ifrs adoption among private companies: impact on earnings quality

http://jaf.sagepub.com/Finance

Journal of Accounting, Auditing &

http://jaf.sagepub.com/content/29/3/278The online version of this article can be found at:

DOI: 10.1177/0148558X14534260

2014 29: 278 originally published online 9 June 2014Journal of Accounting, Auditing & FinanceMara Cameran, Domenico Campa and Angela Pettinicchio

IFRS Adoption Among Private Companies: Impact on Earnings Quality

Published by:

http://www.sagepublications.com

On behalf of:

BusinessSponsored by The Vincent C. Ross Institute of Accounting Research, The Leonard N. Stern School of

can be found at:Journal of Accounting, Auditing & FinanceAdditional services and information for

http://jaf.sagepub.com/cgi/alertsEmail Alerts:

http://jaf.sagepub.com/subscriptionsSubscriptions:

http://www.sagepub.com/journalsReprints.navReprints:

http://www.sagepub.com/journalsPermissions.navPermissions:

http://jaf.sagepub.com/content/29/3/278.refs.htmlCitations:

What is This?

- Jun 9, 2014OnlineFirst Version of Record

- Jun 27, 2014Version of Record >>

at UNIVERSITY OF WINDSOR on July 2, 2014jaf.sagepub.comDownloaded from at UNIVERSITY OF WINDSOR on July 2, 2014jaf.sagepub.comDownloaded from

http://jaf.sagepub.com/

http://jaf.sagepub.com/content/29/3/278

http://www.sagepublications.com

http://w4.stern.nyu.edu/ross/research.cfm?doc_id=1746

http://w4.stern.nyu.edu/ross/research.cfm?doc_id=1746

http://jaf.sagepub.com/cgi/alerts

http://jaf.sagepub.com/subscriptions

http://www.sagepub.com/journalsReprints.nav

http://www.sagepub.com/journalsPermissions.nav

http://jaf.sagepub.com/content/29/3/278.refs.html

http://jaf.sagepub.com/content/29/3/278.full.pdf

http://jaf.sagepub.com/content/early/2014/05/30/0148558X14534260.full.pdf

http://online.sagepub.com/site/sphelp/vorhelp.xhtml



Journal of Accounting,Auditing & Finance

2014, Vol. 29(3) 278–305�The Author(s) 2014

Reprints and permissions:sagepub.com/journalsPermissions.nav

DOI: 10.1177/0148558X14534260jaf.sagepub.com

IFRS Adoption Among PrivateCompanies: Impact onEarnings Quality

Mara Cameran1, Domenico Campa2, andAngela Pettinicchio1

Abstract

EU gave the opportunity to each Member State to oblige/allow non-listed (i.e., private)companies to use international financial reporting standards (IFRS). Considering a sample ofItalian private companies that switched to IFRS in the time span from 2005 to 2008, wecompare financial reporting quality between IFRS adopters and a matched sample of compa-nies still using local (Italian) generally accepted accounting principles (GAAP). This shouldbe of interest for the EU Commission in evaluating the impact of the current financialreporting regulation and for EU national regulators, who are left with a certain degree offlexibility in endorsing parts of the European legislation. Overall, our results show that IFRSadoption did not improve reporting quality among private companies but, on the contrary,decreased it. As companies can exploit the level of flexibility embedded in IFRS to pursuetheir own reporting interests, separate analyses were conducted taking into considerationfirms’ incentives. In particular, assuming that entities controlled by listed companies mighthave switched to IFRS mainly for complying with parent company requirements and/or sim-plifying the financial reporting process, we run the analyses separately for this sub-sampleand other firms. Findings reveal signs of earnings quality deterioration for both groupsalthough the impact seems slightly worse for subsidiaries of listed companies.

Keywords

IFRS, reporting quality, private companies, reporting incentives

Introduction

The aim of this study is to analyze the impact of adopting international financial reporting

standards (IFRS) on financial reporting quality using a sample of Italian private (i.e., non-

listed) companies that switched to IFRS.1

The European Union (EU) introduced a common set of accounting standards in 2005,

with the objective of enhancing financial reporting quality and comparability across coun-

tries. This shift was intended for all public (i.e., listed) companies in Europe preparing

1Universita Bocconi, Milan, Italy2Trinity College Dublin, Ireland

Corresponding Author:

Angela Pettinicchio, Department of Accounting, Universita Bocconi, Via Rontgen, 1, 20136 Milano, Italy.

Email: [email protected]

Article

at UNIVERSITY OF WINDSOR on July 2, 2014jaf.sagepub.comDownloaded from


consolidated financial statements, but the regulation also gave each Member State the

opportunity to decide whether to oblige/allow other kind of companies, for example non-

listed ones, to use the same set of standards for financial reporting purposes. In most recent

years, International Accounting Standards Board (IASB) and EU Commission have particu-

larly focused their attention on the use of international accounting standards by private enti-

ties (Nobes, 2009). Indeed, the latter represent the majority of EU economy and account

for more than 75% of European GDP (The European Confederation of Directors

Associations [Ecoda], 2010).

Dealing with private companies only, our research should be of interest for the EU

Commission in evaluating the impact of the current financial reporting regulation and for

EU national regulators, who are left with a certain degree of flexibility in endorsing parts

of the European legislation. Given that standard setters and regulators are asked to take

into account the effects and the consequences of the standards they develop/suggest

(European Financial Reporting Advisory Group, 2011), providing this kind of empirical

evidence is, in our opinion, crucial. This also permits us to reply to the Maijoor (2010) call

to the academia ‘‘to be more involved in policy-orientated and normative debates, of

course after having done proper research based on evidence-gathering’’ (p. 330).

Our article focuses on an area where it is difficult to locate any prior literature: The

effects of IFRS adoption on the reporting quality of private companies. As recent literature

demonstrates, financial reporting quality cannot be assumed as homogeneous between

public and private companies (e.g., Ball & Shivakumar, 2005; Burgstahler, Hail, & Leuz,

2006); therefore, we feel that the mere extension of the (conflicting) results obtained for

listed companies is inadequate for understanding the effects on unlisted companies. The

research site used in this article, Italy, can be considered a suitable setting for many rea-

sons. First of all, the Italian environment is a typical example of stakeholder-oriented

accounting system (like France, Germany, Belgium, and Spain). As emphasized in previous

works (Bartov, Goldberg, & Kim, 2005; Hung & Subramanyam, 2007), IFRS are influ-

enced by a shareholder-oriented model: Conversely, we consider a setting where the effect

of the transition to the new standards is likely to be particularly marked. This is also sup-

ported by Bae, Tan, and Welker (2008) who ranked countries according to the ‘‘distance’’

between local generally accepted accounting principles (GAAP) and IFRS. Among a

sample of 49 countries, Italy was considered to be one of those countries where local

(Italian) GAAP differed most from the international ones. In particular, Italian ‘‘scored’’ 12

differences whereas Anglo-Saxon settings report ‘‘difference scores’’ below 4. For this

reason, we expect that the shift to the new set of standards would lead to stronger effects in

Italy compared with other countries where national standards are more similar to IFRS

(like the United Kingdom and Australia). Moreover, the other most important European

countries with a distance between local GAAP and IFRS similar to the Italian one (like, for

example, France, Belgium, Austria, and Germany) are not allowed free choice as to prepar-

ing financial statements using either national standards or international ones2

(PricewaterhouseCoopers, 2012). In addition, small- and medium-size (mainly family-

owned) companies are the strongest component of the Italian economy (Economist

Intelligence Unit [EIU], 2005). Finally, according to the Italian tax principle of neutrality,

an equal treatment will be granted for those company adopting IFRS and those accounting

according to the Italian GAAP (PricewaterhouseCoopers, 2006). Therefore, individual tax

issues and, more generally, the peculiarities of the national tax system should not influence

the results of our analysis.

Cameran et al. 279



Our purpose aims at understanding whether the level of earnings quality and, in particu-

lar, the level of abnormal accruals and timely loss recognition are different between private

companies adopting IFRS and a matched sample of firms reporting under local GAAP.

We first select a sample made of all Italian private companies that decided to adopt

IFRS in the time span from 2005 to 2008 with reference to their annual reports. Then, we

match each IFRS adopter with a pair that, in the same time span, accounts under local

(Italian) GAAP, using a propensity-score matching methodology. We then compare the

level of abnormal accruals and timely loss recognition across the two samples. Overall, our

findings show that IFRS adopters do not show higher earnings quality compared with local

GAAP adopters. On the contrary, we find evidence indicating that companies that adopted

IFRS exhibit higher levels of abnormal accruals and a decrease in timely loss recognition,

according to the Ball and Shivakumar (2005) accrual-cash flow model. Evidence suggesting

no improvements in the level of earnings quality among IFRS adopters is also confirmed

by a set of robustness tests, where we use other proxies for earnings quality and an alterna-

tive research methodology in which earnings quality is measured before and after the IFRS

adoption for the sample of IFRS adopters only, thus mitigating endogeneity problems.

Taken as a whole, these findings suggest that the adoption of a set of accounting standards

reputed to be of better quality than national ones (Barth, Landsman, & Lang, 2008) does

not imply, per se, better financial reporting quality.

Because IFRS contain several accounting policy options (Kvaal & Nobes, 2012), there

is room for discretion in IFRS application (e.g., Daske, Hail, Leuz, & Verdi, 2008; Leuz,

2010). As companies can exploit the flexibility within IFRS, separate analyses were con-

ducted distinguishing between firms controlled by listed companies (i.e., subsidiaries the

parent company of which is obliged by EU Regulator to use IFRS), which are assumed to

adopt IFRS for complying with parent company requirements and/or for simplifying finan-

cial reporting process, and other firms. We find that reporting quality does not show any

sign of improvement for both groups of firms, although the impact of IFRS on our earnings

quality proxies seems, in some cases, worse for subsidiaries of listed entities.

The structure of the article is as follows: In ‘‘Literature Review and Hypotheses

Development’’ section, we frame our research in the context of the extant literature; the

‘‘Method’’ section describes the sample and the methodology used; ‘‘Empirical Results’’

section provides the main empirical findings and robustness tests; ‘‘Conclusion’’ section

concludes the article highlighting its main implications and limitations.

Literature Review and Hypotheses Development

EU regulation 1606/2002 imposed companies listed on any European country to adopt

IFRS in their consolidated accounts from the 1st of January 2005 and gave the possibility

to each Member State to decide whether to oblige/allow other kind of companies, that is

non-listed ones, to use the same set of standards. As a consequence, in 2012, IFRS can be

used by (all or some) private companies in all European countries with the exception of

Austria, Belgium, France, Latvia, Romania, Spain, Sweden, and Switzerland where the

adoption of international standards by this kind of firms is prohibited. On the contrary,

Cyprus, Montenegro, and Serbia require all private companies to follow IFRS for the pre-

paration of their annual report (PricewaterhouseCoopers, 2012).

