Mandatory IFRS adoption, investor protection and earnings management. A data analysis of Germany, France and Belgium listed companies

Published date05 March 2018
Date05 March 2018
AuthorAhmed Kouki
Subject MatterAccounting & Finance,Accounting/accountancy,Accounting methods/systems
Mandatory IFRS adoption,
investor protection and
earnings management
A data analysis of Germany, France and
Belgium listed companies
Ahmed Kouki
Department of Accounting, Higher Institute of Business Administration,
Gafsa University and LARTIGE Laboratory, Sfax University, Tunisia
Purpose The purposeof this paper is to examine the effect of investor protection on earningsmanagement
before and afterIFRS adoption.
Design/methodology/approach A sample of 106 companies listed on Germany, Franceand Belgium
stock markets for the pre-IFRS (2000-2004) and post-IFRS (2006-2011) periods was used. This research is
based on a comparativestudy between the pre- and the post-IFRS periods.
Findings The results showed that investor protection better explains earnings management after the
transition to IFRS. The ndingsrevealed that international standards and investor protection are signicant
in jointlyexplaining earnings management for the secondreporting period.
Originality/value The study givesrise to a score that is considered as a proxy of investor protectionthat
regroupsseveral macroeconomic indexes.
Keywords Agency theory, Earnings management, IFRS adoption, Investor protection
Paper type Research paper
1. Introduction
This paper investigates the impact of investor protection on earnings management before
and after mandatory adoption of International Financial Reporting Standard (IFRS) based
on panel analysis in France, Germany and Belgium context. IFRS was developed by the
International Accounting Standard Board (IASB) with the aim to establish a common
accounting language across the world (Ball, 2006). Globalization of nancial markets has
provided strong motives for IFRS adoption.The principal determinant for adopting IFRS is
the quest for economic efciency and effectiveness (Guerreiro et al.,2012). IASB seeks to
release more relevant accounting information that underwrites the making economic
decisions (Houqe et al., 2012). Hilliard (2013) suggests that investor protection is one of the
major concerns of IFRS. Shleifer and Vishny (1997) and La Porta et al. (2000) focused that
investor protection is an institutionaldeterminant of corporate choices and policy. Similarly,
prior studies provide that stronginvestor protection is a potential factor that determines the
disclosure of high-quality accounting information (La Porta et al., 1998;Ball et al.,2000;La
Porta et al.,2000;Leuz et al., 2003;La Porta et al., 2006;Houqe et al., 2012). Leuz et al. (2003)
stressed that investorprotection has a signicant effect on earnings management.
JEL classication M41, G15, F62
IFRS adoption
Received24 July 2017
Revised26 August 2017
Accepted13 September 2017
InternationalJournal of
Accounting& Information
Vol.26 No. 1, 2018
pp. 187-204
© Emerald Publishing Limited
DOI 10.1108/IJAIM-07-2017-0091
The current issue and full text archive of this journal is available on Emerald Insight at:
In this paper, we associate the investor protection with mandatory IFRS adoption and
their effect on earnings management from the perspective of the agency theory. Jensen and
Meckling (1976) reveal that this theory aims to mitigate the conict of interest between
manager and investor. A managertries to adopt opportunistic behaviors that maximizehis/
her personal interest based on accounting choice offered by reporting standards. However,
this behavior affects the investorinterest by limiting the decision-making power. Barth et al.
(2008) show that the inherent exibility in principles-based standards could grant greater
opportunity for managers to manage earnings. Iatridis (2012) reveals that IFRS adoption
aims to enhance accounting quality,mitigate informational asymmetry and reduces agency
costs. In this sense, Pelucio-Grecco et al. (2014) focused that, after transition to IFRS,
enforcement of investor protection reduces earnings management. This assumption makes
the communication between the principal and the agent more condent, and accounting
information becomesmore relevant.
In our study, we use a panel data from three countries, namely, France, Germany and
Belgium as these countries are characterized as civil law legal origins. We test our
hypotheses on a sample of 1,166 rm-year observationsfrom 2000 to 2011, except 2005 (the
transition year). In the pre-IFRS period,the sample composed of rms that voluntary adopt
IFRS and those which keep their domesticstandards (DS). In the post-IFRS period, all rms
have mandatorily adoptedIFRS.
Our article contributes to the literature in several ways. First, the study has been
concerned with comparative analysis in threelevels. In the rst level, we make the analysis
in the pre-adoption period (from 2000 to 2004) between voluntary IFRS adoption and
domestic standards. In the second level, we do the comparison between mandatory IFRS
adoption and voluntary IFRS adoption in the post-adoption period (from 2006 to 2011). In
the third level, we perform the analysis into both reporting periods. Second, our sample
includes three different countries from Franco-Germanic law origin. Finally, to measure
investor protection, we develop a score composed of four macroeconomics factors collected
from annuals reports of World Economic Forum (WEF). The score consists of calculating
the weighted averages ofeach index for each company (i) of each country (j) at time (t), then,
we made the sum of all indexes,and nally, we divided the sum by the number of indexes.
Therefore, the main objective of this paper is to examine the effectof investor protection
on earnings management before and after transition to IFRS. To achieve this goal, we
conducted a comparativestudy between pre- and post-IFRS periods.
The remainder of the paper is organized as follows. In Section 2, we develop the
theoretical background. Section 3 describes prior empirical literature and hypotheses
development. Section 4 explains the research design, and Section 5 presents the results and
discussion. Section6 offers conclusions and summary.
2. Theoretical background
2.1 Investor protection determinants
Investor protectionis conditioned by legal factors and economic factors.
2.1.1 Legal determinants of investor protection. The degree of investor protection
depends of the countrys legal system. In fact, theliterature highlights the existence of two
systems; civil law and common law (La Porta et al., 1998). The civil law is based on the
codication (Houqe et al.,2014). Laws obey a set of rules and regulation. However, common
law is based on the judicial decisions determined by jurisprudence (Daske et al., 2008). In
addition, the laws are established following a decentralized and controlled fashion by
several interest groups. Under common law, institutions and private organizations can
ensure the production of rules and principles.Indeed, the IASB takes its legitimacy from this

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