Abstract
We investigate whether variations in earnings management in the Asia-Pacific region countries can be explained by the extent of IFRS adoption having regard to the diversity of cultures across countries in the region and the degree of accounting standards enforcement. Across 17 key countries in the region, we find that IFRS convergence is associated with reduced levels of earnings management, particularly in recent years when IFRS has been increasingly adopted by publicly listed firms in the region. Nevertheless, the influence of cultural values and the degree of accounting standards enforcement remain significant and persistent institutional factors explaining international differences in earnings management.
Similar content being viewed by others
References
ACGA. (2018). The Report on the Quality of Corporate Governance in Asian Market. Asian Corporate Governance Association (ACGA) and CLSA Asia-Pacific. https://www.acga-asia.org/cgwatch-detail.php?id=10. Retrieved 8 July 2018.
Apergis, N., & Cooray, A. (2014). Tax revenues convergence across ASEAN, Pacific and Oceania countries: Evidence from club convergence. Journal of Multinational Financial Management, 27(8), 11–21.
Armstrong, C. S., Barth, M. E., Jagolinzer, A. D., & Riedl, E. J. (2010). Market reaction to the adoption of IFRS in Europe. Accounting Review, 85(1), 31–61.
Atiase, R. K. (1985). Predisclosure information, firm capitalization, and security price behavior around earnings announcements. Journal of Accounting Research, 23(1), 21–36.
Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29(1), 1–51.
Ball, R., Robin, A., & Wu, J. S. (2003). Incentives versus standards: Properties of accounting income in four East Asian countries. Journal of Accounting and Economics, 36(1–3), 235–270.
Bamber, L. S. (1987). Unexpected earnings, firm size, and trading volume around quarterly earnings announcements. Accounting Review, 62(3), 510.
Barth, M. E. (2008). Global financial reporting: Implications for U.S. academics. Accounting Review, 83(5), 1159–1179.
Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of Accounting Research, 46(3), 467–498.
Baskerville, R. F. (2003). Hofstede never studied culture. Accounting, Organizations and Society, 28(1), 1–14.
Beugelsdijk, S., Kostova, T., & Roth, K. (2017). An overview of Hofstede-inspired country-level culture research in international business since 2006. Journal of International Business Studies, 48(1), 30–47.
Braun, G. P., & Rodriguez, R. P., Jr. (2008). Earnings management and accounting values: A test of Gray (1988). Journal of International Accounting Research, 7(2), 1–23.
Brown, P., Preiato, J., & Tarca, A. (2014). Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance and Accounting, 41(1–2), 1–52.
Byard, D., Li, Y., & Yu, Y. (2011). The effect of mandatory IFRS adoption on financial analysts’ information environment. Journal of Accounting Research, 49(1), 69–96.
Callen, J. L., Morel, M., & Richardson, G. (2011). Do culture and religion mitigate earnings management? Evidence from a cross-country analysis. International Journal of Disclosure and Governance, 8(2), 103–121.
Chen, C. J. P., Ding, Y., & Xu, B. (2014). Convergence of accounting standards and foreign direct investment. The International Journal of Accounting, 49(1), 53–86.
Christensen, H. B., Hail, L., & Leuz, C. (2016). Capital-market effects of securities regulation: Prior conditions, implementation, and enforcement. The Review of Financial Studies, 29(11), 2885–2924.
Christensen, H. B., Lee, E., Walker, M., & Zeng, C. (2015). Incentives or standards: What determines accounting quality changes around IFRS Adoption? European Accounting Review, 24(1), 31–61.
Daske, H., Hail, L., Leuz, C., & Verdi, R. (2008). Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research, 46(5), 1085–1142.
Dechow, P., & Ge, W. (2006). The persistence of earnings and cash flows and the role of special items: Implications for the accrual anomaly (Article). Review of Accounting Studies, 11(2–3), 253–296.
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of Accounting and Economics, 50(2–3), 344–401.
Dechow, P. M., Sloan, R. G., & Sweeney, A. R. (1995). Detecting earnings management. Accounting Review, 70(2), 193–225.
DeFond, M. L. (2010). Earnings quality research: Advances, challenges and future research. Journal of Accounting and Economics, 50(2–3), 402–409.
DeFond, M., Hung, M., & Trezevant, R. (2007). Investor protection and the information content of annual earnings announcements: International evidence. Journal of Accounting and Economics, 43(1), 37–67.
Deloitte (2018). The use of IFRSs by jurisdiction. http://www.iasplus.com/country/useias.htm. Retrieved 11 Aug 2018.
Desender, K. A., Castro, C. E., & León, S. A. E. (2011). Earnings management and cultural values. American Journal of Economics and Sociology, 70(3), 639–670.
Ding, Y., Hope, O.-K., Jeanjean, T., & Stolowy, H. (2007). Differences between domestic accounting standards and IAS: Measurement, determinants and implications. Journal of Accounting and Public Policy, 26(1), 1–38.