Given that accounting standards directly influence reporting quality (Soderstrom & Sun,

2007), it has been observed a pressing need to understand the effects of this change on

280 Journal of Accounting, Auditing & Finance



reporting quality as soon as financial statements prepared under IFRS were available. The

intent of the IASB is

to develop, in the public interest, a single set of high quality, understandable and enforceable

global accounting standards that require high quality, transparent, and comparable information

in financial statements and other financial reporting to help participants in the world’s capital

markets and other users make economic decisions (IASC Constitution).

Moreover, international accounting standards are expected to enhance the quality of

companies’ annual report in most countries (Francis, Khurana, Martin, & Pereira, 2008;

Leuz, 2010). As a consequence, the literature has plenty of studies that investigate the

effect of the adoption of IFRS on earnings quality (for a recent review, please refer to

Brown, 2011). However, this stream of literature only focuses on public companies provid-

ing for findings which are not always consistent. Although some authors document an

improvement in the quality of earnings under IFRS (e.g., Paananen & Henghsiu, 2009;

Tsalavoutas & Evans, 2010), most of the studies reveal very limited improvements, con-

flicting results across metrics or no differences in earnings quality between IFRS and local

GAAP (e.g., Van Tendeloo & Vanstraelen, 2005). Finally, it is also documented that earn-

ings quality decreases after the adoption of IFRS (e.g., Jeanjean & Stolowy, 2008).

Although the impact of IFRS adoption on earnings quality is still an open issue for

public companies, at the best of our knowledge, it is even more a pending question for pri-

vate firms, as no study has directly investigated this issue so far. Francis et al. (2008) inves-

tigate the determinants of voluntary adoption of IFRS by non-listed companies, analyzing

whether firm-specific incentives matter in their decision to shift to a different body of

accounting standards. However, they do not test whether the quality of accounting numbers

changes after the adoption of international GAAP. The same is true for a more recent arti-

cle by Matonti and Iuliano (2012), which focused on Italian private companies.

Earnings quality is still an important issue for private firms. Their incentives in manag-

ing financial statements may be different from those of public companies but are still pres-

ent. Privately held firms have more concentrated ownership and major capital providers

often have insider access to corporate information so earnings would not have to be as

informative about the true economic performance. Bank is usually the major source of

external funds in privately held companies, resulting in agency conflicts between bankers

and owners/management (Vander Bauwhede & Willekens, 2004), which could also create

earnings management incentives, exacerbated in the case of earnings-based debt

covenants.3

Moreover, even in private companies, as well as in public ones, management’s bonuses

might be earnings-based. Under this perspective, executive compensation might represent

relevant incentives for managers to manipulate earnings, whereas shareholders have a clear

interest in obtaining non-manipulated numbers. Finally, in settings where earnings reported

in financial reports are the basis for determining tax obligation, management/shareholder

would like to pursue tax saving objectives, whereas fiscal authorities have an interest to

obtain high-quality accounting numbers. Even if it is clear that incentives to manipulate

earnings are present in private companies, it is not evident yet whether these incentives are

stronger or weaker compared with listed companies.

Givoly, Hayn, and Katz (2010) notice that two competing hypotheses can be used for

testing the differences in incentives and, therefore, in the quality of accounting numbers

produced by public and private held companies: the ‘‘demand’’ and ‘‘opportunistic

Cameran et al. 281



behavior’’ hypothesis. The ‘‘demand’’ argument postulates that earnings of public firms are

of higher quality due to stronger demand by shareholders and creditors for high-quality

reporting. In contrast, the second (opportunistic behavior) posits that public company man-

agers have a greater incentive to manage earnings in comparison with private ones due to

the continuous pressure by investors to meet certain performance benchmarks or as a result

of having stock-based compensation. This ‘‘opportunistic behavior’’ hypothesis is sup-

ported by the results of Beatty, Ke, and Petroni (2002) and the survey conducted by Penno

and Simon (1986). In accordance with the demand hypothesis, previous research shows

that European private firms engage in more earnings management than public companies

(Ball & Shivakumar, 2005; Burgstahler et al., 2006), as their financial statements are not

widely distributed to the public and are more likely to be influenced by tax objectives (Ball

& Shivakumar, 2005).

Taking into consideration all the above, whether IFRS adoption impacts on earnings

quality in private firms is a relevant but still open question. Previous literature results on

the effect of IFRS adoption on earnings quality for public companies are unclear.

Moreover, a simple extension of findings of previous research on public companies would

not be appropriate as reporting incentives are found to be different between public and pri-

vate companies. For these reasons, we do not have clear a priori expectations related to the

direction with which the shift to IFRS standards affects private companies in Italy. So, our

first hypothesis can be stated in the null form:

Hypothesis 1 (H1): Earnings quality among Italian private companies is not different

between IFRS and local GAAP adopters.

As IFRS contain several accounting policy options (Kvaal & Nobes, 2012), it has been

claimed that there is still room for discretion in IFRS application (e.g., Daske et al., 2008;

Leuz, 2010). Companies can exploit the level of flexibility embedded in IFRS to pursue

their own reporting interests. Earlier literature suggests that results on the consequences of

IFRS adoption may depend on factors reflecting preparer incentives (Brown, 2011; Leuz,

2010; Pope & McLeay, 2011). Previous research (Cameran & Campa, 2010) that analyses

the characteristics of Italian private companies that adopt IFRS on a voluntary basis in

2006 and 2007 finds that about 75% of these firms are part of a group where the parent

company is a listed company thus obliged to adopt IFRS. In the sample used in the present

study, 172 firms out of 270 (63.7% of our IFRS adopters) are controlled by listed entities.

We assume that subsidiaries of listed companies may be forced to use international

accounting standards on the basis of parent company requirements and/or for simplifying

the financial reporting process. This would be consistent with what has been observed in a

survey carried out by PricewaterhouseCoopers in 2011, investigating the adoption of

IFRS in the United States. The survey states that ‘‘IFRS has increasingly become a

fact of life for certain companies including . . . subsidiaries of non-US companies’’

(PricewaterhouseCoopers, 2011, p. 17). Indeed, according to the current EU regulation,

firms listed on one of the European financial markets have to prepare their consolidated

statements in accordance with the international accounting standards. Voluntary IFRS adop-

tion by their subsidiaries would permit a simplification in their financial reporting process:

They would prepare only one financial statement that would be used both for their parent

company consolidated financial statement and local (national) requirements. Otherwise sub-

sidiaries would have to prepare two different financial statements: One in accordance with

local GAAP and the other with IFRS for permitting parent company to obtain its




consolidated financial report. This is also in line with a PricewaterhouseCoopers (2009)

executive survey that supports the conclusion that the adoption of IFRS by subsidiaries

may bring ‘‘considerable benefits to the company as a whole, for example streamlining the

consolidation process’’ (p. 2).

For other private companies, IFRS adoption may be part of private firms’ signaling strat-

egy. According to Francis et al. (2008), ‘‘accounting is likely to play a more important role

for private firms (compared with large established corporations) in addressing market

imperfections in the form of agency conflicts and information asymmetry’’ (p. 333). A

financial statement contains the only public available accounting data for some private

companies’ stakeholders like customers, suppliers, employees, and government (Van

Tendeloo & Vanstraelen, 2008). Also banks, that are usually the major source of finance

for private companies, consider financial statement data for their decisions. The use of

IFRS, a set of accounting standards reputed to be of better quality than national ones

(Barth et al., 2008), could imply a ‘‘reputational effect’’ for the voluntary adopter and a

wider possibility to contract with outside parties.

As private companies controlled by listed companies obliged to use IFRS might have

different incentives to adopt IFRS in comparison with private companies not controlled by

listed companies, and given that previous literature suggests that incentives matter in evalu-

ating IFRS adoption consequences (Brown, 2011; Leuz, 2010; Pope & McLeay, 2011), we

formulate the following second hypothesis:

Hypothesis 2 (H2): The effect of IFRS adoption on earnings quality of Italian private

companies differs between subsidiaries of listed firms and other private

companies.

Method

Sample Selection

To test our hypotheses, we select all the Italian non-listed and non-financial companies that

use IFRS in their financial statements from 2005 to 2008.4 For each firm, we downloaded

all the financial information included in their balance sheet, income statement, cash flow

statement, and all the other data we need for our tests from the first year after the transition

to IFRS5 until the most recent financial statement, which was 2009 at the time of the data

collection. We excluded firms where financial information was not available. We ended up

with a sample of 355 IFRS adopters. We then create a control sample of non-IFRS adopters

matched with our IFRS adopters using the propensity-score matching approach developed

by Rosenbaum and Rubin (1983). Employing this methodology, we estimate propensity-

scores using a logistic model that relates the adoption of IFRS to firm size, leverage, profit-

ability, and industry at the year of the transition to the new accounting standards.6 The

dependent variable of our logistic model is a dummy variable that is equal to 1 for our

sample of IFRS adopters and 0 for a large group of non-IFRS adopters extracted from

AIDA database and counting 4,535 companies.7 We finally match, without replacement,

each IFRS adopter to the non-IFRS adopter that has the closest propensity-score following

the ‘‘nearest neighbor matching’’ procedure. As we cannot find a match for all our IFRS

adopters, the final sample is composed of 270 pairs of IFRS and non-IFRS adopters and a

total of 948 firm-year observations.8

Cameran et al. 283



Proxies for Earnings Quality

Earnings quality has been traditionally measured in the literature by the investigation of

three dimensions: earnings management, timely loss recognition, and value relevance

(Dechow, Ge, & Schrand, 2010). Because our article considers non-listed companies, the

value relevance dimension is not applicable to our sample. For this reason, we only focus

on earnings management and timely loss recognition. The next sections explain in detail

the proxies used to estimate these aspects of earnings quality.

Earnings management. Our measure of earnings management considers discretionary or

abnormal accruals. This is believed to be the part of total accruals that is more likely to be

the result of managerial discretion to achieve particular goals. Prior literature that ana-

lyzes earnings management through abnormal accruals often uses Jones-type abnormal

accrual measures (Jones, 1991; Kothari, Leone, & Wasley, 2005). However, when the

number of observations per year/industry is limited such models might be unreliable

(Wysocki, 2004). As the latter is the case of our sample, we use the DeFond and Park

(2001) model to estimate abnormal working capital accruals (AWCA) as a proxy for

earnings management. This proxy was already used in prior research that investigates the

Italian context (e.g., Marra & Mazzola, 2014; Prencipe & Bar-Yosef, 2011). Moreover,

the choice of the DeFond and Park (2001) measure of earnings management also permits

to limit measurement errors. In fact, according to Kim, Chung, and Firth (2003), Jones

(1991) type models have been criticized as the parameter estimates are biased and mea-

surement errors associated therewith could potentially induce erroneous conclusions

about the existence of earnings management (e.g., Bernard & Skinner, 1996). DeFond

and Park (2001) methodology is independent from potential measurement errors associ-

ated with the Jones (1991) model parameters.

