Mandatory adoption of International Financial Reporting Standards and the accounting quality of Latin American firms

This paper investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) has resulted in higher accounting quality among Latin American firms than in the pre-adoption period. We examine the variation in firms’ incentive and financial reporting behaviours according to three firm characteristics: (i) operating performance, (ii) possibility of bankruptcy, and (iii) listing status on U.S. stock exchanges. The results indicate that the length of delay in the recognition of bad news in the post-adoption period reduced from eight quarters to four quarters in the pre-adoption period. We also found that firms might choose to write off losses when they experience good news or inflate earnings when they experience bad news. Earnings figures in the post-adoption period have higher value relevance than those in the pre-adoption period. The degree of earnings management via accruals in the post-adoption period is lower than that in the pre-adoption period. These improvements in accounting quality cannot be found in firms with poor operating performance and high possibility of bankruptcy. For firms listed on U.S. stock exchanges, the results are inconsistent. We only find evidence of improvements in accounting quality when applying value relevance models. However, we did find positive evidence of improvement in firms not listed on U.S. stock exchanges.