Elsevier

Emerging Markets Review

Volume 38, March 2019, Pages 377-388
Emerging Markets Review

Unintended effects of IFRS adoption on earnings management: The case of Latin America☆

https://doi.org/10.1016/j.ememar.2018.11.004Get rights and content
Under a Creative Commons license
open access

Highlights

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    The paper studies the effects of IFRS on earnings opacity in Latin America.

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    The effect of audit quality on opacity is, as expected, negative.

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    A decrease in the audit quality of firms followed the IFRS adoption.

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    Thus, the total effect of IFRS adoption on opacity is incidentally positive.

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    The mere adoption of IFRS is not sufficient for transparency in emerging markets.

Abstract

We study the determinants of earnings opacity in the six largest Latin American economies (Argentina, Brazil, Chile, Colombia, Mexico, and Peru), in particular the effects of adopting IFRS. Using panel data on 871 listed firms during the period 2000 to 2016, we find that in Latin America the adoption of IFRS caused firms to substitute high quality audit practices with the newly imposed regulation, to the extent that its effect on the degree of opacity in the region became unintendedly positive. The results hold after a number of robustness checks. Thus, we provide compelling evidence against the belief that the mere adoption of the IFRS is sufficient to guarantee transparency in emerging markets.

JEL classification

G30
M48
O54

Keywords

Earnings management
Audit quality
Accounting regulation
Policy effects

Cited by (0)

☆

We are grateful to two anonymous referees as well as seminar participants at the XVII International Finance Conference (Santiago de Chile) for useful comments. We also thank Cinzia Delfino for valuable research assistance. We gratefully acknowledge the financial support of the Universidad del Pacifico Research Center and of the EGADE Business School. We alone are responsible for the views expressed and for any errors that may remain in this paper.

© 2018 The Authors. Published by Elsevier B.V.