IS THERE EARNINGS DISCONTINUITY AFTER THE IMPLEMENTATION OF IFRS IN NIGERIA?

Abstract

Earnings metrics are major financial indicators which capital market participants and investors focus on for informed decisions. Because reporting earnings increase may enhance firms’ stock price, many managers are motivated to avoid reporting earnings decreases, but prefer to consistently report increase earnings greater than its previous valuation. There is evidence that such practice has led to a situation of conspicuous upward shift in frequency of observations, starting from the left of identified earnings benchmark to the right. Recent studies have shown that a change in accounting regulation may have effects on the shape of the firm-year distribution of earnings. This paper examines the discontinuity evidence for Nigeria, in relation to the adoption of the international financial reporting standard. The aim is to establish whether discontinuity in earnings, represented by the asset-scaled net profits, as well the discontinuity in earnings-change, has reduced following the adoption. According to literature, the study employs three methods – empirical histogram, standardise differences tests and the permutation tests – to validate the aims. The findings suppose evidence for increase in discontinuity, indicating increased in small profits’ earnings management, after the adoption. Contrary, the evidence is not sufficient to conclude that the discontinuity has increase for the earnings-change. It can be argued that the adoption has not achieve much in ensuring firms are monitored against earnings management to avoid losses. The study has limitation, since it considers only the distributions of earnings and earnings-changes. The distribution of forecast errors is not investigated because such is influence by forecast management. Future studies may consider this for improvement.