By Chan Lyu, Desmond C.Y. Yuen, Xu Zhang, Nini Zhang
This paper studies the relationship between IFRS adoption and real activities manipulation, and investigates whether IFRS reduces earnings management and improves the quality of accounting information. As China steps into the era of IFRS (International Financial Reporting Standard) adoption, it is important to focus on this issue and its implementation in such emerging markets.
The paper finds that real earnings management is primarily driven by abnormal production costs, and that more companies manipulate earnings through operational transactions after IFRS adoption. Our findings suggest that real activities manipulation is positively related with IFRS implementation, and that such an association is stronger for real estate firms, especially in the case of abnormal cash flows of operations.