The International Journal of Accounting

We examine a potential informational cost of adopting the International Financial Reporting Standards (IFRS). Using a difference-in-differences approach, we find that mandatory IFRS adoption leads to a significant decrease in accrual reliability. We also find that this negative relation between IFRS adoption and accrual reliability is more pronounced for firms (a) holding more financial instruments and (b) domiciled in jurisdictions with weak institutional features. The above findings are robust to alternative sampling and an extended sample period. Further analysis shows that reduced accrual reliability reflects a trade-off with increased value relevance and that outside investors fail to understand the IFRS-induced reductions in accrual reliability.

We investigate whether the comparability of financial statements changes after a switch from International Financial Reporting Standards (IFRS) in substance (i.e., content of IFRS) to IFRS in both substance and form (i.e., IFRS as issued by the IASB). While the substance of the accounting standards remains the same, form is added to the adoption in that it is now formally referred to as “IFRS as issued by the IASB.” We use data from South Africa, a country whose local generally accepted accounting practices (GAAP) was the same, word-for-word, as IFRS prior to the adoption of IFRS as issued by the IASB in 2005. We compare South African firms with firms in other countries, divided into two groups: mandatory IFRS adopters and non-adopters. We find evidence of increased comparability of financial statements of South African firms with both adopters and non-adopters. Furthermore, we find a global increase in the comparability of firms’ financial statements, consistent with market changes unrelated to IFRS adoption. However, an incremental increase in the comparability of financial statements of South African firms with the adoption of IFRS relative to non-adopting firms is consistent with benefits from South Africa’s addition of form to its existing in-substance adoption of IFRS. This increased comparability is also consistent with the benefits observed in the accounting amounts of firms from other adopting countries becoming more comparable with those of South African firms.

Based on a country-level-characteristics framework, we empirically tested the impact of IFRS 8 adoption, the country’s legal system and level of legal enforcement, investor protection, conservatism, and closeness between national GAAP and IFRS on both the quantity and quality of segment reporting. Using a sample of companies from 15 EU countries covering four years (two years preadoption and two years postadoption of IFRS 8), we found that the adoption of IFRS 8 is associated with a decrease in the quantity and an increase in the quality of segment reporting. Moreover, we report that a common-law system, the country-level legal enforcement, and investor protection have a significant and positive impact on the quantity and quality of segment reporting. Meanwhile, country-level conservatism and closeness between national GAAP and IFRS are negatively related to the quantity and quality of segment reporting. In addition to firm-level characteristics, this study extends the prior limited literature by documenting the importance of country-level characteristics as factors that enhance segment reporting practices in Europe. We also discuss the research contributions and implications for research, professional practice, and policymakers.

This study tests the effect of unbalanced power distance (PD) (i.e., Hofstede’s cultural dimensions PD index) and individual stock price crash risk. We examine the stock price behavior of listed firms in 37 countries from 2004 to 2016 and use multivariate analyses to document that societal PD is important in explaining firms’ propensity to release accounting information. This propensity suggests a psychological tendency regarding timing management, particularly for bad news. As countries with large PD prefer to keep things under control, the result is fewer unexpected stock price crashes during the long windows between election events. However, because large-PD countries focus their markets on maintaining temporary peace before and during periods of political events (i.e., national elections), crash risk increases after the political event window. Consistent with these predictions, we find that in large-PD countries, companies generally have less incentive to hide negative information and thus generate stock price crashes. This situation is substantially changed during the postpolitical windows, when firms and ways of spreading information are more controlled by the government. Our findings suggest that formal mechanisms alone are insufficient to explain the behaviors of corporate disclosure that are entangled with informal instruments.

This paper investigates the association between related-party transactions (RPTs) and stock price crash risk in China. Our investigation is motivated by the controversy in the RPT literature over whether RPTs are value enhancing or opportunistic. Through the lens of stock price crash risk, we reveal that RPTs may violate the arm’s-length assumption of regular market-based transactions, impairing the representational faithfulness and verifiability of accounting data and, consequently, increasing the risk of future price crash. Importantly, we find that this detrimental economic consequence of RPTs is driven by abnormal RPTs that are opportunistic in nature. Our analyses also extend to operating RPTs, related-party loans, and two types of opportunistic RPTs: tunneling and propping. The positive association between RPTs and stock price crash risk is not mediated by financial reporting quality, suggesting that the risk factors associated with RPTs are operational. Our main results remain robust to a series of tests done to address the potential endogeneity between RPTs and stock price crash risk.