DeFond and Park (2001) estimate AWCA using the following formula:

AWCAt¼WCt �WCt�1

St�1

� �3St ;

where AWCA is the abnormal working capital accrual as defined by DeFond and Park

(2001); WC is non-cash working capital accruals, which is calculated as follows: (current

assets 2 cash and short-term investments) 2 (current liabilities 2 short-term debt); S is

year’s sales.

We use absolute values of AWCA to analyze earnings management per se. This

approach is employed when there is no a priori expectation about the direction of earnings

manipulation (Becker, DeFond, Jiambalvo, & Subramanyam, 1998; Warfield, Wild, &

Wild, 1995).9

We measure the relation between accounting standards and abnormal accruals using the

following regression (Equation 1):

AWCAit ¼ a1b1IFRSit1b2LEVit1b3CFOit1b4ROAit1b5GROWTHit1b6DISSUEit

1b7FAMILYit1b8SIZEit1b9BIG4it1b10QUOTit1biINDt1bjYEARi1eit ;

ð1Þ

where AWCAit = abnormal working capital accruals; IFRSit = 1 if the company adopts

IFRS and 0 otherwise; LEVit = total debt divided by beginning total assets; CFOit = cash




flow from operations divided by beginning total assets; ROAit = operating profit divided by

beginning total assets; GROWTHit = annual change in net sales; DISSUEit = annual change

in total liabilities; FAMILYit = 1 if members of a family own the absolute majority of the

capital in a direct or in an indirect way and 0 otherwise; SIZEit = natural logarithm of total

assets; BIG4it = 1 for Big 4 clients and 0 otherwise; QUOTit = 1 if the firm is controlled by

a listed company and 0 otherwise; INDt = industry dummy variables; YEARi = year dummy

variables.

We test our first hypothesis looking at the sign and the significance of b1. If H1 is veri-

fied, then b1 is expected to be not significantly different from zero.

In line with the previous literature, a set of control variables is also included in the

regression to control for other firm-level factors that can influence earnings management.

Earlier studies have found that financial leverage is positively related with earnings man-

agement (e.g., Frankel, Johnson, & Nelson, 2002): For this reason, variable LEV is intro-

duced in our model. Cash flow from operations and return on assets are included in the

model to control for extreme performance, which may affect the level of accruals (Kothari

et al., 2005; McNichols, 2000). Growth and profitability of the firm can affect the extent of

earnings management (Carey & Simnett, 2006), for this reason variables GROWTH and

ROA are introduced. Ball and Shivakumar (2008) indicate that there could be a significant

effect between net financing changes and unexpected accruals measurement. In the same

way, Shan, Taylor, and Walter (2011) show that failure to control for external financing

can result in significant measurement errors and erroneous inferences. DISSUE, designed to

capture the effect of debt issues, is included in the model. Previous studies (for a review,

see Moores & Salvato, 2010) have shown that family firms can be differently sensitive to

earnings management in comparison with non-family firms. As family-owned firms are the

strongest component of the Italian economy (EIU, 2005) a dummy variable, FAMILY, is

introduced to control for this effect. There are several definitions of family firms (e.g.,

Villalonga & Amit, 2006). They include different combinations of family ownership, man-

agement, and control. Accordingly with other studies (e.g., Bennedsen, Nielsen, &

Wolfenzon, 2005), our definition is based on control. In our analyses, we classify a firm as

a family firm if the members of a single family hold more than 50% of the shares either in

a direct or an indirect way. We use a 50% threshold for control as opposed to the lower

one used in empirical analysis of publicly held corporations because of the different owner-

ship structures of closely held and publicly held firms. In a publicly held firm, a share-

holder with a large minority stake (e.g., 10%-20%) can have effective control. However,

because the number of shareholders in a close corporation is smaller, it is likely that a 50%

stake is needed to achieve control (e.g., Bennedsen & Wolfenzon, 2000). SIZE, measured

as the natural logarithm of total assets, is included as abnormal accruals are found to be

negatively related to firms’ dimension, (Bedard, Chtourou, & Courteau, 2004; Warfield

et al., 1995). The choice of a firm’s auditor is also likely to affect earnings quality and Big

4 audit firms are usually associated to less earnings management (Francis, 2004). A

dummy variable controls for this effect (BIG4). Finally, consistently with our second

hypothesis, a dummy variable that identifies subsidiaries of listed parent companies is

introduced (QUOT).

Timely loss recognition. As stated by Ball and Shivakumar (2005), timely loss recognition

is a crucial attribute of earnings quality, enhancing information usefulness for example in

Cameran et al. 285



loan agreements. For this reason, this is the second dimension of earnings quality analyzed

in this study. Our measure of timely loss recognition is based on the Ball and Shivakumar

(2005) accrual-cash flow model that relates accruals (ACC) to cash from operations (CFO).

We consider this methodology as it was developed to overcome other models’ shortfall

(e.g., Basu, 1997)10 and was specifically implemented for a private firms’ sample.

Consequently, it is better tailored for our research needs. The model is specified by

Equation 2.

ACCit ¼ a1g1DCFOit1g2CFOit1g3DCFOit3CFOit1giINDt1gjYEARi1eit ; ð2Þ

where ACCit = earnings before extraordinary items minus CFO, scaled by beginning total

assets; DCFOit = 1 if CFO is negative and 0 otherwise; CFOit = cash flow from operations

divided by beginning total assets; INDt = industry dummy variables; YEARi = year dummy

variables.

It follows from the definition of accruals and cash flow from operations that they tend

to be inversely related. For example, collecting cash from selling inventory results in

higher CFO but lower ACC because the balance of inventory decreases when a sale is

made. This suggests that g2 should be negative. However, timely loss recognition may be

based on expected, not realized, cash flows and therefore attenuates this relationship. For

example, if the reporting entity is experiencing a decline in demand for its products, it

likely needs to recognize a loss for the possibility that inventory can only be liquidated

below cost. In such a case, ACC will decrease at the same time as the entity is experiencing

lower or negative cash from operations. That is, timely recognition of losses may create a

positive relationship between ACC and CFO. It follows that timely recognition of unrea-

lized losses should attenuate the negative relationship between accruals and cash from oper-

ations (Ball & Shivakumar, 2005). It is therefore expected that g3 is positive. We test

differences in timely loss recognition by estimating model (Equation 2) separately among

IFRS and local GAAP adopters investigating the difference between the coefficients g3. In

the hypothesis that accounting quality does not change for the former group of companies,

so we should not observe any significant difference between the coefficients across the two

scenarios. Indeed, a significant and positive (negative) difference would suggest that the

adoption of IFRS enhances (decreases) the process of timely recognition of unrealized

losses.

The above presented models (Equations 1 and 2) are calculated for the entire matched

sample and then separately for IFRS adopters that are subsidiaries of listed companies

(with their pairs) and other firms to gather evidence about our second hypothesis. In both

these models, standard errors are clustered at firm level.

Empirical Results

Descriptive Statistics and Univariate Analyses

Table 1 shows descriptive statistics for the variables used in our analyses.

Results indicate that companies included in our sample show an average level of

AWCA of 0.118 (median = 0.048). Firms run by families represent 47% of the sample

while around 33% are owned by listed companies; the use of debt is relevant given that it

is more than the half of total assets (61.70%). Finally, 37% of the sample is audited by a

Big 4 audit firm.




Correlation Analysis

We report correlation matrix in Table 2.

The level of AWCA is positively associated with IFRS, suggesting that the IFRS adop-

ters exhibit larger abnormal accruals that would lead to a decrease in reporting quality. As

expected, AWCA is also positively associated with ACC, and with variables LEV,

GROWTH, SIZE, BIG, and QUOT. Looking at other correlations, we notice that IFRS

shows a positive association with QUOT indicating that IFRS adopters are more likely to

be part of a group where the parent company is listed on a financial market.

We also observe significant correlations between variables that are used as control vari-

ables in our regression. For example, BIG4 and QUOT exhibit a significant positive corre-

lation coefficient (r = .570), so do CFO and ROA (r = .719). High correlation coefficients

between control variables might affect the regression results because of potential multicolli-

nearity problems. For this reason, we test the robustness of all our results using the

Variance Inflation Factor (VIF) test and it shows that multicollinearity is not biasing our

results.11

Regression Analysis

Voluntary IFRS adoption and earnings management. First of all, we test whether the volun-

tary adoption of IFRS affected the reporting quality of non-listed companies on the basis of

our discretionary accrual proxy (Table 3).

Results indicate that companies that switched to IFRS exhibit higher levels of AWCA

(b1 = .070; p = .001), with a corresponding decrease in reporting quality, in comparison

Table 1. Descriptive Statistics.

n M Median SD First quartile Third quartile

AWCA 948 0.118 0.048 0.169 0.015 0.143ACC 948 20.045 20.030 0.050 20.062 20.012IFRS 948 0.500 0.500 0.500 0.000 1.000LEV 948 0.617 0.667 0.231 0.455 0.802CFO 948 0.048 0.034 0.087 0.003 0.082ROA 948 0.019 0.005 0.095 20.005 0.043GROWTH 948 0.143 0.049 1.049 20.116 0.122DISSUE 948 0.153 0.023 0.634 20.120 0.247FAMILY 948 0.474 0.000 0.500 0.000 1.000SIZE 948 7.548 5.870 3.179 4.785 10.648BIG4 948 0.371 0.000 0.483 0.000 1.000QUOT 948 0.332 0.000 0.471 0.000 1.000

Note. AWCA is the absolute value of the abnormal working capital accrual (DeFond & Park, 2001) scaled by begin-

ning total assets; ACC is earnings before extraordinary items minus CFO, scaled by beginning total assets; IFRS is a

dummy variable that takes the value of 1 for IFRS adopters and 0 otherwise; LEV is total debt over total assets;

CFO is the cash flow from operation scaled by beginning total assets; ROA is operating profit divided by beginning

total assets; GROWTH is the annual change in net sales; DISSUE is the annual change in total liabilities; FAMILY is a

dummy variable that takes the value of 1 if members of a family own the absolute majority of the capital in a direct

or in an indirect way and 0 otherwise; SIZE is the natural logarithm of the total assets; BIG4 is a dummy variable

that equals 1 if the firm’s auditor is Deloitte and Touche, Ernst & Young, KPMG or PwC; QUOT is a dummy variable

that equals 1 if the firm is controlled by a listed company and 0 otherwise.

