Secrecy and the Impact of Mandatory IFRS Adoption on Earnings Quality in Europe

This study examines the effects of secrecy and mandatory IFRS adoption on earnings quality proxied by signed abnormal accruals and earnings conservatism. Using 19,324 firm-years from 14 countries over the period 1998-2011, we find that firms in a high secrecy country tend to report higher abnormal accruals and earnings conservatism, which result in lower earnings quality. On the other hand, we find that mandatory IFRS adoption improves earnings quality by decreasing abnormal accruals and earnings conservatism. Interestingly, the effect of IFRS adoption reinforces the effect of secrecy is positively related to earnings quality. The reason can be that IFRS encourages managers to enforce high quality standards and to share information with outside investors, improving earnings quality. The result highlights the benefit of IFRS adoption to earnings quality and the need for policy maker to consider the interaction between IFRS and culture