Abstract
A study investigates whether firms adopting international financial reporting standards (IFRS, formerly known as IAS) have higher earnings quality in an emerging market (China). The literature proposes that, compared to non-adopting firms, firms adopting IFRS are less likely to smooth earnings, less likely to engage in earnings management as a means to avoid reporting losses, and more likely to recognize losses in a timely manner. However, critics also argue that IFRS provides more opportunities for managers to use accruals to manipulate earnings in China, where a rule-based accounting system had been used before the introduction of accounting standards. We compare the characteristics of accounting data for firms adopting IFRS with those from non-adopting firms. We find that adopting firms are less likely to smooth earnings in the post-adoption period. We, however, did not find that adopting firms have any lower tolerance for reporting losses or engage in more timely loss recognition. Overall, our results suggest some improvement in the quality of accounting information associated with the adoption of IFRS. Our results also suggest that providing managers more opportunities for earnings manipulation under IFRS may neutralize its otherwise positive effect on earnings quality. Because of the relatively newer regulatory environment in China, our findings may point to the need for a stricter enforcement mechanism of accounting standards in emerging markets.