Effects of IFRS adoption on earnings quality

This paper investigates the link between earnings management and earnings quality for the Chinese firms listed in the Shanghai and Shenzhen stock exchanges from 2003 to 2007. The earnings quality is measured by four separate earnings attributes: accruals quality, earnings persistence, earnings predictability, and earnings smoothness. We find that the stressed/bankrupt firms prefer opportunistic earnings management; the non-stressed/non-bankrupt firms are more likely to choose more efficient earnings management than the stressed/non-bankrupt firms. We find that earnings management performs better than earnings quality in predicting future profitability. We also find that the earnings quality has deteriorated over the sample period; the number of stressed/bankrupt firms increased and the number of non-stressed/non-bankrupt firms decreased.

By employing a Heckman two-stage selection model, we identify whether employing a financial expert with or without accounting expertise on the audit committee is optimal and how earnings quality varies across these optimal and suboptimal choices. Using four earnings quality measures (informativeness, timely loss recognition, earnings persistence, and accruals quality), we find no differences in earnings quality between firms optimally choosing an expert with or without accounting expertise, consistent with Demsetz and Lehn (J Polit Econ 93:1155–1177, 1985) and others who argue that when firms optimize their choice (i.e., accounting expertise), there should be no difference across the characteristic (i.e., earnings quality) being examined. We do find, however, earnings quality is significantly higher for firms that optimally choose an accounting expert relative to firms that choose (with/without accounting expertise) suboptimally. Finally, firms suboptimally choosing an accounting expert exhibit no improvement, or even lower earnings quality, than firms that optimally choose no accounting expert. Our results provide important evidence of the impact accounting expertise has on earnings quality when considering the firm’s choice.

Secrecy and Mandatory IFRS Adoption on Earnings Quality

Sarbanes Oxley Internal Control Requirements and Earnings Quality

A key measure of earnings quality is the deviation of net income from operating cash flows. Sloan (1996) finds that firms with high accruals (or a large gap between net income and operating cash flow) experience a decline in earnings performance not anticipated by investors, resulting in predictable future returns. In this paper, I examine whether investors short sell securities with high accruals. Such a strategy is able to directly profit from the predictable lower future returns. Using a sample of U.S traded firms from 1990-1998, I do not find evidence that short sellers trade on the basis of information contained in accruals.

Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities

Over the last two decades, a growing body of literature has investigated the factors influencing the differences in financial reporting, especially earnings quality, in an international setting. The purpose of this paper is to provide an overview of the crosscountry research that focuses on earnings quality and to offer suggestions for future topics in the field. In this study, I first discuss the relationship between earnings quality and the following institutional and cultural factors that have been examined in prior literature: legal tradition, investor protection (outside investor rights and legal enforcement), tax system, regulations, financial development, market competition, accounting standards (divergence from IAS), enforcement of accounting standards, culture, religiosity, and language. Second, the relationship between the improvement of earnings quality and International Financial Reporting Standards (IFRS) adoption is described. The results are mixed and suggest that a single set of accounting standards that are generally viewed as high quality does not always improve earnings quality. In addition, the relationship varies with the institutional and cultural factors of a country. It means that improvement through IFRS adoption would require the development of an institutional environment. Finally, as a prospect for future research, this paper discusses the extension from a single-country to cross-country study, the impact of IFRS adoption on the contracting role of accounting through the change in earnings quality, and earnings quality of non-listed firms in an international setting. These topics have become a more fruitful avenue of research with the recent increase in the availability of data.

