International Financial Reporting Standards adoption and information quality: Evidence from Brazil

• Date: 01 February 2019
• DOI: http://doi.org/10.1111/jifm.12092
• Author: João Neiva De Figueiredo,Jing Lin,Li Li Eng
• Published date: 01 February 2019

J Int Financ Manage Account. 2019;30:5–29.

|

5

wileyonlinelibrary.com/journal/jifm

Received: 1 March 2016

|

Revised: 17 September 2017

|

Accepted: 16 December 2017

DOI: 10.1111/jifm.12092

ORIGINAL ARTICLE

International Financial Reporting Standards

adoption and information quality: Evidence from

Brazil

Li Li Eng1

|

Jing Lin2

|

João Neiva De Figueiredo3

© 2018 John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

1Department of Business and Information

Technology,Missouri University of Science

and Technology, Rolla, Missouri

2Department of Accounting,Haub School

of Business,Saint Joseph’s University,

Philadelphia, Pennsylvania

3Department of Management,Saint Joseph’s

University, Philadelphia, Pennsylvania

Correspondence

Li Li Eng, Department of Business and

Information Technology, Missouri University

of Science and Technology, Rolla, MO

Email: engl@mst.edu

Abstract

This paper examines whether the mandatory adoption of

International Financial Reporting Standards (IFRS) in Brazil

in 2010 has improved the value relevance of accounting in-

formation, information content of earnings, financial analyst

forecasting activities, and liquidity. We examine the variables

in the pre- IFRS mandatory adoption sample period, consid-

ered herein as 2008 to 2009, and the post- IFRS adoption pe-

riod of 2011 to 2012. We provide evidence demonstrating

improvement in value relevance of earnings and number of

analysts following the firms in the period after IFRS adop-

tion, but we do not find improvements in information content

of earnings, accuracy in analyst forecasting, and liquidity in

the post- adoption period. Our findings suggest a positive re-

lationship between IFRS adoption and some areas of infor-

mation quality in Brazil. By focusing on one important

economy as it takes significant steps toward full convergence

with IFRS, our study contributes to the growing literature

concerning the impact of IFRS adoption around the world.

KEYWORDS

Brazil, IFRS, information quality, value relevance

1

|

INTRODUCTION

Adoption of International Financial Reporting Standards (IFRS) has been mandated in many coun-

tries around the globe, although as of 2017, a few large rising economic powers such as China and

India have yet to mandate IFRS. In 2010, Brazil required its publicly traded companies to prepare

6

|

ENG Etal.

financial statements in compliance with IFRS, making it the first BRIC (Brazil, Russia, India, and

China) nation to do so, with Russia beginning a gradual transition to IFRS starting in the year 2011.

Given the size of Brazil’s economy, its increasing importance in the world markets, the unique ele-

ments of its environment, and the overarching goal of the International Accounting Standards Board

(IASB) to achieve global convergence of accounting standards, Brazil’s move was significant and its

impact worth studying. Developed countries, including those in Western Europe, instituted manda-

tory IFRS adoption early on, leading to prolific research output. This paper replicates analysis meth-

ods used previously to study IFRS adoption in European and other countries (for example, Daske,

Hail, Leuz, & Verdi, 2008; Horton, Serafeim, & Serafeim, 2013; Kim, 2013; Landsman, Maydew,

& Thornock, 2012) and extends these methods to examine the effect of mandatory adoption of IFRS

on firms’ information quality in Brazil. As summarized by De George, Li, and Shivakumar (2016) in

their comprehensive review of the IFRS adoption literature, the majority of early IFRS studies have

documented significant benefits to adopting firms and countries. However, more recent studies now

attribute some of the earlier documented benefits to factors other than IFRS adoption. For example,

Christensen, Hail, and Leuz (2013) found that there is little evidence of liquidity benefits in IFRS

countries without substantive enforcement changes even when they have strong legal and regulatory

systems. Specifically, when evaluating the impact of mandatory IFRS adoption on the improvement of

financial reporting quality, De George et al. (2016) confirm that cross- country studies have had mixed

evidence. De George et al. (2016) also report that country- specific studies have also yielded incon-

sistent results, such as the study of German firms by Lin, Riccardi, and Wang (2012), of U.K. firms

by Horton and Serafeim (2010), and of Finnish firms by Lantto and Sahlstrom (2009). Commenting

on the pros and cons of IFRS for investors, Ball (2006) cautioned that uniform standards alone will

not produce uniform financial reporting, and that deep- rooted political and economic factors would

influence the incentives of financial statement preparers and shape the financial reporting practice. As

such, it is important that we look into Brazil’s political and economic factors to understand the impact

of IFRS on reporting.

Based on the legal origin classification by La Porta, Lopez- de- Silanes, Shleifer, and Vishny (1998),

Brazil belongs to the French- civil law group. Compared to common- law, German- and Scandinavian-

civil- law groups, French- civil law countries afford the worst legal protections to shareholders and

creditors, and have the weakest law enforcement, as well as the lowest quality of accounting. Although

the Global Competitiveness Report (2014) gave Brazil an adequate ranking in terms of investor pro-

tection, it also put Brazil near the bottom decile in categories such as Public Trust of Politicians,

Diversion of Public Funds, and Burden of Government Regulation. In the area of accounting, The

World Bank (2005) recognized that significant gaps existed between Brazilian domestic account-

ing standards and IFRS,1 perhaps resulting from the scattered enforcement of accounting standards

across many institutions within a context of strong state participation in the economy. Indeed, Brazil

has had significant state economic influence. As described by Musacchio, Lazzarini, and Aguillera

(2015), different versions of state capitalism are increasingly being observed throughout the world.

Examining the effects of the IFRS adoption in Brazil would be helpful in understanding the impact

of market incentives on environments with strong governmental influence. This is because increased

transparency provided by IFRS adoption adds a degree of market- based oversight to a perceived weak-

accountability institutional framework, possibly contributing to enhanced minority investor rights,

improved corporate governance practices, and reduced politically motivated interference.

Given that Brazil is one of the largest emerging economies in the world and has its unique insti-

tutional setting characterized by weak legal and regulatory systems, historically strong state influ-

ence, and significant gaps between domestic accounting standards and IFRS, it becomes an empirical

question whether the mandatory adoption of IFRS has led to higher quality accounting information.