Mandatory Adoption of International Financial Reporting Standards and Earnings Management: Evidence from China

43 Pages Posted: 16 Jan 2014

See all articles by Zining Li

Zining Li

Loyola Marymount University - College of Business Administration

Qiliang Liu

Wuhan University - School of Economics and Management

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Le Luo

School of Management, Huazhong University of Science and Technology

Date Written: January 14, 2014

Abstract

We investigate the implications of mandatory IFRS adoption by Chinese listed firms for earnings management behavior, and whether those implications vary by type of controlling shareholder. We find that the increased financial reporting flexibility under IFRS provides more earnings management opportunities for firms operating in emerging markets, where investor protection and corporate governance are deficient. We find that whereas the magnitude of discretionary accruals for firms owned by local governments (local SOEs) and private investors (NSOEs) increased after IFRS adoption, it remained unchanged for firms owned by the central government (central SOEs). More interestingly firms changed the forms of earnings management to take advantage of the flexibility under IFRS; they switched from internally making accounting errors to changing accounting policies and estimates. Evidence on the value relevance of earnings following adoption of IFRS indicates that the informativeness of earnings decreased for local SOEs and for NSOEs, but remained unchanged for central SOEs.

Keywords: International Financial Reporting Standards, Earnings Management, China

Suggested Citation

Li, Zining and Liu, Qiliang and Lobo, Gerald J. and Luo, Le, Mandatory Adoption of International Financial Reporting Standards and Earnings Management: Evidence from China (January 14, 2014). Available at SSRN: https://ssrn.com/abstract=2379198 or http://dx.doi.org/10.2139/ssrn.2379198

Zining Li (Contact Author)

Loyola Marymount University - College of Business Administration ( email )

Los Angeles, CA 90045
United States

Qiliang Liu

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Le Luo

School of Management, Huazhong University of Science and Technology ( email )

No. 1037, Luoyu Road, Hongshan District
Wuhan, Hubei 430074
China

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