Mandatory IFRS Adoption and Earnings Management: The Role of Culture

Posted: 22 Apr 2019

See all articles by Kevin C. K. Lam

Kevin C. K. Lam

Hang Seng Management College; The Chinese University of Hong Kong (CUHK) - School of Accountancy

Heibatollah Sami

Lehigh University

Jun Yao

Deakin University

Yiwei Yao

Independent

Date Written: April 2, 2019

Abstract

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.

Suggested Citation

Lam, Kevin C. K. and Sami, Heibatollah and Yao, Jun Alex and Yao, Yiwei, Mandatory IFRS Adoption and Earnings Management: The Role of Culture (April 2, 2019). Available at SSRN: https://ssrn.com/abstract=3364200

Kevin C. K. Lam

Hang Seng Management College ( email )

Hang Shin Link
Siu Lek Yuen
Shatin, Hong Kong
China

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Heibatollah Sami

Lehigh University ( email )

Bethlehem, PA 18015
United States
610-758-3407 (Phone)

Jun Alex Yao

Deakin University ( email )

Burwood, Victoria 3215
Australia

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