International Accounting Standards and Accounting Quality

Abstract

We compare characteristics of accounting amounts for firms that apply International Accounting Standards (IAS) to a matched sample of firms that do not to investigate whether applying IAS is associated with higher accounting quality and lower equity cost of capital. We find that firms applying IAS evidence less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do those applying domestic GAAP. Firms applying IAS have higher variance of the change in net income, a higher ratio of the variances of the change in net income and change in cash flows, a significantly less negative correlation between accruals and cash flows, and a lower frequency of small positive net income. They have a significantly higher frequency of large negative net income and generally higher value relevance of accounting amounts. Differences between firms applying IAS and those applying domestic GAAP in the period before IAS firms adopt IAS do not explain the differences in accounting quality. Firms applying IAS generally exhibit higher accounting quality than when they previously applied domestic GAAP. The increase in accounting quality for IAS firms is generally greater than that for firms applying domestic GAAP throughout the sample period. We also find weak evidence suggesting that application of IAS is associated with a lower equity cost of capital. Overall, our results suggest improvement in accounting quality associated with applying IAS.

Intellectual capital disclosure and accounting standards

“…Extant literature generally confirms the beneficial effect of IFRS adoption (Schipper, 2003;Barth et al, 2008;Daske et al, 2008;Armstrong et al, 2010;Li, 2010). Barth et al (2008) examine whether application of IFRS is associated with higher accounting quality.…”

“…Barth et al (2008) examine whether application of IFRS is associated with higher accounting quality. Using a sample from 21 countries, they find that firms applying IFRS generally incur less earnings management, more timely loss recognition, and more Intellectual capital disclosure value relevance of accounting amounts.…”

A theory of voluntary disclosure and cost of capital

“…Recently, several studies have examined the consequences on firm's average cost of capital of changes to accounting standards (which may or may not improve accounting quality). Barth, Landsman, and Lang (2007) find evidence that firms applying IAS generally have higher valuerelevant information than domestic standards. Leuz and Verrecchia (2000) report that a sample of firms voluntarily switching from German to IASB standards decreased their cost of capital.…”

Accounting Regulation, Financial Development, and Economic Growth

“…High-quality IAS may contribute to better functioning of financial markets. Prior research provides evidence that use of IFRS leads to higher earnings quality and more foreign investment (Barth et al 2005). Although a shift from domestic accounting standards to IFRS benefits the countries involved, there is still controversy among scholars about whether there is a qualitative difference between GAAP and the IFRS.…”