Cameran et al. 287



Tab

le2.

Pear

son

Corr

elat

ion

Mat

rix.

AWC

AAC

CIF

RS

LEV

CFO

RO

AG

RO

WTH

DIS

SUE

FAM

ILY

SIZ

EBIG

4Q

UO

T

AWC

A1

ACC

.154***

1IF

RS

.242***

.157***

1LE

V.1

01***

.059*

2.0

31

1CFO

2.0

17

2.4

78***

.041

2.1

95***

1RO

A.0

45

2.0

37

2.0

06

2.1

09***

.719***

1G

RO

WTH

.177***

2.0

58*

2.0

67**

.083**

.121***

.155***

1D

ISSU

E2

.021

2.1

08***

2.1

02***

.186***

.094***

.078**

.390***

1FA

MIL

Y.0

29

2.0

31

2.1

08***

.049

.074**

.101***

.010

.023

1SI

ZE

.118***

.130***

.428***

.033

.019

.035

2.0

37

2.0

28

2.0

61*

1BIG

4.1

71***

.114***

.664***

2.0

42

.056*

.027

2.0

34

2.0

63*

2.0

69**

.472***

1Q

UO

T.2

66***

.096***

.683***

2.0

33

.052

.015

2.0

51

2.0

72**

2.0

77**

.288***

.570***

1

Not

e.AW

CA

isth

eab

solu

teva

lue

of

the

abnorm

alw

ork

ing

capital

accr

ual

(DeF

ond

&Par

k,2001)

scal

edby

beg

inni

ng

tota

las

sets

;AC

Cis

earn

ings

bef

ore

extr

aord

inar

yitem

s

min

us

CFO

,sc

aled

by

beg

inni

ng

tota

las

sets

;IF

RS

isa

dum

my

vari

able

that

take

sth

eva

lue

of

1fo

rIF

RS

adopte

rsan

d0

oth

erw

ise;

LEV

isto

taldeb

tove

rto

talas

sets

;CFO

isth

e

cash

flow

from

oper

atio

nsc

aled

by

beg

inni

ng

tota

las

sets

;RO

Ais

oper

atin

gpro

fitdiv

ided

by

beg

innin

gto

tal

asse

ts;

GRO

WTH

isth

ean

nual

chan

gein

net

sale

s;D

ISSU

Eis

the

annual

chan

gein

tota

llia

bili

ties

;FA

MIL

Yis

adum

my

vari

able

that

take

sth

eva

lue

of

1if

mem

ber

sof

afa

mily

ow

nth

eab

solu

tem

ajori

tyof

the

capital

ina

dir

ect

or

inan

indir

ect

way

and

0oth

erw

ise;

SIZ

Eis

the

nat

ura

llo

gari

thm

of

the

tota

las

sets

;BIG

4is

adum

my

vari

able

that

equal

s1

ifth

efir

m’s

auditor

isD

eloitte

and

Touch

e,Ern

st&

Young

,K

PM

G

or

Pw

C;Q

UO

Tis

adum

my

vari

able

that

equal

s1

ifth

efir

mis

contr

olle

dby

alis

ted

com

pan

yan

d0

oth

erw

ise.

*,**,***

indic

ate

that

aco

effic

ient

isst

atis

tica

llysi

gnifi

cant

atth

e10%

,5%

,an

d1%

leve

lor

bet

ter,

two-t

aile

d.

288



with a control group of pairs that still use local GAAP during the same time-period

investigated.

Most of our control variables show a relation with the level of AWCA generally consis-

tent with the literature. In particular, the level of AWCA is positively associated with lever-

age, return on assets, firm growth and family firms while it is negatively associated with

cash flow from operations and issuance of debt, given the higher level of scrutiny the com-

pany is usually subject to when asking for additional funding (Rodrıguez-Perez & Van

Table 3. Voluntary IFRS Adoption and Abnormal Accruals.

DEPENDENT VARIABLE AWCA

INTERCEPTit 20.005(0.951)

IFRSit 0.070***(0.001)

LEVit 0.091***(0.001)

CFOit 20.187*(0.062)

ROAit 0.159*(0.078)

GROWTHit 0.040***(0.000)

DISSUEit 20.020**(0.038)

FAMILYit 0.024*(0.075)

SIZEit 0.001(0.671)

BIG4it 20.023(0.236)

QUOTit 0.071***(0.000)

Observations 948R2 0.162Industry and year dummies Yes

Note. Regression model:

AWCAit ¼a1b1IFRSit1b2LEVit1b3CFOit1b4ROAit1b5GROWTHit1b6DISSUEit1b7FAMILYit1b8SIZEit1b9BIG4it

1b10QUOTit1bi INDt1bjYEARi1eit;

where AWCA is the absolute value of the abnormal working capital accrual (DeFond & Park, 2001) scaled by begin-

ning total assets; IFRS is a dummy variable that takes the value of 1 for IFRS adopters and 0 otherwise; LEV is total

debt over total assets; CFO is the cash flow from operation scaled by beginning total assets; ROA is operating profit

divided by beginning total assets; GROWTH is the annual change in net sales; DISSUE is the annual change in total

liabilities; FAMILY is a dummy variable that takes the value of 1 if members of a family own the absolute majority of

the capital in a direct or in an indirect way and 0 otherwise; SIZE is the natural logarithm of the total assets; BIG4

is a dummy variable that equals 1 if the firm’s auditor is Deloitte and Touche, Ernst & Young, KPMG or PwC;

QUOT is a dummy variable that equals 1 if the firm is controlled by a listed company and 0 otherwise; IND is an

industry dummy variable; YEAR is a year dummy variable. Variables of interest are highlighted in bold. IFRS =

International Financial Reporting Standards.

*, **, *** indicate that a coefficient is statistically significant at the 10%, 5%, and 1% level or better, two-tailed.

Cameran et al. 289



Hemmen, 2010). Interestingly, results also highlight a positive and very significant coeffi-

cient between AWCA and QUOT (b1 = .071; p = .000), suggesting that subsidiaries of

listed companies are, on average, characterized by lower reporting quality.

Voluntary IFRS adoption and timely loss recognition. We report the analysis of the impact

of IFRS adoption on timely loss recognition in Table 4.

It is here matter of interest the significance of the difference between the coefficients g3

from model (2) estimated both among IFRS and non-IFRS adopters. The difference is nega-

tive and highly significant (g3IFRS ADOPTERS 2 g3NON-IFRS ADOPTERS = 20.590;

p = .000), evidence that losses are less timely recognized by IFRS adopters. It suggests a

decrease in timely loss recognition as a consequence of IFRS adoption with a correspon-

dent negative impact on earnings quality, consistently with our earnings management

indicator.12

Voluntary IFRS adoption and earnings quality between subsidiaries of listed companiesand other companies. Findings, so far, did not highlight any improvement in earnings qual-

ity among private companies that voluntarily adopt IFRS in comparison with the matched

group of firms that use local GAAP. On the contrary, results are consistent with lower levels

of reporting quality among the former, according to both the dimensions investigated.

In this section, we test our second hypothesis analyzing whether the effect of IFRS

adoption is different for firms controlled by a listed entity and other companies. Almost

63.7% (172 firms out of 270) of voluntary IFRS adopters in our sample are controlled by

companies listed on a financial market that must use IFRS for their consolidated accounts

on a mandatory basis.

Table 4. Voluntary IFRS Adoption and Timely Loss Recognition.

DEPENDENT VARIABLE(A): ACC

(IFRS adopters)(B): ACC

(Non-IFRS adopters)(A – B):

(Differences)

INTERCEPTit 20.010 20.046 0.036(0.672) (0.190) (0.433)

DCFOit 0.008 0.007 0.001(0.231) (0.234) (0.962)

CFOit 20.216*** 20.493*** 0.277***(0.000) (0.000) (0.000)

DCFOit 3 CFOit 0.313*** 0.903*** 20.590***(0.000) (0.000) (0.000)

Observations 474 474R2 0.349 0.632Industry and year dummies Yes Yes


ACCit ¼ a1g1DCFOit1g2CFOit1g3DCFOit3CFOit1gi INDt1gjYEARi1eit;

where ACC is earnings before extraordinary items minus CFO, scaled by beginning total assets; DCFO is a dummy

variable taking the value 1 if CFO is negative and 0 otherwise; CFO is the cash flow from operation scaled by begin-

ning total assets; IND is an industry dummy variable; YEAR is a year dummy variable. Variables of interest are high-

lighted in bold. IFRS = International Financial Reporting Standards.

***indicate that a coefficient is statistically significant at the 1% level or better, two-tailed.




The estimation of model in Equation 1 separately for IFRS adopters controlled by a

listed company and IFRS adopters that are not controlled by a listed company, together

with their corresponding pairs that do not use IFRS, is reported, respectively, in Columns

(A) and (B) of Table 5.13

Results are different between these two groups of firms. The coefficient associated to

the variable IFRS is positive and significant at the 1% level (b1 = .199; p = .000) in

Column (A). This suggests that IFRS adopters controlled by listed companies exhibit

Table 5. Voluntary IFRS Adoption and Abnormal Accruals: Firms Controlled/Not Controlled byListed Companies.

DEPENDENT VARIABLE

(A): AWCA (IFRS adopterscontrolled by listed companies

and their pairs)

(B): AWCA (IFRS adoptersnot controlled by listed

companies and their pairs)(A – B):

Difference

INTERCEPTit 0.095 20.041 0.136(0.437) (0.704) (0.225)

IFRSit 0.199*** 0.023 0.176***(0.000) (0.444) (0.000)

LEVit 0.065* 0.136** 20.071(0.078) (0.013) (0.706)

CFOit 20.320** 0.064 20.384*(0.013) (0.714) (0.073)

ROAit 0.219** 0.090 0.129(0.046) (0.615) (0.509)

GROWTHit 0.047*** 0.045*** 0.002(0.000) (0.000) (0.900)

DISSUEit 20.019 20.036** 0.017(0.144) (0.025) (0.847)

FAMILYit 0.019 0.006 0.013(0.292) (0.805) (0.912)

SIZEit 0.001 20.002 0.003(0.716) (0.737) (0.143)

BIG4it 20.077*** 0.014 20.091**(0.006) (0.647) (0.049)



AWCAit ¼a1b1IFRSit1b2LEVit1b3CFOit1b4ROAit1b5GROWTHit1b6DISSUEit1b7FAMILYit1b8SIZEit1b9BIG4it

1b10QUOTit1bi INDt1bjYEARi1eit;


ning total assets; IFRS is a dummy variable that takes the value of 1 for IFRS adopters and 0 otherwise; LEV is total

debt over total assets; CFO is the cash flow from operation scaled by beginning total assets; ROA is operating profit

divided by beginning total assets; GROWTH is the annual change in net sales; DISSUE is the annual change in total

liabilities; FAMILY is a dummy variable that takes the value of 1 if members of a family own the absolute majority of

the capital in a direct or in an indirect way and 0 otherwise; SIZE is the natural logarithm of the total assets; BIG4

is a dummy variable that equals 1 if the firm’s auditor is Deloitte and Touche, Ernst & Young, KPMG or PwC; IND

is an industry dummy variable; YEAR is a year dummy variable. Variables of interest are highlighted in bold. IFRS =

International Financial Reporting Standards.


