How have the IAS/IFRS adoption affected earnings management in eu? The effect of the absence/divergence of regulation and of legal enforcement

Abstract

This paper aims to investigate the effect produced by the adoption of IAS/IFRS on earnings management in European Union. We calculate four indexes for the periods 2000-2003 and 2006-2009 to identify different reasons that could lead insiders to manipulate earnings and by comparing them we observe that the IAS/IFRS first-time adoption produced different effects on earnings management depending on the countries analysed and the kind of earnings management investigated. Moreover, while we find a positive relation between the reduction of earnings management and the extent to which IAS/IFRS regulates issues not covered by domestic standards, on the contrary we do not find any relation between the such reduction and the existing divergence between domestic standards and IASB standards. Finally, our findings also show a positive and significant relation between the reduction of the earnings management and the level of the legal enforcement of each country.