Abstract
This study examines the earning management behavior of Sri Lankan firms following IFRS convergence. Moreover, we investigate whether the earning management following IFRS convergence is similar across different companies. We separately evaluate the companies based on size, auditor type, and performance to see whether these factors can moderate earning management behavior. We collected the data from a sample of 160 companies that are listed on the Colombo Stock Exchange (CSE) for the period spanning from 2008 to 2015. The period from 2008 to 2011 was the pre-IFRS convergence and the period after 2012 was the post-IFRS period. Following prior studies, we used several measures to capture the earning management around IFRS convergence. Especially, our measures aim to identify earning smoothing and managing towards earning target and thereby determining whether the firms have engaged in earning management and its increase and decrease. The results show that the earning management, in overall, has not decreased following IFRS convergence. However, our results indicate that the post-IFRS earning management is vary between companies. That is, large companies and companies with big four auditors experienced a decrease in earning management following IFRS convergence. Similarly, certain aspects of earning management of high performing companies is also found to have decreased in post-IFRS convergence. Finally, our findings provide important implications for regulators, investors and other corporate stakeholders.Keywords: Earnings Management, IFRS Convergence, Sri Lankan FirmsJEL Classifications: M410, M480, C2, C3DOI: https://doi.org/10.32479/ijefi.8872
Highlights
Regardless of the debate over the adoption of International Financial Reporting Standards (IFRS), almost all the countries around the world have adopted or converged with or have set the timeline for the prospective adoption of IFRS
This study examines the effects of IFRS convergence on earning management empirically; in particular, we investigate whether firm-level factors such as firm size, auditor, and performance could explain the earning management behavior
To test H2, firms were divided based on their external auditor during the post-IFRS convergence period as firms with big four auditors and non-big four auditors
Summary
Regardless of the debate over the adoption of International Financial Reporting Standards (IFRS), almost all the countries around the world have adopted or converged with or have set the timeline for the prospective adoption of IFRS. Following this widespread adoption of IFRS, it has gained increasing academic attention during the last decade and as a result, there are plenty of studies available in this regard. The proponent of IFRS argue that firms may be benefited from IFRS adoption, for instance, IFRS improve the comparability of financial statements across companies and countries. Barth et al (2008) suggested that IFRS convey new information to the market.
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