Ding, Y., Jeanjean, T., & Stolowy, H. (2005). Why do national GAAP differ from IAS? The role of culture. The International Journal of Accounting, 40(4), 325–350.
DKIAPCSS. (2018). Countries of the Asia-Pacific Region. The Daniel K. Inouye Asia-Pacific Center for Security Studies. https://apcss.org/about-2/ap-countries/. Retrieved 1 Aug 2018.
Easley, D., & O’Hara, M. (2004). Information and the cost of capital. Journal of Finance, 59(4), 1553–1583.
Fama, E. F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88(2), 288–307.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, Corporations and Private Property: A Conference Sponsored by the Hoover Institution, 26(2), 301–325.
Fontes, A., Rodrigues, L. L., & Craig, R. (2005). Measuring convergence of National Accounting Standards with International Financial Reporting Standards. Accounting Forum, 29(4), 415–436.
García-Meca, E., & Sánchez-Ballesta, J. P. (2009). Corporate governance and earnings management: A meta-analysis. Corporate Governance: An International Review, 17(5), 594–610.
Geiger, M., & Smith, J. (2010). The effect of institutional and cultural factors on the perceptions of earnings management. Journal of International Accounting Research, 9(2), 21–43.
Gordon, E. A., Jorgensen, B. N., & Linthicum, C. L. (2008). Could IFRS replace U.S. GAAP? A comparison of earnings attributes and informativeness in the U.S. Market. http://ssrn.com/Abstract=1132908.
Gray, S. J. (1988). Towards a theory of cultural influence on the development of accounting systems internationally. Abacus, 24(1), 1–15.
Gray, S., Kang, T., Lin, Z., & Tang, Q. (2015). Earnings management in Europe post IFRS: Do cultural influences persist? Management International Review, 55(6), 1–30.
Gray, S. J., Linthicum, C. L., & Street, D. L. (2009). Have ‘European’ and US GAAP measures of income and equity converged under IFRS? Evidence from European companies listed in the US. Accounting and Business Research, 39(5), 431–447.
Gray, S. J., & Vint, H. M. (1995). The impact of culture on accounting disclosures: Some international evidence. Asia-Pacific Journal of Accounting, 2(1), 33–43.
Guan, L., Pourjalali, H., Sengupta, P., & Teruya, J. (2005). Effect of cultural environment on earnings manipulation: A five Asia-Pacific country analysis. Multinational Business Review, 13(2), 23–41.
Hail, L., & Leuz, C. (2006). International differences in the cost of equity capital: Do legal institutions and securities regulation matter? Journal of Accounting Research, 44(3), 485–531.
Han, S., Kang, T., Salter, S., & Yoo, Y. K. (2010). A cross-country study on the effects of national culture on earnings management. Journal of International Business Studies, 41(1), 123–141.
Healy, P. M., Hutton, A. P., & Palepu, K. G. (1999). Stock performance and intermediation changes surrounding sustained increases in disclosure. Contemporary Accounting Research, 16(3), 485–520.
Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31(1–3), 405–440.
Henry, E., Lin, S., & Ya-Wen, Y. (2009). The European-U.S. “GAAP gap”: IFRS to U.S. GAAP Form 20-F reconciliations. Accounting Horizons, 23(2), 121–150.
Hodder, L., Koonce, L., & McAnally, M. L. (2001). SEC market risk disclosures: Implications for judgment and decision making. Accounting Horizons, 15(1), 49–70.
Hofstede, G. (1980). Culture’s consequences. Thousand Oaks: Sage Publications.
Hofstede, G. (1983). National cultures in four dimensions: A research-based theory of cultural differences among nations. International Studies of Management and Organization, 13(1–2), 46–74.
Hofstede, G. (2015). The Hofstede Center: Strategy, Culture, Change. http://geert-hofstede.com/countries.html. Retrieved 12 Dec 2015.
Hofstede, G., & Bond, M. H. (1988). The Confucius connection: From cultural roots to economic growth. Organizational Dynamics, 16(4), 5–21.
Hope, O.-K. (2003). Disclosure practices, enforcement of accounting standards, and analysts’ forecast accuracy: An international study. Journal of Accounting Research, 41(2), 235–272.
Hope, O.-K., Kang, T., Thomas, W., & Yoo, Y. K. (2008). Culture and auditor choice: A test of the secrecy hypothesis. Journal of Accounting and Public Policy, 27(5), 357–373.
Houqe, M. N., Easton, S., & van Zijl, T. (2014). Does mandatory IFRS adoption improve information quality in low investor protection countries? Journal of International Accounting, Auditing and Taxation, 23(2), 87–97.
