS Influence Earnings Management towards Small Positive Profits? Evidence from Emerging Markets
This paper investigates the effect of International
Financial Reporting Standards (IFRS) adoption on the frequency of
earnings managements towards small positive profits. We focus on
two emerging markets IFRS adopters: South Africa and Turkey.
We tested our logistic regression using appropriate panelestimation
techniques over a sample of 330 South African and 210
Turkish firm-year observations over the period 2002-2008. Our
results document that mandatory adoption of IFRS is not associated
with a reduction in earnings management towards small positive
profits in emerging markets. These results contradict most of the
previous findings of the studies conducted in developed countries.
Based on the legal system factor, we compare the intensity of
earnings management between a code law country (Turkey) and a
common law country (South Africa) over the pre and post-adoption
periods. Our findings show that the frequency of such earnings
management practice increases significantly for the code law
country.
[1] Barth, M., Landsman, W. and Lang, M., "International Accounting
Standards and Accounting Quality"Journal of Accounting Research,46,
pp. 467-728, 2008.
[2] Ben Othman,H et Zeghal,D., "A study of earnings management motives
in the Anglo-American and Euro-Continental accounting models: The
Canadian and French cases",The International Journal of Accounting,
41, pp. 406-435, 2006.
[3] Burgstahler, D., Dichev, I., " Earnings management to avoid earnings
decreases and losses", Journal of Accounting and Economics,24, pp. 99-
126,1997.
[4] Callao,S. andJarne, J.I., " Have IFRS Affected Earnings Management in
the European Union?", Accounting in Europe,7, pp. 159-189, 2010.
[5] Callao,S.,Jarne,J. et La'─▒nez,A., "Adoption of IFRS in Spain: Effect on
the comparability and relevance of financial reporting", Journal of
International Accounting, Auditing and Taxation ,16, pp.148-178, 2007.
[6] Capkun, A., Jeny, C., Jeanjean, T. and Weissc, L.A., "Earnings
Management and Value Relevance during the Mandatory Transition
from Local GAAPs to IFRS in Europe", 2008, Working paper, available
on http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1125716.
[7] Chamisa, E.E., "The Relevance and Observance of the IASC Standards
in Developing Countries and the Particular Case of Zimbabwe", The
International Journal of Accounting, 35(2), pp. 267-286, 2000.
[8] Christensen, H. B, Lee, E. et Walker, M., " Incentives or standards:
What Determine Accounting Quality Changes Around IFRS
Adoption?", 2008, Financial Accounting and Reporting Section (FARS)
Paper. Available on
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1013054.
[9] Clarkson ,P., Hanna J.D., Richardson ,G. and Thompson,R., " The
impact of IFRS adoption on the value relevance of book value and
earnings", Journal of Contemporary Accounting & Economics, 7, pp. 1-
17,2011
[10] Degeorge, F., Patel, J., Zeckhauser, R., "Earnings management to exceed
thresholds", Journal of Business ,72, pp. 1-33, 1999.
[11] Healy P.M. and Wahlen J.M., "A review of the earnings management
literature and its implications for standard setting", Accounting
Horizons, 13, pp. 365-383, 1999.
[12] Jeanjean T. and Stolowy H., "Do accounting standards matter? An
exploratory analysis of earnings management before and after IFRS
adoption", Journal Accounting Public Policy, 27, pp.480-494, 2008.
[13] La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. W., "Law
and finance",Journal of Political Economy, 106,pp. 1113-1155, 1998.
[14] Lang, M., J. Raedy and M. Yetman, "How Representative Are Firms
That Are Cross Listed in the United States? An Analysis of Accounting
Quality", Journal of Accounting Research, 41, pp. 363-86, 2003.
[15] Lang,M.; J. Raedy; and W. Wilson, " Earnings Management and Cross
Listing: Are Reconciled Earnings Comparable to US Earnings?" Journal
of Accounting and Economics, 42, pp. 255-83, 2006.
[16] Latridis,G. "International Financial Reporting Standards and the quality
of financial statement information", International Review of Financial
Analysis ,19, pp.193-204, 2010.
[17] LEUZ, C., "IAS versus U.S. GAAP: Information Asymmetry-Based
Evidence from Germany-s New Market." Journal of Accounting
Research, 41 , pp. 445-27, 2003.
[18] Leuz, C., Nanda, D., Wysocki, P.D., " Earnings management and
investor protection: an international comparison", Journal of Financial
Economics, 69, 505-527,2003.
