Earnings Management Motives and Firm Value Following Mandatory IFRS Adoption Evidence from Canadian Companies

Abstract

When Canada already has a set of well- established legal enforcement and investor protection mechanism to control earnings management; and the quality of Canadian GAAP is high, I examine if the accounting quality for Canada can still be improved since its adoption of IFRS mandatorily in 2011. The extant literature argues that IFRS adoption benefits firms domiciled in countries with strong legal and financial institutions. However, when the quality of IFRS is as good as the local standards for many Anglo-Saxon countries such as Canada, it is questionable if these countries can still receive substantial economic consequences. Following the literature, I estimate a set of comprehensive measurements of earnings management as the proxies of accounting quality. Empirically, I document evidence that the results are mixed: while discretionary accruals have been improved, but not for Manage Earnings Towards Target (METT) and Timely Loss Recognition. Besides accounting standards, I also find that firms issuing more equities are motivated to associate with lower earnings quality. In addition, firms engaging in two distinct strategic directions (prospector vs. defender) have systemically dissimilar effects on earnings quality in IFRS adoption. Finally, I document evidence that firm value following IFRS adoption has been increased, but at the expense of lower accounting quality. Overall, my study shed some lights into the literature that accounting standards per se implemented in strong institutional setting is not sufficient to ensure a higher level of accounting quality; and firm-level earnings management motives are important factors too.