IFRS Adoption, Reporting Incentives, and Earnings Quality in Private Firms

Abstract

The effects of IFRS adoption in public firms have been extensively studied, but the private firm setting still remains underresearched. This study examines financial reporting quality effects around IFRS adoptions of German private firms across two dimensions, earnings quality and disclosure practices. To capture differences in the perceived net benefits of higher financial reporting quality, we identify four different types of firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firms, which are young, fast growing and seeking access to public equity markets. Using a matched sample of German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are incomplete measures of reporting quality, we additionally compare IFRS and German GAAP firms’ disclosure practices. We find that IFRS private firms are generally more likely to publish financial reports on their website and they disclose significantly more information in their financial reports. Collectively, our findings provide novel insights into the role of IFRS adoption in the private firms setting.