Houqe, M. N., Monem, R. M., Tareq, M., & van Zijl, T. (2016). Secrecy and the impact of mandatory IFRS adoption on earnings quality in Europe. Pacific-Basin Finance Journal, 40, 476–490.
Houqe, M. N., van Zijl, T., Dunstan, K., & Karim, A. (2012). The effect of IFRS adoption and investor protection on earnings quality around the world. The International Journal of Accounting, 47(3), 333–355.
IFRS. (2018). Who uses IFRS Standards? https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/. Retrieved 1 Aug 2018.
IFRS-Foundation. (2018). Why global accounting standards. http://www.ifrs.org/use-around-the-world/why-global-accounting-standards/. Retrieved 1 Jan 2018.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of Accounting Research, 29(2), 193–228.
Kanagaretnam, K., Lim, C. Y., & Lobo, G. J. (2011). Effects of national culture on earnings quality of banks. Journal of International Business Studies, 42(6), 853–874.
Kim, J., Kim, Y., & Zhou, J. (2017). Languages and earnings management. Journal of Accounting and Economics, 63(2), 288–306.
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), 163–197.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. The Journal of Political Economy, 106(6), 1113.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and corporate governance. Journal of Financial Economics, 58(1–2), 3–27.
Landsman, W. R., Maydew, E. L., & Thornock, J. R. (2012). The information content of annual earnings announcements and mandatory adoption of IFRS. Journal of Accounting and Economics, 53(1), 34–54.
Lang, M., Raedy, J. S., & Wilson, W. (2006). Earnings management and cross listing: Are reconciled earnings comparable to US earnings? Journal of Accounting and Economics, 42(1–2), 255–283.
Lee, C.-W., Li, L., & Yue, H. (2006). Performance, growth and earnings management. Review of Accounting Studies, 11(2–3), 305–334.
Leuz, C., Nanda, D., & Wysocki, P. D. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69(3), 505–527.
Lipe, M. G. (1998). Individual investors’ risk judgments and investment decisions: The impact of accounting and market data. Accounting, Organizations and Society, 23(7), 625–640.
Lo, K. (2008). Earnings management and earnings quality. Journal of Accounting and Economics, 45(2–3), 350–357.
McVay, S., Nagar, V., & Tang, V. (2006). Trading incentives to meet the analyst forecast. Review of Accounting Studies, 11(4), 575–598.
Nabar, S., & Boonlert-U-Thai, K. K. (2007). Earnings management, investor protection, and national culture. Journal of International Accounting Research, 6(2), 35–54.
Nissim, D., & Penman, S. H. (2001). Ratio analysis and equity valuation: From research to practice. Review of Accounting Studies, 6(1), 109–154.
Qu, X., & Zhang, G. (2010). Measuring the convergence of national accounting standards with international financial reporting standards: The application of fuzzy clustering analysis. The International Journal of Accounting, 45(3), 334–355.
Richardson, S. A., Sloan, R. G., Soliman, M. T., & Tuna, I. (2005). Accrual reliability, earnings persistence and stock prices. Journal of Accounting and Economics, 39(3), 437–485.
Ronen, S., & Shenkar, O. (2013). Mapping world cultures: Cluster formation, sources and implications. Journal of International Business Studies, 44(9), 867–897.
Salter, S. B. P., Kang, T. A. P., Gotti, G. A. P., & Doupnik, T. S. P. (2013). The role of social values, accounting values and institutions in determining accounting conservatism. Management International Review, 53(4), 607–632.
Salter, S. B., & Niswander, F. (1995). Cultural influence on the development of accounting systems internationally: A test of Gray’s [1988] theory. Journal of International Business Studies, 26(2), 379–397.
SEC. (2007). Acceptance from foreign private issuers of financial statements prepared in accordance with International Financial Reporting Standards without reconciliation to U.S. GAAP. Release 33-8879, December 21, Washington DC.
Soderstrom, N. S., & Sun, K. J. (2007). IFRS adoption and accounting quality: A review. European Accounting Review, 16(4), 675–702.
Sun, J., Cahan, S. F., & Emanuel, D. (2011). How would the mandatory adoption of IFRS affect the earnings quality of U.S. firms? Evidence from cross-listed firms in the U.S. Accounting Horizons, 25(4), 837–860.
Wang, D. (2006). Founding family ownership and earnings quality. Journal of Accounting Research, 44(3), 619–656.
Watts, R. L., & Zimmerman, J. L. (1986). Positive accounting theory. New Jersey: Prentice-Hall Career and Technology.
Worldbank. (2017). Market capitalization of listed domestic companies (% of GDP). World Federation of Exchanges database.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Wijayana, S., Gray, S.J. Institutional Factors and Earnings Management in the Asia-Pacific: Is IFRS Adoption Making a Difference?. Manag Int Rev 59, 307–334 (2019). https://doi.org/10.1007/s11575-018-0371-1
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11575-018-0371-1