[19] Paananen, M. et Lin, C., "The Development of Accounting Quality of
IAS and IFRS Over Time: The Case of Germany", Journal of
International Accounting Research, 8, pp. 31-55, 2009.
[20] Peasnell, K., "Accounting in developing countries: A search for
appropriate technologies" , Research in Third World Accounting, 2,
pp.1-16 ,1993.
[21] Perera H. and Baydoun N., "Convergence with international financial
reporting standards: the case of Indonesia", Advances in International
Accounting, 20, pp. 201-224, 2007.
[22] Perera MHB, "Accounting in developing countries: a case for localized
uniformity", British Accounting Review, 21, pp. 141-158, 1989.
[23] Samuels, J.M. , J.C. Oliga, "Accounting Standards in Developing
Countries", International Journal of Accounting Education and
Research, pp. 69-88, 1989.
[24] Schiebel, A., "Empirical Value Relevance of German GAAP and IFRS",
Journal of Economic and Financial Sciences, 1 (2), pp. 141-170, 2007.
[25] Soderstrom,N.S. and Sun,K.J., " IFRS adoption and accounting quality:
a review", European Accounting Review,16(4), pp. 675-702, 2007.
[26] Tyrrall, D., Woodward, D., Rakhimbekova, A., "The relevance of
International Financial Reporting Standards to a developing country:
Evidence from Kazakhstan", The International Journal of Accounting,
42, pp. 82-110, 2007.
[27] Van tendeloo, B. and Vanstraelen, A., "Earnings management under
German GAAP versus IFRS", European Accounting Review, 14(1),
pp.155-180, 2005.
[28] Wallace RSO, " Accounting in developing countries. A review of
literature". Research in Third World Accounting , pp. 1,3-54, 1990.
[29] Zeghal D., Chtourou S. and Y. Mnif, "An analysis of the effect of
mandatory adoption of IAS/IFRS on earnings management", Journal of
International Accounting, Auditing and Taxation ,20 , pp.61-72, 2011.
[1] Barth, M., Landsman, W. and Lang, M., "International Accounting
Standards and Accounting Quality"Journal of Accounting Research,46,
pp. 467-728, 2008.
[2] Ben Othman,H et Zeghal,D., "A study of earnings management motives
in the Anglo-American and Euro-Continental accounting models: The
Canadian and French cases",The International Journal of Accounting,
41, pp. 406-435, 2006.
[3] Burgstahler, D., Dichev, I., " Earnings management to avoid earnings
decreases and losses", Journal of Accounting and Economics,24, pp. 99-
126,1997.
[4] Callao,S. andJarne, J.I., " Have IFRS Affected Earnings Management in
the European Union?", Accounting in Europe,7, pp. 159-189, 2010.
[5] Callao,S.,Jarne,J. et La'─▒nez,A., "Adoption of IFRS in Spain: Effect on
the comparability and relevance of financial reporting", Journal of
International Accounting, Auditing and Taxation ,16, pp.148-178, 2007.
[6] Capkun, A., Jeny, C., Jeanjean, T. and Weissc, L.A., "Earnings
Management and Value Relevance during the Mandatory Transition
from Local GAAPs to IFRS in Europe", 2008, Working paper, available
on http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1125716.
[7] Chamisa, E.E., "The Relevance and Observance of the IASC Standards
in Developing Countries and the Particular Case of Zimbabwe", The
International Journal of Accounting, 35(2), pp. 267-286, 2000.
[8] Christensen, H. B, Lee, E. et Walker, M., " Incentives or standards:
What Determine Accounting Quality Changes Around IFRS
Adoption?", 2008, Financial Accounting and Reporting Section (FARS)
Paper. Available on
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1013054.
[9] Clarkson ,P., Hanna J.D., Richardson ,G. and Thompson,R., " The
impact of IFRS adoption on the value relevance of book value and
earnings", Journal of Contemporary Accounting & Economics, 7, pp. 1-
17,2011
[10] Degeorge, F., Patel, J., Zeckhauser, R., "Earnings management to exceed
thresholds", Journal of Business ,72, pp. 1-33, 1999.
[11] Healy P.M. and Wahlen J.M., "A review of the earnings management
literature and its implications for standard setting", Accounting
Horizons, 13, pp. 365-383, 1999.
