Earnings quality and the adoption of IFRS‐based accounting standards

Abstract

PurposeThis study aims to investigate the differences in earnings quality of Malaysian companies after the adoption of IFRS‐based accounting standards named FRS.Design/methodology/approachIt is hypothesize that under the new set of accounting standards, the quality of earnings reported by these companies is relatively higher. Specifically, the study tests whether the level of earnings management is significantly lower after the adoption of IFRS, and reported earnings is more value relevant during the IFRS period. This study uses a large sample of 4,010 observations over a three‐year period before and a three‐year period after the adoption of the new set of accounting standards.FindingsThe results show that IFRS adoption is associated with higher quality of reported earnings. It is found that earnings reported during the period after the adoption of IFRS is associated with lower earnings management and higher value relevant.Originality/valueThe results of this study contribute additional evidence to the literature on earnings quality and the impact of IFRS adoption. As most of the existing studies on earnings quality and IFRS have been conducted on data from the U.S and European countries, this study fills a gap in the existing literature by studying the effect of adoption of IFRS on earnings quality in an emerging market.