Does the adoption of international financial reporting standards restrain earnings management? Evidence from an emerging market.

Zhou, Haiyan ; Xiong, Yan ; Ganguli, Gouranga 等

INTRODUCTION

The issue of earnings management has always been a concern for the integrity of published accounting reports. Evidence from the academic literature has shown that the practice of earnings management is extensively practiced by publicly listed firms (Barth et al., 2005; Burgstahler and Dichev, 1997). In recent years, primarily due to revelations of corporate scandals resulting from fraudulent financial reporting, both the popular press and accounting regulatory agencies have been focusing on earnings management, which may be regularly engaged in by public firms. In emerging markets, earnings management is more universally practiced because of relatively weak legal enforcement capabilities (e.g., Jian and Wong, 2004).

Not surprisingly, earnings management has recently been an extensively researched topic in the emerging market literature. Prior studies examine accounting accruals (Aharony et al., 2000), non-operating earnings (Chen and Yuan, 2004), and related party transactions (Jian and Wang, 2004) to detect earnings manipulations by public companies in emerging markets. However, there is relatively little empirical evidence on whether the adoption of international financial reporting standards (IFRS, formerly known as IAS) has been instrumental in the improvement of the quality of accounting information, including any reduction in the level of earnings management.

In this study, we investigate whether adopting IFRS is associated with less earnings management and more timely loss recognition. We use a pooled time-series cross-sectional sample to examine whether firms adopting IFRS are less likely to smooth earnings, less likely to manage earnings upwards to avoid reporting losses, and more likely to recognize losses in a timely fashion, compared with non-adopting firms. Our results indicate that adopting firms are less likely to smooth earnings to achieve earnings management than their non-adopting counterparts. However, we did not find that adopting firms evidence lower tolerance of losses or more timely loss recognition than non-adopting firms.

Our study contributes to the literature in several ways. First, the empirical evidence provided in this paper suggesting that the adoption of accounting standards appears to improve financial reporting could prompt regulators to push for such adoption by public firms in emerging markets. This conclusion is especially relevant now that Chinese accounting standards are undergoing substantial changes. Second, the findings of this paper would help investors understand earnings management issues in China. Finally, the findings also suggest that the influence of IFRS on the quality of reported accounting information may be limited if it provides more accounting choices to managers without a concurrent stricter enforcement mechanism.

The remainder of our paper is organized as follows. We present a summary of the evolution of accounting standards in China and develop our testable hypotheses regarding the impact of IFRS on earnings management in background and hypotheses development sections. This is followed by the presentation of our research design and sample selection in research methods and sample selection sections. We report our results in results section and the conclusions and limitations of our study in conclusion and limitation section.

BACKGROUND-EVOLUTION OF CHINESE ACCOUNTING STANDARDS

In the process of transforming itself from a centrally planned economy to a market oriented economy, China realized early the importance of a sound financial infrastructure. The earlier accounting standards and regulations were to provide information to various levels of government for planning and control purposes (Rask et al., 1998; Xiang, 1998). Accordingly, the financial performance measurements reported were not suitable for the financial reporting objectives in a market oriented economy.

During China's progress toward a market oriented economy, it has experienced rapid growth of its economy, international trade and securities markets, which, in turn, demanded new objectives for financial reporting. Even in state-owned enterprises now functioning like profit-oriented businesses, managers, as well as other users, need reliable and relevant financial information to make decisions to ensure the efficient allocation of capital. At the same time, China has reached out to the international community to form joint ventures and gain greater access to the latest technologies and the world's captial markets at large. These changed circumstances have increasingly demanded a framework of accounting standards to meet the needs of investors and creditors as well as management and the government, thus necessitating signficant accounting reforms undertaken during the past two decades.

The Ministry of Finance (MOF) of China promulgated the Accounting Standards for Enterprises No. 1--Basic Standards (ASFE) in 1992, initiating the most important reform in setting accounting standards. This ASFE represents the first step to bring Chinese accounting system in line with international practice (Xiang, 1998; Sami and Zhou, 2004), as the ASFE is modeled after western accounting standards and thus is familiar to outside investors. However, it is also recognized that there are certain variations from western standards. For example, ASFE is less detailed and complex than western standards in that it left out complex liability issues (Winkle et al., 1994). Following the ASFE, a series of specific accounting standards were issued. From May 1997 to December 2001, there were sixteen specific standards promulgated . These standards claimed to improve corporate accounting disclosure in both quality and quantity.

In China, public companies issue two kinds of shares--A-shares to domestic investors and B-shares to foreign investors. A-shares are denominated in RMB and issued only to Chinese citizens, while B-shares are denominated in U.S. dollars on the Shanghai Stock Exchange or in Hong Kong dollars on the Shenzhen Stock Exchange and issued only to foreign residents before Year 2001 (Sami and Zhou, 2004). Both A-shares and B-shares convey equal rights though they are different in terms of ownership. However, A-share investors receive accounting information prepared under the Chinese GAAP and audited by local CPA firms, while Bshare investors receive accounting information prepared under the IFRS and audited primarily by international accounting firms. Therefore, the Chinese emerging market provides a unique environment in which one can examine whether accounting information prepared under the IFRS has higher earnings quality than that prepared under local GAAP. While A-share data represent the information prepared by the nonadopters of IFRS and B-share data represent the information prepared by the adopters, comparing A-share and B-share financial data would help us identify the difference in the earnings quality due to the difference between IFRS and local GAAP.

