Heterogeneity in earnings quality between different classes of companies after IFRS adoption: evidence from Brazil

Roberto Black,Sílvio Hiroshi Nakao

doi:10.1590/1808-057x201702750

Abstract

ABSTRACT This paper aims to investigate the existence of heterogeneity in earnings quality between different classes of companies after the adoption of the International Financial Reporting Standards (IFRS). IFRS adoption is generally associated with an increase in the quality of financial statements. However, companies within the same country are likely to have different economic incentives regarding the disclosure of information. Thus, treating companies equally, without considering the related economic incentives, could contaminate earnings quality investigations. The case of Brazil is analyzed, which is a country classified as code-law, in which tax laws determined accounting practice and in which IFRS adoption is mandatory. First, Brazilian companies listed on the São Paulo Stock, Commodities, and Futures Exchange (BM&FBOVESPA) were separated into two classes: companies issuing American Depositary Receipts (ADRs) before IFRS adoption and companies that did not issue ADRs until the adoption of IFRS. Then, this second class of companies was grouped, using cluster analysis, into two different subclasses according to economic incentives. Based on the groups identified, the quality of accounting earnings is tested for each class of the companies before and after IFRS adoption. This paper uses timely recognition of economic events, value relevance of net income, and earnings management as proxies for the quality of accounting earnings. The results indicate that a particular class of companies began showing conditional conservatism, value relevance of net income, and lower earnings management after IFRS adoption. On the other hand, these results were not found for the two other classes of companies.

Highlights

The adoption of the International Financial Reporting Standards (IFRS) is normally associated with an increase in the quality of disclosed accounting information (Barth, Landsman & Lang, 2008)
American Depositary Receipts (ADRs) = American Depositary Receipt; DRit = dummy that takes the value 1 when the return on a share is negative and 0 otherwise; EARNit = earnings per share for company i in year t; label compliers = class with low economic incentives for improving the quality of accounting information after International Financial Reporting Standards (IFRS); Retit = return on the share price of company i in year t; serious compliers = class with economic incentives for improving the quality of accounting information after IFRS
This paper verified that adoption of the IFRS framework cannot be seen as the only guide to accounting information quality

Summary

Introduction

The adoption of the International Financial Reporting Standards (IFRS) is normally associated with an increase in the quality of disclosed accounting information (Barth, Landsman & Lang, 2008). Arguments suggesting that IFRS adoption produces significant benefits for the capital market are based on the assumption that disclosure under IFRS increases the transparency and quality of financial statements. This reflects the fact that the IFRS framework is more capital market orientated and more comprehensive, especially with regards to disclosure, in relation to much of the national generally accepted accounting principles (GAAP). The evidence in various studies indicates a limited role for the accounting standards in determining the accounting quality observed; on the contrary, it emphasizes the importance of incentives in company accounting disclosure (Ball, Kothari & Robin, 2000; Ball, Robin & Wu, 2003; Burgstahler, Hail & Leuz, 2006)

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Results

Conclusion