Cameran et al. 291



higher levels of abnormal accruals in comparison with a control sample of companies that

still prepare annual reports in accordance with the Italian GAAP.

The same coefficient is not significant (b1 = .023; p = .444) in Column (B) of Table 5

indicating that the use of abnormal accruals among IFRS adopters is not more pervasive

than firms which use Italian GAAP if the former are not part of a group where the parent

company is listed.

The difference between the two coefficients reported above is also statistically signifi-

cant at the 1% level (p = .000), suggesting that IFRS adoption has a significantly worse

impact on abnormal accruals among subsidiaries of listed companies.

The results reported in Table 6 refer to the timely loss recognition aspect of earnings

quality.

Panel A of Table 6 highlights results for IFRS adopters controlled by listed companies

and their non-IFRS pairs. The difference between the coefficients g3 between the two

groups is negative and highly significant (g3IFRS ADOPTERS 2 g3NON-IFRS ADOPTERS =

20.514; p = .000), indicating that losses are less timely recognized among IFRS adopters.

The same results are found in Panel B of Table 6 that investigates IFRS adopters that are

not controlled by listed entities and their non-IFRS pairs (g3IFRS ADOPTERS 2 g3NON-IFRS

ADOPTERS = 21.052; p = .000). The difference of the differences between the coefficients

of these two sub-samples is not significant (p = .893). Differently from the evidence

coming from the analysis of discretionary accruals, it suggests that earnings quality, mea-

sured as timely loss recognition, becomes worse for all IFRS adopters and the impact is

similar regardless if they are part of a group where the parent company is listed or not.

Robustness Tests

To test the robustness of our results, we run a set of additional analyses.

First of all, we investigate earnings quality using an additional dimension: income

smoothing. It has been found that managers tend to smooth earnings for several reasons,

for example, as a signal, because current earnings can be used as a predictor of future

income (e.g., Chaney & Lewis, 1995). Moreover, income smoothing could be pursued to

reduce earnings volatility, usually perceived as an increasing risk factor for investors/credi-

tors impacting on the cost of capital/debt (e.g., Barth, Landsman, & Wahlen, 1995).

Finally, income smoothing could be a mean to divert political attention from too high or

too low income (e.g., Watts & Zimmerman, 1986). We estimate income smoothing as the

variability of annual changes in net income. However, changes in net income can be attrib-

uted to other factors such as the economic environment and characteristics of the firms. For

this reason, the earnings variability metric used in this article is the variance of the resi-

duals from the regression of change in net income on several control variables identified in

prior research (e.g., Lang, Raedy, & Wilson, 2006; Tarca, 2004). In accordance with these

studies, the model is run on a set of control factors, which are expressed in Equation 3,

where standard errors are clustered at the firm level:

DNiit ¼a1b1SIZEit1b2GROWTHit1b3LEVit1b4EISSUEit1b5DISSUEit1b6TURNit1

b7CFOit1b8BIG4it1biINDt1bjYEARi1eit ; ð3Þ

where DNiit = change in net income; SIZEit = natural logarithm of total assets;

GROWTHit = annual change in net sales; LEVit = total debt divided by beginning total




assets; EISSUEit = annual change in shareholder’s equity; DISSUEit = annual change in

total liabilities; TURNit = total sales divided by beginning total assets; CFOit = cash flow

from operations divided by beginning total assets; BIG4it = 1 for Big 4 clients and 0 other-

wise; INDt = industry dummy variables; YEARi = year dummy variables.

We calculate regression (Equation 3) separately for the observations under Italian

GAAP and under IFRS. The residuals of the model specified above, denoted as DNi* and,

Table 6. Voluntary IFRS Adoption and Timely Loss Recognition: Firms Controlled/Not Controlledby Listed Companies.

Panel A: IFRS Adopters Controlled by Listed Companies and Their Pairs.




(Differences)

INTERCEPTit 20.020 0.041 20.061(0.518) (0.221) (0.277)

DCFOit 0.020*** 0.005 0.015(0.009) (0.476) (0.315)

CFOit 20.178*** 20.498*** 0.320***(0.000) (0.000) (0.000)

DCFOit 3 CFOit 0.325*** 0.839*** 20.514***(0.000) (0.000) (0.000)


Panel B: IFRS Adopters Not Controlled by Listed Companies and Their Pairs.




(Differences)

INTERCEPTit 20.009 20.059 0.050(0.667) (0.155) (0.845)

DCFOit 20.017 0.009 20.026(0.193) (0.504) (0.185)

CFOit 20.232*** 20.428*** 20.196***(0.000) (0.006) (0.001)

DCFOit 3 CFOit 20.128 0.924*** 21.052***(0.617) (0.000) (0.000)

Observations 164 164R2 0.385 0.596Industry and year dummies Yes YesDifferences-in-differences 0.538

(0.893)


ACCit ¼ a1g1DCFOit1g2CFOit1g3DCFOit3CFOit1bi INDt1bjYEARi1eit;


variable taking the value 1 if CFO is negative and 0 otherwise; CFO is the cash flow from operation scaled by

beginning total assets; IND is an industry dummy variable; YEAR is a year dummy variable. Variables of interest are

highlighted in bold. IFRS = International Financial Reporting Standards.


Cameran et al. 293



more exactly, their standard deviation sDNi*, is the metric used for assessing earnings

smoothing. Lower values of sDNi* are evidence of increasing earnings smoothing, and

vice versa. We compare the standard deviations using Levene’s Test.14 Results are reported

in Table 7.

Findings corroborate our evidence that suggests that the adoption of international

accounting standards does not lead to an increase in reporting quality. Panel A of Table 7

reports the evidence for the entire sample. It highlights that the standard deviation of resi-

duals from Equation 3 measures 0.130 among firms that voluntarily adopt IFRS while it is

2.752 among our control sample of companies that still use local GAAP. A Levene’s test

indicates that the difference between the two standard deviations is strongly significant

(p = .000), suggesting that IFRS increased the level of income smoothing of private compa-

nies that can be interpreted as a decrease in earnings quality, in accordance with findings

derived from our discretionary accrual analysis. Panel B of Table 7 includes the results for

IFRS adopters controlled by a listed company and their pairs. The standard deviation of

residuals from Equation 2 is 2.875 for non-IFRS adopters while it is 0.148 for IFRS adop-

ters, suggesting higher income smoothing and, consequently, lower earnings quality, among

the latter group of companies as Levene’s test indicates that these two figures are signifi-

cantly different at the 1% level. The same evidence is found in Panel C that investigates

income smoothing among IFRS adopters, which are not controlled by listed companies and

Table 7. Voluntary IFRS Adoption and Income Smoothing.

Panel A: All Sample.

Sample sDNi* Levene’s test (p)

Non-IFRS adopters 2.752 (0.000***)IFRS adopters 0.130

Panel B: IFRS Adopters Controlled by Listed Companies and Their Pairs.



Panel C: IFRS Adopters Not Controlled by listed Companies and Their Pairs.



Income smoothing is calculated as the standard deviation of residuals from Equation 3:

DNit ¼ a1b1SIZEit1b2GROWTHit1b3LEVit1b4EISSUEit1b5DISSUEit1b6TURNit1b7CFOit1b8BIG4it1bi INDt1

bjYEARi1eit;

where DNi is the change in net income; SIZE is the natural logarithm of the total assets; GROWTH is the annual

change in net sales; LEV is total debt over total assets; EISSUE is the annual change in shareholder’s equity; DISSUE

is the annual change in total liabilities; TURN is total sales divided by beginning total assets; CFO is the cash flow

from operation scaled by beginning total assets; BIG4 is a dummy variable that equals 1 if the firm’s auditor is

Deloitte and Touche, Ernst & Young, KPMG or PwC; IND is an industry dummy variable; YEAR is a year dummy

variable. Differences in standard deviations are calculated using Levene’s test. IFRS = International Financial

Reporting Standards.





their pairs. The standard deviation of residuals from Equation 2 is 3.054 for non-IFRS

adopters while it measures 0.073 for IFRS adopters. A test on the difference between these

two values is strongly statistically significant (p = .000) and indicates that income smooth-

ing is higher also among the IFRS adopters that are not part of a group where the company

at the apex is listed. In accordance with the evidence coming from the analysis of timely

loss recognition, findings in Table 7 suggest that earnings quality, measured as the level of

income smoothing, becomes worse for IFRS adopters regardless of whether they are part of

a group where the parent company is listed on a financial market or not.

We then re-estimate our model in Equation 1 separating income-increasing and income-

decreasing abnormal accruals. Evidence (untabled) indicates that, in relation to the entire

sample, IFRS adopters use abnormal accruals more extensively than their non-IFRS pairs.

With reference to income-increasing accruals, the more extensive use of abnormal

accruals by IFRS adopters is documented when we consider both firms that are controlled

by a listed company (b1 = .121; p = .012) and when the investigation involves those which

are not part of a group where the parent company is listed (b1 = .146; p = .016). We do not

find differences between these two sub-samples as the difference between the above high-

lighted coefficients is not significant (p = .398).

Findings from income-decreasing abnormal accruals highlight that their use is more per-

vasive among IFRS adopters that are controlled by listed entities (b1 = 2.243; p = .000),15

while a non-significant relationship between abnormal accruals and accounting standards is

observed among the group of IFRS adopters that are not controlled by listed companies

(b1 = .027; p = .500). In addition, the difference between the coefficients reported above is

significant at the 1% level (p = .000).

So, taking together the results of income smoothing and positive/negative accruals anal-

yses, we can see once more that IFRS adoption does not imply any improvement from the

earnings quality point of view. Again, the impact of the new set of standards on financial

reporting quality seems to be slightly worse for firms controlled by listed companies.