[12] Jeanjean T. and Stolowy H., "Do accounting standards matter? An
exploratory analysis of earnings management before and after IFRS
adoption", Journal Accounting Public Policy, 27, pp.480-494, 2008.
[13] La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. W., "Law
and finance",Journal of Political Economy, 106,pp. 1113-1155, 1998.
[14] Lang, M., J. Raedy and M. Yetman, "How Representative Are Firms
That Are Cross Listed in the United States? An Analysis of Accounting
Quality", Journal of Accounting Research, 41, pp. 363-86, 2003.
[15] Lang,M.; J. Raedy; and W. Wilson, " Earnings Management and Cross
Listing: Are Reconciled Earnings Comparable to US Earnings?" Journal
of Accounting and Economics, 42, pp. 255-83, 2006.
[16] Latridis,G. "International Financial Reporting Standards and the quality
of financial statement information", International Review of Financial
Analysis ,19, pp.193-204, 2010.
[17] LEUZ, C., "IAS versus U.S. GAAP: Information Asymmetry-Based
Evidence from Germany-s New Market." Journal of Accounting
Research, 41 , pp. 445-27, 2003.
[18] Leuz, C., Nanda, D., Wysocki, P.D., " Earnings management and
investor protection: an international comparison", Journal of Financial
Economics, 69, 505-527,2003.
[19] Paananen, M. et Lin, C., "The Development of Accounting Quality of
IAS and IFRS Over Time: The Case of Germany", Journal of
International Accounting Research, 8, pp. 31-55, 2009.
[20] Peasnell, K., "Accounting in developing countries: A search for
appropriate technologies" , Research in Third World Accounting, 2,
pp.1-16 ,1993.
[21] Perera H. and Baydoun N., "Convergence with international financial
reporting standards: the case of Indonesia", Advances in International
Accounting, 20, pp. 201-224, 2007.
[22] Perera MHB, "Accounting in developing countries: a case for localized
uniformity", British Accounting Review, 21, pp. 141-158, 1989.
[23] Samuels, J.M. , J.C. Oliga, "Accounting Standards in Developing
Countries", International Journal of Accounting Education and
Research, pp. 69-88, 1989.
[24] Schiebel, A., "Empirical Value Relevance of German GAAP and IFRS",
Journal of Economic and Financial Sciences, 1 (2), pp. 141-170, 2007.
[25] Soderstrom,N.S. and Sun,K.J., " IFRS adoption and accounting quality:
a review", European Accounting Review,16(4), pp. 675-702, 2007.
[26] Tyrrall, D., Woodward, D., Rakhimbekova, A., "The relevance of
International Financial Reporting Standards to a developing country:
Evidence from Kazakhstan", The International Journal of Accounting,
42, pp. 82-110, 2007.
[27] Van tendeloo, B. and Vanstraelen, A., "Earnings management under
German GAAP versus IFRS", European Accounting Review, 14(1),
pp.155-180, 2005.
[28] Wallace RSO, " Accounting in developing countries. A review of
literature". Research in Third World Accounting , pp. 1,3-54, 1990.
[29] Zeghal D., Chtourou S. and Y. Mnif, "An analysis of the effect of
mandatory adoption of IAS/IFRS on earnings management", Journal of
International Accounting, Auditing and Taxation ,20 , pp.61-72, 2011.
@article{"International Journal of Business, Human and Social Sciences:57748", author = "Sawcen Chebaane and Hakim Ben Othman", title = "Does the Adoption of IFRS Influence Earnings Management towards Small Positive Profits? Evidence from Emerging Markets", abstract = "This paper investigates the effect of International
Financial Reporting Standards (IFRS) adoption on the frequency of
earnings managements towards small positive profits. We focus on
two emerging markets IFRS adopters: South Africa and Turkey.
We tested our logistic regression using appropriate panelestimation
techniques over a sample of 330 South African and 210
Turkish firm-year observations over the period 2002-2008. Our
results document that mandatory adoption of IFRS is not associated
with a reduction in earnings management towards small positive
profits in emerging markets. These results contradict most of the
previous findings of the studies conducted in developed countries.
Based on the legal system factor, we compare the intensity of
earnings management between a code law country (Turkey) and a
common law country (South Africa) over the pre and post-adoption
periods. Our findings show that the frequency of such earnings
management practice increases significantly for the code law
country.", keywords = "Civil law, common law, emerging markets, Mandatory IFRS adoption, small positive profits.", volume = "7", number = "6", pages = "1673-7", }
