Abstract
This study examines the consequences of International Financial Reporting Standards (IFRS) adoption in terms of the investor perception of earnings quality in the Korean stock market. Building on evidence from Ecker et al. (2006) suggesting that return-based earnings quality (E-loading), as captured by the sensitivity of stock returns to accounting information risk, accurately represents investor perceptions of earnings information risk, the authors examine whether E-loading is different between the pre- and post-IFRS adoption periods. Using KSE-listed firms from 2006 to 2014, the authors find the evidence that the extent of stock return sensitivity to information risk embedded in financial statements is greater in the period of post-IFRS adoption than in the period of pre-IFRS adoption. This finding indicates that even though accounting-based earnings quality improves after the adoption of IFRS, investors perceive earnings information after the adoption of IFRS as riskier than before. In addition, the difference in investor perception is more pronounced for firms with low accruals quality as captured by discretionary accruals, indicating that the effect of IFRS adoption on return-based earnings quality is distinctive from that on accounting-based earnings quality. The paper contributes to the literature on IFRS by exploring the effect of IFRS adoption through a new perspective on earnings quality in capital market.
Highlights
The purpose of this study is to examine the consequences of International Financial Reporting Standards (IFRS) adoption in terms of earnings quality that investors perceive from financial statements
Using Korean Stock Exchange (KSE)-listed firms from 2006 to 2014, we find evidence that E-loading is higher in post-IFRS adoption period compared to pre-IFRS adoption period
Accruals quality has improved since IFRS adoption, the results show that the positive relation between E-loading and the post-IFRS period is pronounced for firms with low accruals quality
Summary
The purpose of this study is to examine the consequences of IFRS adoption in terms of earnings quality that investors perceive from financial statements. According to survey results by Lee et al (2016), while accounting practitioners recognize that accounting numbers in financial statements under IFRS reflect firm performance and financial conditions with more accuracy and faithfulness, neither auditors nor analysts approve them This implies that accounting information users perceive less improvement in earnings quality. Using Korean Stock Exchange (KSE) listed firms from 2006 to 2014, we find that while the average of accruals quality measured as discretionary accruals decreases over the post-IFRS adoption period, market-based earnings quality ( E-loading) is higher after IFRS adoption than before This result indicates that despite improvements in accounting-based earnings quality, investors assess earnings quality from financial statements under IFRS to be relatively low compared to those under non-IFRS.
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