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Setting the Bar: earnings management during a change in accounting standards

Author

Listed:
  • Vedran Capkun

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Anne Cazavan-Jeny
  • Thomas Jeanjean
  • L. A. Weiss

Abstract

This study examines how European Union firms used the flexibility of IFRS 1 during the 2004/2005 mandatory transition from Local GAAPs to IFRS to set their 2004 reconciliated IFRS earnings. More precisely, we analyze earnings reconciliations published during the 2004/2005 mandatory transition from Local GAAPs to IFRS in Europe, a period during which firms had to disclose earnings both under the old GAAP and IFRS. Our sample is comprised of 1,635 firms from the nine countries subject to IFRS 1 where early adoption of IFRS was not allowed. We posit and find that firms with negative Local GAAP earnings are more likely to report positive Local GAAP-to-IFRS earnings reconciliations, while firms with large positive earnings under Local GAAP are more likely to report negative Local GAAP-to-IFRS earnings reconciliations. We also find firms that increase (decrease) their first benchmark IFRS earnings are more likely to show a decrease (increase) in earnings in subsequent reporting periods. Markets returns are associated with meeting or beating last year earnings only if managers set the bar high in the previous period, consistent with compensation related factors to this IFRS transition earnings management. Overall, this evidence is consistent with firms using the flexibility of IFRS1 and resulting reconciliations to manage their earnings.
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Suggested Citation

  • Vedran Capkun & Anne Cazavan-Jeny & Thomas Jeanjean & L. A. Weiss, 2011. "Setting the Bar: earnings management during a change in accounting standards," Post-Print hal-00577836, HAL.
    • Handle: RePEc:hal:journl:hal-00577836
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    Cited by:

    1. Alina Beattrice Vladu & Barcelona Spain, 2013. "Smoothing Behavior Of Firms In Times Of Crisis: Empirical Evidence From The Spanish Economic Environment," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 1-13.
    2. Agrianti Komalasari, 2017. "Implementation the International Financial Reporting Standards as a Moderating Variable of the Relationship of Corporate Governance with Earnings Management," European Research Studies Journal, European Research Studies Journal, vol. 0(3A), pages 259-277.
    3. Filip, Andrei & Raffournier, Bernard, 2014. "Financial Crisis And Earnings Management: The European Evidence," The International Journal of Accounting, Elsevier, vol. 49(4), pages 455-478.

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