he Effect of IFRS Adoption and Investor Protection on Earnings Quality Around the World
In the paper “The Effects of IFRS Adoption and Investor Protection on Earnings Quality Around the World” Houqe et al. study the interaction of two fundamental factors that influence financial reporting. So, the authors developed an empirical model that tested whether the quality of earnings is a function of mandatory IFRS adoption, the country’s investor protection and the interaction of these two variables. For the purpose of having accurate results they used discretionary accruals as an inverse measure of earnings quality. The study was conducted on a large sample of firm observations from 46 countries for the years 1998-2007.
This paper argues that earnings quality is a joint function of investor protection and the quality of accounting standards. IFRS adoption improves earnings quality only if strong investor protection is present. However, increasing the degree of investor protection without adoption of IFRS does not improve financial reporting quality. The authors also argue that despite having high quality accounting standards, lower investor protection causes managerial discretion within an organization that impedes production of high quality accounting numbers.
The major strength of the paper is the importance of its research topic which is undisputable. High quality financial reporting is essential in helping investors to make informed decisions with regard to future investments in the company. Moreover, this issue is relevant for a large audience since IFRS is so widely used, in about 134 countries in the world. The chosen topic for research has the potential of offering new valuable insights to the already existing literature. Since, it is a debatable issue among academics whether IFRS adoption improves earnings quality or not. We will begin by presenting the strong points of the research paper. Firstly, the authors have succeeded at
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