Critical Accounting Perspectives Assignment

We examine whether accounting quality improvements around voluntary International Financial Reporting Standards (IFRS) adoption can be attributed to the change in accounting standards per se. Following the mandatory adoption of IFRS in many regions of the world, much attention is being given to the association between accounting standards and accounting quality.

Some prior studies document accounting quality improvements or favorable economic consequences around voluntary IFRS adoption. Yet, the extent to which we could expect the same improvement for firms forced to adopt remains an open question. By examining this question, we provide evidence on whether accounting standard regulations improve information in capital markets.

To isolate the effect of IFRS, we need a setting where we can identify managerial financial reporting incentives. Germany offers such a setting. Between 1998 and 2005, firms in Germany could choose to voluntarily adopt IFRS, and in 2005 compliance became mandatory. The German setting enables us to analyze firms that voluntarily adopted IFRS before 2005 and firms that were forced to comply as of 2005.

Examining the German firms that are forced to adopt IFRS against their will is different from estimating the consequences of mandatory adoption when the such group includes firms from countries not allowing voluntary adoption; mandatory IFRS adoption in countries without voluntary adoption does not distinguish between the underlying managerial financial reporting incentives. To highlight this important distinction in our German setting, we label firms that delayed the adoption of IFRS until 2005 as ‘resisters’ rather than mandatory adopters.

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