The Impact of Ifrs Adoption on Earnings Quality of Chinese Firms

Abstract

This research examines whether the 2007 mandatory adoption of Accounting Standards for Business Enterprises (ASBE) by Chinese publicly traded companies had an impact on firms' earnings quality. Due to the close similarity between ASBE and International Financial Reporting Standards (IFRS), this study contributes to the growing literature on the impact of the proposed implementation of a single global set of reporting standards on the quality of financial disclosures. Following prior research (such as Barth, Landsman, and Lang), we examine earnings smoothing as a proxy for the quality of reported earnings. Three separate measures are used: variability of net income, variability of net income relative to that of operating cash flows, and the correlation between accruals and cash flows. The data samples are from the Chinese Securities Market and Accounting Research database; they span a period of six years (2004-09). ^ ' Our results, consistent and robust across different measures, show less earnings smoothing after implementation of ASBE. Thus, we conclude that there was an enhancement in the quality of reported earnings after the adoption of ASBE. This research is the first evidence on effects of mandatory implementation of IFRS-based standards in China, an important developing country.