Mandatory IFRS Adoption and Earnings Management: The Role of Culture
Posted: 22 Apr 2019
Date Written: April 2, 2019
In this study, based on a sample of 14,892 firm-year observations for 3,242 firms from 23 countries that mandated IFRS adoption in 2005, we examine the role of culture in shaping how the adoption of International Financial Reporting Standards (IFRS) has affected financial reporting quality. We examine four dimensions of national culture: trust, power distance, individualism, and uncertainty avoidance. Consistent with our predictions, we find that earnings management increases with IFRS adoption, and the increasing effect is more pronounced in countries with low trust, large power distance, and strong uncertainty avoidance after controlling for legal enforcement. These results imply that culture plays an important role in shaping accounting choices in a principles-based accounting standards regime.
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