Finally, as the economic environment went into a severe recession in 2007, we control

for this event by including in all our models a dummy variable that equals 1 for the year

affected by the crisis (2008-2009) and 0 for all other year (untabled). All evidence reported

thus far still holds.16

As already mentioned, earnings quality might be driven by underlining incentives

(Brown, 2011; Leuz, 2010; Pope & McLeay, 2011). Given that the decision to switch to

IFRS standards is made on a voluntary basis for private companies, one could argue that

endogeneity issues might bias our results. The matched sample methodology that we use in

our main analyses should already limit this threat, as our local GAAP pairs are chosen on

the basis of similar size, leverage, profitability, and industry. However, to be on the safe

side, we employ an alternative methodology to control for potential endogeneity. In partic-

ular, we investigate the use of abnormal accruals and timely loss recognition using the

larger group of 355 IFRS adopters and observations pre- and post-IFRS adoption.17 The

comparison between local GAAP and IFRS is therefore made within the same companies.

More precisely, we collect financial data under Italian GAAP for the period pre-IFRS adop-

tion to have the same number of observations before and after IFRS introduction, sym-

metric around the transition. This process yields a sample of 702 firms-year observations

under IFRS and 702 firm-year observations under Italian GAAP. Results are reported in

Tables 8 and 9, respectively.

Table 8 investigates the abnormal accrual dimension through the estimation of model in

Equation 1. Column (A) includes results for the entire sample and evidence indicates that

Cameran et al. 295



the shift to IFRS seems to have increased the level of AWCA (b1 = .041; p = .000) with a

corresponding decrease in reporting quality. Columns (B) and (C) present results related to

IFRS adopters controlled by a listed company and IFRS adopters that are not part of a

group where the apex is a listed company, respectively. The coefficient associated with the

Table 8. Voluntary IFRS Adoption and Abnormal Accruals (Pre- and Post-IFRS Implementation).

DEPENDENT VARIABLE(A): AWCA(All sample)

(B): AWCA (Firmscontrolled by

listed companies)

(C): AWCA(Firms not

controlled bylisted companies)

(B – C):Differences

INTERCEPTit 0.072*** 0.134*** 0.067** 0.067**(0.010) (0.000) (0.045) (0.043)

IFRSit 0.041*** 0.050*** 0.025** 0.025(0.000) (0.000) (0.035) (0.160)

LEVit 0.075** 0.069* 0.077* 20.008(0.015) (0.066) (0.097) (0.893)

CFOit 20.066 20.131 0.120 20.251*(0.511) (0.236) (0.229) (0.091)

ROAit 0.004 0.011*** 20.002 0.013***(0.416) (0.000) (0.435) (0.000)

GROWTHit 0.056*** 0.068*** 0.035** 0.033*(0.000) (0.000) (0.035) (0.086)

DISSUEit 0.002 20.001 0.015 20.016(0.878) (0.927) (0.481) (0.499)

FAMILYit 0.030** 0.032** 0.021 0.011(0.015) (0.040) (0.222) (0.645)

SIZEit 20.005*** 20.004** 20.005* 0.001(0.003) (0.040) (0.077) (0.731)

BIG4it 20.014 20.030* 0.004 20.034(0.278) (0.084) (0.803) (0.160)

QUOTit 0.056***(0.000)

Observations 1,404 948 456R2 0.155 0.169 0.113Industry and year dummies Yes Yes Yes


AWCAit ¼a1b1IFRSit1b2LEVit1b3CFOit1b4ROAit1b5GROWTHit1b6DISSUEit1b7FAMILYit1b8SIZEit1b9BIG4it1

b10QUOTit1bi INDt1bjYEARi1eit;


ning total assets; IFRS is a dummy variable that takes the value of 1 for the period after IFRS adoption and 0 other-

wise; LEV is total debt over total assets; CFO is the cash flow from operation scaled by beginning total assets; ROA

is operating profit divided by beginning total assets; GROWTH is the annual change in net sales; DISSUE is the

annual change in total liabilities; FAMILY is a dummy variable that takes the value of 1 if members of a family own

the absolute majority of the capital in a direct or in an indirect way and 0 otherwise; SIZE is the natural logarithm

of the total assets; BIG4 is a dummy variable that equals 1 if the firm’s auditor is Deloitte and Touche, Ernst &

Young, KPMG or PwC; QUOT is a dummy variable that equals 1 if the firm is controlled by a listed company and 0

otherwise; IND is an industry dummy variable; YEAR is a year dummy variable. Variables of interest are highlighted

in bold. IFRS = International Financial Reporting Standards.





Table 9. Voluntary IFRS Adoption and Timely Loss Recognition (Pre- and Post-IFRSImplementation).

Panel A: All Firms.

DEPENDENT VARIABLEACC (After

IFRS adoption)ACC (Before

IFRS adoption) (Differences)

INTERCEPTit 20.018*** 20.011** 20.007(0.000) (0.031) (0.185)

DCFOit 20.003 20.011 0.008(0.622) (0.214) (0.401)

CFOit 20.272*** 20.450*** 0.178***(0.000) (0.000) (0.005)

DCFOit 3 CFOit 0.366*** 0.706*** 20.340***(0.000) (0.000) (0.001)


Panel B: Firms Controlled by Listed Companies and Their Pairs.




INTERCEPTit 20.020*** 20.002 20.018***(0.000) (0.733) (0.003)

DCFOit 0.005 20.012 0.017(0.468) (0.231) (0.116)

CFOit 20.254*** 20.532*** 0.278***(0.000) (0.000) (0.000)

DCFOit 3 CFOit 0.339*** 0.799*** 20.460***(0.000) (0.000) (0.000)


Panel C: Firms Not Controlled by Listed Companies and Their Pairs.




INTERCEPTit 20.014** 20.027*** 0.013**(0.017) (0.000) (0.025)

DCFOit 20.009 20.027 0.018(0.371) (0.144) (0.342)

CFOit 20.311*** 20.281*** 20.030(0.003) (0.006) (0.730)

DCFOit 3 CFOit 0.661** 0.408** 0.253(0.023) (0.013) (0.421)

Observations 228 228R2 0.231 0.183Industry and year dummies Yes YesDifferences-in-differences 20.713**

(0.031)


ACCit ¼ a1g1DCFOit1g2CFOit1g3DCFOit3CFOit1gi INDt1gjYEARi1eit;


variable taking the value 1 if CFO is negative and 0 otherwise; CFO is the cash flow from operation scaled by

beginning total assets; IND is an industry dummy variable; YEAR is a year dummy variable. Variables of interest are

highlighted in bold. IFRS = International Financial Reporting Standards; ACC = accruals.

**, *** indicate that a coefficient is statistically significant at the 5% and 1% level or better, two-tailed.

Cameran et al. 297



variable IFRS is positive and significant for both groups of companies suggesting that the

use of international accounting standards increases the level of abnormal accruals regard-

less the characteristics of the controlling shareholder. The coefficient b1 is however higher

and more significant among entities controlled by listed companies (b1 = .050; p = .000)

compared with other firms (b1 = .025; p = .035). The difference between the two coeffi-

cients is statistically (weakly) significant only if considered one-tailed (p = .160), suggest-

ing that IFRS have a slightly more negative impact on earnings quality among subsidiaries

of listed companies.

Table 9 focuses on the timely loss recognition dimension. Panel A shows that, on aver-

age, losses are less timely recognized after IFRS adoption (g3AFTER_IFRS 2 g3BEFORE_IFRS

= 20.340; p = .001). Panel B of Table 9 highlights results for subsidiaries of listed compa-

nies. The difference between the coefficients g3 after and before the adoption of IFRS is

negative and highly significant (g3AFTER_IFRS 2 g3BEFORE_IFRS = 20.460; p = .000), sug-

gesting again that losses are less timely recognized after IFRS adoption. On the contrary,

Panel C reports no difference in reporting quality under the timely loss recognition dimen-

sion among firms that are not controlled by listed company after switching the type of

accounting standards adopted (g3AFTER_IFRS 2 g3BEFORE_IFRS = 0.253; p = .421). In this

case, the difference of the differences in these coefficients between the two sub-samples is

significant (p = .031). It indicates that the effect of the adoption of IFRS on timely loss rec-

ognition is different between the two groups of companies.

We repeated the same analyses reported in Tables 8 and 9 on the smaller group of 270

IFRS adopters used in the main tests (i.e., the IFRS adopters sample used in match pair

analysis) and the evidence (untabled) is unchanged.

Overall, findings consistently indicate that IFRS adoption does not improve earnings

quality among Italian private companies, on the contrary, on average, an increase in the

abnormal accruals and a deterioration of timely loss recognition is observed. The effect of

IFRS on earnings quality seems to be worse when IFRS adopters are part of a group where

the company at the apex is listed on a financial market, for whom we assume that IFRS

adoption is driven by meeting headquarters’ requirements and/or by simplifying the finan-

cial reporting process.

Conclusion

The aim of this study is to analyze the impact of adopting IFRS on financial reporting qual-

ity of private companies. EU regulation 1606/2002 required companies listed on any

European exchange to adopt IFRS from the 1st of January 2005 and gave each Member

State the right to decide whether to oblige/allow other kind of companies, for example,

non-listed ones, to use the same set of standards. Given the importance of understanding

the effects of this regulation on accounting quality, there have been many studies exploring

changes in earnings quality for publicly listed companies. However, the findings of these

studies are mixed and do not reach any definitive conclusions regarding the impact of IFRS

adoption on financial reporting quality. It is therefore of considerable interest to explore

the effects on private firms. Private companies constitute about 75% of European GDP

(Ecoda, 2010) and the effects of adopting International Accounting Standards on non-listed

companies has not been addressed in earlier studies.

We compare earnings reporting quality between a group of private companies that

switched to IFRS in the period 2005-2008 and a matched set of companies that, in the

same period, used local GAAP. Overall, our results show that IFRS did not contribute to




the improvement of financial reporting quality among private companies in Italy. On the

contrary, we find evidence suggesting that the adoption of this set of standards seems to

have increased earnings management (measured by absolute AWCA) and to have led to a

deterioration of timely loss recognition. These findings suggest that the adoption of a set of

accounting standards reputed to be of better quality than national ones (Barth et al., 2008;

Leuz, 2010) does not imply, per se, better financial reporting quality.

To further investigate the last point, we repeat our analyses distinguishing private com-

panies that are controlled by listed companies from the rest of the sample. As previous lit-

erature has pointed out that companies can exploit the level of flexibility embedded in

IFRS to pursue their own reporting interests (Daske et al., 2008; Kvaal & Nobes, 2012;

Leuz, 2010), separate analyses were conducted taking into consideration firms’ incentives.

Overall, we find that earnings quality shows signs of deterioration in both groups of firms.

However, the analysis of the differences indicates a slightly worse impact among subsidiar-

ies of listed companies, especially in relation to the use of abnormal accruals. Robustness

tests using only the set of IFRS adopters, thus controlling for endogeneity problems, con-

firm our main results.