The paper investigates the controversial relationship between firms' earnings quality and environmental, social and governance (ESG) performance, focusing on the energy and utility sectors given their significant regulatory pressures, environmental impact, and capital‐intensive nature, which render ESG performance particularly important for financial reporting practices. Using a cross‐country dataset of firms in these sectors, we empirically assess whether ESG performance amplifies or dampens earnings quality, extending our framework to incorporate CEO power and board strength, with respect to a comprehensive set of firm‐specific and country‐level controls. We show that a higher level of ESG commitment is positively associated with improved earnings quality, suggesting that ethical engagement and transparency enhance the integrity of financial reporting. We find that CEO power weakens the positive relationship between ESG commitment and earnings quality, as managerial discretion may facilitate earnings management practices that obscure the firm's underlying financial condition. In contrast, strong boards amplify earnings quality by enhancing effective oversight and promoting corporate accountability. Nevertheless, board effectiveness is subject to the inherent trade‐offs between maintaining legitimacy, addressing diverse stakeholder interests, and meeting economic needs. We conclude that ESG initiatives are substantially shaped by internal corporate governance structure and firm‐specific operational characteristics.

PurposeThe purpose of this study is to examine whether institutional investors monitoring attenuate (exacerbate) weaker earnings persistence in politically connected firms (PCFs). In addition, it investigates whether earnings persistence do vary according to different types of political connections.Design/methodology/approachThis study employs earnings persistence as measure of earnings quality and ordinary least squares (OLS) model to examine: (1) the moderating effect of institutional investors’ ownership on the association between earnings persistence and PCFs and (2) the association between different types of political connections and earnings persistence.FindingsThis study finds that institutional investors' ownership attenuates weaker earnings quality in PCFs, indicating effective monitoring. However, stronger earnings persistence is associated with PCFs with longer political ties, audited by big four audit firm and with higher CEO power.Originality/valueThis study reveals the lower earnings persistence in PCFs can be attenuated by institutional investors monitoring. However, findings also suggest that earnings persistence in PCFs is affected by duration of political ties, big four audit firm and CEO power. This suggests that PCFs should not be viewed as a homogeneous group of firms.

Banking Reform, Risk-Taking, and Earnings Quality – Evidence from Transition Countries

Secrecy and the impact of mandatory IFRS adoption on earnings quality in Europe

Integrated reporting combines information about company's governance, performance, strategy, and future prospects that reflect the company's activities. As the voluntary integrated reporting practice increases, the global issue related to that is about the integrated reporting’s future implications, particularly the accounting information. In Indonesia, companies that are ready for integrated reporting are the winners the Sustainability Reporting Awards (SRA). Implementation of integrated reporting can improve earnings quality. This research is to provide evidence for the effect of integrated reporting on earnings quality and the moderating effect agency costs in it.
 The research design is a quantitative research using secondary data sources from company’s annual reports. The research object are Indonesian non-financial sector companies that are winners and non-winners of the 2015-2019 SRA which are registered in the IDX fact book 2019. This research used a moderation regression analysis model. The research contributed to three new findings: (a) integrated reporting has no effect on earnings quality; (b) agency costs weaken the effect of integrated reporting on earnings quality in non-financial sector companies; and (c) agency costs strengthen the effect of integrated reporting on earnings quality in SRA companies.

Do Passive Investors Demand High Earnings Quality? Evidence from Natural Experiment

Objective - The purpose of this research is to examine the impact of the International Financial Reporting Standard (IFRS) convergence in Indonesia on earnings quality. Methodology/Technique - Earnings quality is measured on both accrual earnings management and real earnings management. Indonesia began convergence IFRS in 2012. IFRS is considered capable of improving comparability, transparency, and earnings information, which is expected to ultimately improve earnings quality. The sample in this research uses manufacturing firms listed on the Indonesian Stock Exchange that were suspected to avoid loss during the observation period. The data consist of 45 companies examined between 2008 and 2015. Results - This study uses statistical methods and multiple regression linear to analyse the data. The research results show that IFRS convergence in Indonesia has had a negative impact on accrual earnings management and no impact on real earnings management. Novelty - The evidence shows that IFRS convergence in Indonesia has the ability to improve earnings quality related to a decrease in accrual earnings management but not real earnings management. Type of Paper: Empirical Keywords: IFRS; Discretionary Accrual; Abnormal Cash Flow Operation; Abnormal Production; Abnormal Discretionary Expenditure. JEL Classification: M40, M41, M49

Do Corporate Governance Mechanisms Impact on Earnings Quality? Evidence from IFRS Adoption in European Union