Differences between domestic accounting standards and IAS: Measurement, determinants and implications
This study analyzes determinants and effects of accounting differences between Domestic Accounting Standards (DAS) and International Accounting Standards (IAS). Based on an extensive list of differences between DAS and IAS, we create two indices, “absence” and “divergence.” “Absence” measures the difference between DAS and IAS as the extent to which the rules regarding certain accounting issues are missing in DAS while covered in IAS. “Divergence” represents the differences between DAS and IAS as the extent to which the rules regarding the same accounting issue differ in DAS and IAS. Using a sample of more than 30 countries for the year 2001, we show that “absence” is mainly determined by the legal system and the sophistication of the financial system, while “divergence” is positively associated with the level of economic development and constrained by the importance of equity markets. Our analysis also provides evidence that a higher level of “absence” creates more opportunities for earnings management and decreases firm-specific information to investors. A larger “divergence” from IAS offers richer firm-specific information to the capital markets.
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