We believe that our results have several policy implications. First, we document that

IFRS adoption by private companies resulted in increased earnings management, which is

worse among listed companies’ subsidiaries. IFRS were aimed at improving comparability

and relevance of financial reporting.18 These characteristics, while being of critical impor-

tance for outside investors in making economic decisions, might be less critical for private

companies, more bounded to local territory activities and not oriented to market’s sources of

financing. Under this perspective, EU State Members’ decisions to enforce IFRS among pri-

vate companies should be carefully considered, especially if firms might perceive that transi-

tion costs outweigh the benefits (American Institute of Certified Public Accountants, 2008).

The negative effects of IFRS on financial reporting quality seem to be particularly

marked in the case of companies controlled by listed entities that are also most prone to

adopt IFRS as a result of an indirect effect of the current EU regulation (Committee of

European Securities Regulators, 2003). For this reason, our results should be of interest not

only for the EU State Members’ regulators to allow the use of IFRS to their national pri-

vate companies but also for the EU Commission in evaluating the current EU regulation on

financial reporting for private companies. IASB published SME-IFRS (i.e., standards for

small- and medium-sized entities) with the objective to better serve private small entities

reporting needs, whereas the EU Commission issued the Directive 2012/6 of 14 March

2012 that exempts micro-firms from the preparation of the financial statement.19 Future

research will have to provide empirical evidence to understand whether the introduction of

such tailored standards will lead to improved reporting quality among this economically

critical segment of the market.

We acknowledge that this study may suffer from a number of limitations. First of all,

we assume that the decision of private entities controlled by listed companies to switch to

IFRS might be influenced by one common reason: meeting headquarters’ requirements

and/or simplifying the financial reporting process. Unfortunately, it is not possible for

external researchers to identify the actual motivations behind the choice of adopting IFRS

using publicly available data. We therefore acknowledge that, for some of those companies,

other incentives might have led to IFRS adoption. Even so, our empirical evidence docu-

ments a slightly different impact of the switch to IFRS between subsidiaries of listed com-

panies and the rest of the sample.

Cameran et al. 299



In this study, we limit our tests to a single country (Italy). We acknowledge that this

might affect the generalizability of our results. However, this choice permits to avoid our

findings being influenced by country-specific factors that may severely affect empirical

results on the topic (Leuz, 2010; Soderstrom & Sun, 2007). It would still be interesting to

understand whether the lack of reporting quality improvements for private companies after

IFRS adoption can be detected in other countries as well, especially for those cases in

which IFRS adoption has been mandatorily enforced among non-listed companies.

Acknowledgments

We thank the editor, Bharat Sarath, and the anonymous reviewer for the guidance and constructive

comments. The research assistance of Chiara Bonfanti is gratefully acknowledged. Finally, we thank

the participants of the Fourth Financial Reporting Workshop (Luiss, Rome) and of the Sixth

International Workshop on Accounting & Regulation (Siena) for their comments and suggestions.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/

or publication of this article.

Funding

The author(s) disclosed receipt of the following financial support for the research, authorship, and/or

publication of this article: This study was supported by the Claudio Dematte Research Division of the

SDA Bocconi School of Management (Research Projects 2010).

Notes

1. The article uses the word ‘‘IFRS’’ to indicate International Financial Reporting Standards, which

includes also the previous definition of the same principle, namely, International Accounting

Standards (IAS).

2. The only partial exception is Germany where, however, private companies are allowed to use

IFRS in their separate financial statements, but only in addition to the local (German) generally

accepted accounting principles (GAAP). So this could not be considered as a properly full IFRS

transition.

3. Notice also that, especially after Basel accords (the most relevant for this study being the 2004

one), the stability of banking and financial system has been found to critically depend on client

company financial reporting transparency (Bushman & Landsman, 2010), making earnings attri-

butes of crucial importance.

4. The database used for sampling is AIDA, the Italian version of Amadeus provided by Bureau

Van Dijk that contains comprehensive information for private companies in Italy.

5. In our analysis, we do not consider the year of the transition because previous research finds par-

ticular pervasive earnings management practices in that particular year (Capkun, Cavezan-Jeny,

Jeanjean, & Weiss, 2011). Data will then refer to the years 2006-2009.

6. The use of a logistic model is the most prevailing approach for estimating propensity-scores

(Lawrence, Minutti-Meza, & Zhang, 2011).

7. The number of companies included in the group of non-IFRS adopters is the results of a prelimi-

nary selection from AIDA where companies met the following criteria: (a) availability of data

from 2005 to 2009; (b) annual report prepared under Italian GAAP; (c) firms not involved in a

liquidation process; (d) limited liability companies; (e) total asset, leverage, and profitability




30% lower than the minimum and 30% higher than the maximum of the same variables for the

group of IFRS adopters.

8. It includes 85 adopters in 2005 (the only firms that could potentially cover all the time-period

investigated: 2006-2009), 125 adopters in 2006, 34 adopters in 2007, and 26 adopters in 2008.

All missing values have been deleted together with the correspondents of the pairs. There are

cases where the full-time series (which normally should go from the year after IFRS adoption

until 2009) was not available. In the case a firm-year observation was missing, also the corre-

spondent observation referred to its pair was excluded. This further decreased the number of

observations.

9. To remove potential biases due to the presence of outliers, abnormal accruals are winsorized

with a ‘‘top 98% winsorization.’’

10. Basu (1997) model cannot disentangle the role of random errors in accruals and of other types of

earnings management (like reverting excess provisions) and can only identify the existence of

transitory components, and not whether their recognition is timely or untimely (Ball &

Shivakumar, 2005).

11. In all our analyses, we test for potential multicollinearity issues using the Variance Inflation

Factor (VIF) test. All the tests show a maximum VIF factor lower than 5.6, well below the

threshold of 10 suggested by Kennedy (2008).

12. We note that the R2 is different across the two sub-samples, suggesting that the Ball and

Shivakumar (2005) model for timely loss recognition better fits the sub-sample of non-IFRS

adopters.

13. As information on listed ownership was hand-collected, it was impossible to include this variable

as one of the a priori discriminant in the definition of the matched sample. Therefore, the distinc-

tion between the companies that are part of a group where the parent is listed and others was

first made on IFRS adopters only to maintain matched pairs, and therefore allow the analysis to

be made on IFRS adopters and their individual pairs. Then, we rerun the analysis classifying

both IFRS adopters and non-IFRS adopters on the basis of listed ownership (but of course losing

the matches). Results are consistent with those shown in Table 5. Coefficient of variable IFRS

is still positive and significant in the sub-sample of companies controlled by a listed company

(b = .162; p = .000) while it is not significant in the sub-sample of companies not controlled by

a listed company (b = .029; p = .458). The difference between the two coefficients is significant

at the 1% level (p = .001). We similarly repeated the analysis reported in Table 6 and results are

qualitatively the same. The difference between the coefficients g3 between the two groups is neg-

ative and highly significant for firms controlled by a listed company (g3IFRS ADOPTERS 2 g3NON-

IFRS ADOPTERS = 21.156; p = .000), indicating that losses are less timely recognized among

IFRS adopters. The same results are obtained for firms not controlled by a listed companies

(g3IFRS ADOPTERS 2 g3NON-IFRS ADOPTERS = 21.034; p = .000). The difference of the differences

between the coefficients of these two sub-samples is not significant (p = .940).

14. Levene’s test is chosen to test differences in standard deviation because it does not assume the

data to be normally distributed (Gastwirth, Yulia, & Miao, 2009).

15. In this particular case, we are considering negative values of abnormal accruals. More negative

values mean more income-decreasing earnings management. So a negative coefficient should be

interpreted as an increase in earnings management and, consequently a decrease in reporting

quality.

16. We also tested the potential impact of the financial crisis on the relation between IFRS adoption

and earnings quality by testing differences in means of abnormal working capital accruals

(AWCA) between IFRS adopters and non-IFRS adopters before and after 2007. Results show

that the level of AWCA is significantly higher for IFRS adopters compared with non-IFRS adop-

ters at 1% level both before 2007 and after 2007. In particular, before 2007, the mean of AWCA

for non-IFRS adopters is 0.069 while for IFRS adopters is 0.167. After 2007, the mean of

AWCA for non-IFRS adopters is 0.084 while for IFRS adopters is 0.153.

Cameran et al. 301



17. We use the larger group of 355 IFRS adopters as in this case we do not lose observation in the

matching procedure.

18. Relevance and comparability are mentioned in the ‘‘joined conceptual framework among the fun-

damental and enhancing characteristics of financial information’’ (Phase A of the Joint

Conceptual Framework), available at www.ifrs.org

19. Micro-firms are defined as those that do not exceed the limits of two of the three following cri-

teria: (a) balance sheet total: EUR 350,000; (b) net turnover: EUR 700,000; (c) average number

of employees during the financial year: 10.

References

American Institute of Certified Public Accountants. (2008). International financial reporting stan-

dards (Questions and Answers). Retrieved from http://www.ifrs.com/updates/aicpa/ifrs_

faq.html#q6

Bae, K., Tan, H., & Welker, M. (2008). International GAAP differences: The impact on foreign ana-

lysts. The Accounting Review, 83, 593-628.

Ball, R., & Shivakumar, L. (2005). Earnings quality in UK private firms: Comparative loss recogni-

tion timeliness. Journal of Accounting & Economics, 39, 83-128.

Ball, R., & Shivakumar, L. (2008). Earnings quality at initial public offering. Journal of Accounting

& Economics, 45, 324-349.

Barth, M., Landsman, W., & Lang, M. (2008). International accounting standards and accounting

quality. Journal of Accounting Research, 46(3), 1-32.

Barth, M., Landsman, W., & Wahlen, J. (1995). Fair value accounting: Effect on bank’s volatility,

regulatory capital and value of contractual cash flows. Journal of Banking & Finance, 19,

577-605.

Bartov, E., Goldberg, R. S., & Kim, M. (2005). Comparative value relevance among German, U.S.,

and international accounting standards: A German stock market perspective. Journal of

Accounting, Auditing & Finance, 20(2), 95-119.

Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of

Accounting & Economics, 24, 3-35.

Beatty, A., Ke, B., & Petroni, K. (2002). Earnings management to avoid earnings declines across pub-

licly and privately held banks. The Accounting Review, 77, 547-570.

Becker, C., DeFond, M., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on

earnings management. Contemporary Accounting Research, 15, 1-24.

Bedard, J., Chtourou, S. M., & Courteau, L. (2004). The effect of audit committee expertise, indepen-

dence, and activity on aggressive earnings management. Auditing: A Journal of Practice &

Theory, 23(2), 13-35.

