Earnings Management Behavior and Choice of Accounting Standards

In this study we examine earnings management in public listed firms within 15 EU member states plus two non-EU members, namely Switzerland and Norway. In 10 of the countries included in our sample, provisions were made to allow firms to use international accounting standards (IAS/IFRS) well before they became mandatory in 2005. This presents us with an opportunity to compare the earnings management behavior of international accounting standards adopters with earnings management in firms using local standards (GAAPs). We also examine how the transition from local to international accounting standards affected earnings management in different groups of countries according to their legal tradition. Our results suggest that companies that opted for the international accounting standards managed earnings to lesser extent than firms choosing domestic accounting standards. The results are robust to potential endogeneity induced by the possibility of firms in certain countries to choose whether to adopt IAS/IFRS. We also documented that earnings management is generally less pronounced in Anglo-Saxon and Northern European countries than in the rest of Europe.