IFRS diffusion and earnings quality: Moderating role of firm size and IFRS specialists

• Published date: 01 October 2023
• Author: Manish Bansal
• Date: 01 October 2023
• DOI: http://doi.org/10.1002/jcaf.22643

Received: 16 March 2023 Accepted: 24 May 2023

DOI: 10.1002/jcaf.22643

RESEARCH ARTICLE

IFRS diffusion and earnings quality: Moderating role of firm

size and IFRS specialists

Manish Bansal

Finance and Accounting, Indian Institute

of Management Ranchi, Ranchi,

Jharkhand, India

Correspondence

Manish Bansal, Finance and Accounting,

Indian Institute of Management Ranchi,

Ranchi, Jharkhand 834008, India.

Email: manish.bansal@iimranchi.ac.in

Abstract

The study investigates the learning curve impact of International Financial

Reporting Standards (IFRS) adoption on earnings quality. In other words, the

study investigates how IFRS affects the quality of earnings over time. The study

also examines the moderating role of firm size and IFRS specialists/experts on

the issue. We use firm-level data of Bombay Stock Exchange listed firms and

analyze it through the “Difference in Difference” technique. We find that the

association between IFRS and earnings quality changes favorably as the intro-

duction grows longer. In particular, we find that earnings quality is lower during

the initial years of IFRS adoption, however, it improves in the later years of

adoption, consistent with the notion of diffusion and learning curve theory.

Our subsequent tests suggest that small firms are taking more time to per-

colate through the IFRS system, however, it does not hold when small firms

hire IFRS specialists/experts to migrate their older accounts to IFRS, consis-

tent with the notion of resource dependency theory of innovation. Overall, IFRS

is found to be a continuous improvement process in emerging nations whose

benefit can be derived in the initial years by providing sufficient infrastructural

and institutional support, particularly to small firms. Our findings are robust

to the problem of endogeneity and offer real-world ramifications for regulatory

authorities, accounting-standard setters, and investors.

KEYWORDS

diffusion theory, earnings quality, IFRS, IFRS experts, India, learning curve theory

1 INTRODUCTION

International Financial Reporting Standards (IFRS) have

received much consideration from the academic and

researchers’ fraternity after its mandatory adoption by

firms for preparing their financial statements. One of the

main objectives behind the adoption of IFRS is to improve

the earnings quality of firms by limiting managerial dis-

cretions, which are otherwise, allowed under domestic

Generally Accepted Accounting Principles (Adhikariet al.,

2021; Bansal & Garg, 2021; Bansal, 2023).Numerous studies

have empirically investigated the impact of IFRS adoption

on earnings quality, however, their results are mixed and

inconclusive.

One stream of studies (e.g., Adhikari et al., 2021, Ahmed

et al., 2013; Bansal & Garg, 2021, Capkun et al., 2016;

Doukakis, 2010; Jeanjean & Stolowy, 2008; Kabir et al.,

2010; Van Tendeloo & Vanstraelen, 2005) document the

negative impact of IFRS adoption on earnings quality.

These opponents attribute their findings to fair-value

accounting, where the managers are allowed to record the

value of the assets at a favorable amount, hence negatively

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