Bennedsen, M., Nielsen, K., & Wolfenzon, D. (2005). The family behind the family firm: Evidence

from succession in Danish firms (NYU Working Paper No. CLB-06–002). Retrieved from http://

ssrn.com/abstract=1291025

Bennedsen, M., & Wolfenzon, D. (2000). The balance of power in closely held corporations. Journal

of Financial Economics, 58, 113-139.

Bernard, V., & Skinner, D. J. (1996). What motivates managers’ choice of discretionary accruals?

Journal of Accounting & Economics, 22, 313-325.

Brown, P. (2011). International financial reporting standards: What are the benefits? Accounting and

Business Research, 41, 269-285.

Burgstahler, D., Hail, L., & Leuz, C. (2006). The importance of reporting incentives: Earnings man-

agement in European private and public firms. The Accounting Review, 81, 983-1016.

Bushman, R., & Landsman, W. R. (2010). The pros and cons of regulating corporate reporting: A

critical review of the arguments. Accounting and Business Research, 40, 259-273.

Cameran, M., & Campa, D. (2010). La Scelta Operata dalle Societa Italiane con Riferimento ai

Principi Contabili da Utilizzare per la Redazione del Bilancio d’Esercizio (IAS/IFRS versus



http://www.ifrs.com/updates/aicpa/ifrs_faq.html#q6


Standard Nazionali) [Accounting standards choices from Italian companies for the preparation of

the separated annual report: IAS/IFRS versus Local GAAP]. Rivista dei Dottori Commercialisti,

61, 483-505.

Capkun, V., Cavezan-Jeny, A., Jeanjean, T., & Weiss, L. (2011). Setting the bar: Earnings manage-

ment during a change in accounting standards (Working Paper). University of Paris. Retrieved

from http://ssrn.com/abstract=1870007

Carey, P., & Simnett, R. (2006). Audit partner tenure and audit quality. The Accounting Review, 81,

653-676.

Chaney, P., & Lewis, C. (1995). Earnings management and firm valuation under symmetric informa-

tion. Journal of Corporate Finance, 1, 319-345.

Committee of European Securities Regulators. (2003). Standard No. 1 on financial information:

Enforcement of standards on financial information in Europe. Retrieved from http://

www.esma.europa.eu/system/files/03_073.pdf

Daske, H., Hail, L., Leuz, C., & Verdi, R. (2008). Mandatory IFRS reporting around the world: Early

evidence on the economic consequences. Journal of Accounting Research, 46, 1085-1142.

Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies,

their determinants and their consequences. Journal of Accounting & Economics, 50, 344-401.

DeFond, M., & Park, C. (2001). The reversal of abnormal accruals and the market valuation of earn-

ings surprises. The Accounting Review, 76, 375-404.

Directive 2012/6/EU of the European Parliament and of the Council of 14 March. (2012). Retrieved

from http://ec.europa.eu/internal_market/accounting/legal_framework/annual_accounts/original_

text_en.htm

Economist Intelligence Unit. (2005). Italy: Country profile. Available from store.eiu.com

The European Confederation of Directors Associations. (2010). Corporate governance guidance and

principles for unlisted companies in Europe. Available from www.ecoda.org

European Financial Reporting Advisory Group. (2011). Considering the effect of accounting stan-

dards (Discussion paper). Available from www.efrag.org

Francis, J. R. (2004). What do we know about audit quality? The British Accounting Review, 36,

345-368.

Francis, J. R., Khurana, I. K., Martin, X., & Pereira, R. (2008). The role of firm-specific incentives

and country factors in explaining voluntary IAS adoptions: Evidence from private firms. European

Accounting Review, 17, 331-360.

Frankel, R., Johnson, M., & Nelson, K. (2002). The relation between auditors’ fees for non-audit ser-

vices and earnings management. The Accounting Review, 77(Suppl.), 71-105.

Gastwirth, J. L., Yulia, R. G., & Miao, W. (2009). The impact of Levene’s test of equality of variance

on statistical theory and practice. Statistical Science, 24, 343-360.

Givoly, D., Hayn, C. K., & Katz, S. P. (2010). Does public ownership of equity improve earnings

quality? Accounting Review, 85, 195-225.

Hung, M., & Subramanyam, K. R. (2007). Financial statement effects of adopting international

accounting standards: The case of Germany. Review of Accounting Studies, 12, 623-657.

Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An explanatory analysis of earn-

ings management before and after IFRS adoption. Journal of Accounting and Public Policy, 27,

480-494.

Jones, J. (1991). Earnings management during import relief investigations. Journal of Accounting

Research, 29, 193-228.

Kennedy, P. (2008). A guide to econometrics. Hoboken, NJ: Wiley-Blackwell.

Kim, J. B., Chung, R., & Firth, M. (2003). Auditor conservatism, asymmetric monitoring, and earn-

ings management. Contemporary Accounting Research, 20, 323-359.

Kothari, S. P., Leone, A., & Wasley, C. (2005). Performance matched discretionary accrual measures.

Journal of Accounting & Economics, 39, 163-197.

Kvaal, E., & Nobes, C. (2012). IFRS policy changes and the continuation of national patterns of

IFRS practice. European Accounting Review, 21, 343-371.

Cameran et al. 303


http://ec.europa.eu/internal_market/accounting/legal_framework/annual_accounts/original_text_en.htm


Lang, M., Raedy, J., & Wilson, W. (2006). Earnings management and cross listing: Are reconciled

earnings comparable to US earnings? Journal of Accounting & Economics, 42, 255-283.

Lawrence, A., Minutti-Meza, M., & Zhang, P. (2011). Can big 4 versus non-big 4 differences in audit

quality proxies be attributed to client characteristics? The Accounting Review, 86, 259-286.

Leuz, C. (2010). Different approaches to corporate reporting regulation: How jurisdictions differ and

why. Accounting and Business Research, 40, 229-256.

Maijoor, S. (2010). Discussion of ‘‘How can we measure the costs and benefits of changes in finan-

cial reporting standards?’’ Accounting and Business Research, 40, 329-330.

Marra, A., & Mazzola, P. (2014). Is corporate board more effective under IFRS? Or is ‘‘Just an illu-

sion.’’ Journal of Accounting, Auditing & Finance, 29, 31-60.

Matonti, G., & Iuliano, G. (2012). Voluntary adoption of IFRS by Italian private firms: A study of

the determinants. Eurasian Business Review, 2(2), 43-70.

McNichols, M. (2000). Research design issues in earnings management studies. Journal of

Accounting and Public Policy, 19, 313-345.

Moores, K., & Salvato, C. (2010). Research on accounting in family firms: Past accomplishments and

future challenges. Family Business Review, 23(3), 193-215.

Nobes, C. (2009). On researching into the use of IFRS by private entities in Europe. Accounting in

Europe, 7, 212-226.

Paananen, M., & Henghsiu, L. (2009). The development of accounting quality of IFRS and IFRS

over time: The case of Germany. Journal of International Accounting Research, 8(1), 31-55.

Penno, M., & Simon, D. T. (1986). Accounting choices: Public versus private firms. Journal of

Business Finance & Accounting, 86(13), 561-570.

Pope, P., & McLeay, S. (2011). The European IFRS experiment: Objectives, research challenges and

some early evidence. Accounting and Business Research, 41, 233-266.

Prencipe, A., & Bar-Yosef, S. (2011). Corporate governance and earnings management in family-con-

trolled companies. Journal of Accounting, Auditing & Finance, 26, 199-227.

PricewaterhouseCoopers. (2006). IFRS: Tax implications for the EU financial industry—Are you

ready? Available from www.pwc.com

PricewaterhouseCoopers. (2009). IFRS perspective: An executive survey. Retrieved from http://

www.barometersurveys.com/store/docs/ifrs-perspective-executive-survey.pdf

PricewaterhouseCoopers. (2011). 2011 US IFRS outlook survey. Retrieved from http://www.pwc.com/

en_US/us/issues/ifrs-reporting/assets/dt-12-0052-2011-ifrs-survey.pdf

PricewaterhouseCoopers. (2012). IFRS adoption by country. Retrieved from http://www.pwc.com/us/

en/issues/ifrs-reporting/publications/ifrs-status-country.jhtml

Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July. (2002).

Retrieved from http://www.esma.europa.eu/system/files/Reg_1606_02.pdf

Rodrıguez-Perez, G., & Van Hemmen, S. (2010). Debt, diversification and earnings management.

Journal of Accounting and Public Policy, 29, 138-159.

Rosenbaum, P., & Rubin, D. (1983). The central role of the propensity score in observational studies

for causal effects. Biometrika, 70, 41-55.

Shan, Y., Taylor, S., & Walter, T. (2011). Error in estimating unexpected accruals in the presence of

large changes in net external financing (Working paper). Retrieved from http://ssrn.com/

abstract=1572164

Soderstrom, N., & Sun, K. (2007). IFRS adoption and accounting quality: A review. European

Accounting Review, 16, 675-702.

Tarca, A. (2004). International convergence of accounting practices: Choosing between IAS and US

GAAP. Journal of International Financial Management & Accounting, 15, 60-91.

Tsalavoutas, I., & Evans, L. (2010). Transition to IFRS in Greece: Financial statements effect and

auditor size. Managerial Auditing Journal, 25, 814-842.

Vander Bauwhede, H., & Willekens, M. (2004). Evidence on (the lack of) audit-quality differentiation

in the private client segment of the Belgian audit market. European Accounting Review, 13,

501-522.



http://www.pwc.com/en_US/us/issues/ifrs-reporting/assets/dt-12-0052-2011-ifrs-survey.pdf

http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-status-country.jhtml

http://ssrn.com/abstract=1572164


Van Tendeloo, B., & Vanstraelen, A. (2005). Earnings management under German GAAP versus

IFRS. European Accounting Review, 14, 155-180.

Van Tendeloo, B., & Vanstraelen, A. (2008). Earnings management and audit quality in Europe:

Evidence from the private client segment market. European Accounting Review, 17, 447-469.

Villalonga, B., & Amit, R. (2006). How do family ownership, management and control affect firm

value? Journal of Financial Economic, 80, 385-417.

Warfield, T., Wild, J., & Wild, K. (1995). Managerial ownership, accounting choices and informative-

ness of earnings. Journal of Accounting & Economics, 20, 61-91.

Watts, R., & Zimmerman, J. (1986). Positive accounting theory. Englewood Cliffs, NJ: Prentice Hall.

Wysocki, P. (2004). Discussion of ultimate ownership, income management, and legal and extra-legal

institutions. Journal of Accounting Research, 42, 463-474.

Cameran et al. 305



ifrs adoption among private companies: impact on earnings quality

Documents