HYPOTHESES DEVELOPMENT

Previous studies have shown that accounting standards add value to accounting information in developed economies (Hung and Subramanyam, 2004; Bartov et al., 2004). However, it is unclear whether such benefits also apply to developing or transitional economies. Despite the increasing importance of the earnings management problem in emerging markets, there is relatively little empirical evidence to show whether local accounting standards improve the quality of accounting information provided by firms that have adopted them and whether such adoption reduces the level of earnings management.

Recent evidence suggests that accounting information is less useful in emerging markets. For example, Ball et al. (2000) find that there is low transparency of earnings in Hong Kong, Malaysia, Singapore and Thailand. They argue that such low transparency is attributable to weak enforcement of accounting standards in these countries. As this study shows, given the weak legal system and the lack of accounting and capital market infrastructure in transitional economies, emerging economies are particularly likely to face severe problems in monitoring managers' accounting decisions.

The introduction of international accounting principles and practices in emerging markets has been shown to increase market liquidity, reduce transaction cost, and improve pricing efficiency (Feldman and Kumar, 1995). It is still an open question as to whether the adoption of IFRS improves the quality of accounting information, thereby reducing the level of earnings management. The emerging market in China provides a unique opportunity to examine these questions.

Eccher and Healy (2003) compare the value relevance of accounting information prepared under the IFRS to those under Chinese accounting standards. This study finds that accounting information prepared under the IFRS is not more value relevant than that prepared under the Chinese accounting standards for B-share firms--firms that can be owned by foreign investors. The authors posit that one reason for the modest performance of the IFRS may be the lack of effective controls and infrastructure to monitor reporting under the IFRS, a conclusion similar to that of Ball et al. (2000).

An investigation of the changes in the value relevance of earnings between different market segments, following the implementation of new national accounting standards in China, shows that implementation of specific national standards has a positive effective on the perceived value of the accounting information (Zhou et al., 2007).

None of these studies, however, examined whether IFRS or local GAAP proves to be more effective in deterring earnings management by managers in public companies. A study by Barth et al. (2005) demonstrates that firms adopting IFRS are less likely to smooth earnings, less likely to manage earnings upwards to avoid reporting losses, and more likely to recognize losses timely than non-adopting firms. Other studies, on the other hand, indicate that the rule-based Chinese accounting system, even before the adoption of any formal standard, provided little opportunities for managers to manipulate earnings through accruals, implying that the effect of implementing IFRS on earnings management, via accounting accruals, could be negative (Chen and Yuan, 2004; Jian and Wong, 2003). In other words, new accounting standards and IFRS could leave the door open for managers to manipulate earnings via accounting accruals. Such contradicting arguments provide a strong basis to empirically examine the impact of new accounting standards on the earnings mangement behavior of firms. Therefore, it is hypothesized (in alternative form) that

Hypothesis 1: Firms that adopt IFRS are less likely to smooth earnings than firms that adopt local GAAP.

Hypothesis 2: Firms that adopt IFRS are less likely to manage earnings upwards to avoid reporting losses than firms that adopt local GAAP.

Hypothesis 3: Firms that adopt IFRS are more likely to recognize losses in a timely manner than firms that adopt local GAAP.

Our study differs from prior research on the impact of accounting standards on earnings management in at least two ways. First, our study encompasses a sample of firms focused on the emerging market in China. As mentioned by Barth et al. (2005), studies focusing on a single country benefit from having research designs that control for other country-specific factors, although it is difficult to extrapolate inferences relating to their findings to other countries.

Second, we directly focus on the characteristics of accounting information under IFRS and Chinese GAAP. Whereas studies of analyst earnings forecast errors and studies of value relevance provide indirect evidence of the quality of accounting information (e.g., Sami and Zhou, 2004; Bartov et al., 2004; Sankaraguruswamy and Sweeney, 2005), results are generally mixed, and other confounding aspects of markets and firms' information environments make it more difficult to attribute the results directly to the effect of accounting standards. We follow Barth et al. (2005) and Leuz et al. (2003) in focusing more directly on the characteristics of accounting data to provide direct evidence on earnings management, particularly earnings smoothing, and timely loss recognition. We focus on earnings management metrics because a common concern with applying GAAP is that the inherent flexibility under GAAP affords firms the opportunity to manage earnings, which, in turn, has long been a concern of securities markets regulators (e.g., Breeden, 1994). Our metrics of earnings management are the variance of the change in net income, the frequency of small positive net income, and the frequency of large negative net income (Lang et al., 2003; 2005). Following these studies, we interpret a higher variance of the change in net income, a lower frequency of small positive net income, and a higher frequency of large negative net income as evidence of less earnings management and higher earnings quality.

RESEARCH METHODS

As already stated, we use three measures of earnings management: variance of the change in net income (VARNI), frequency of small positive net income (SPOS), and frequency of large negative net income (LNEG). Our selection of these variables closely follows the work of Barth et al. (2005). We share the argument of these authors that less earnings management results in higher quality of earnings. We further argue that higher valuation of the change in net income (VARNI), a lower frequency of small positive net income (SPOS), and a higher frequency of large negative net income (LNEG) provide evidence of less earnings management, and hence, of higher quality of earnings. We first compare firms adopting standards (ADOPT) with non-adopting firms (NADOPT) to see if accounting amounts determined using IFRS evidence higher quality. To the extent that results are consistent across the measures, there is greater assurance that such consistent findings can be attributed to earnings management rather than other factors. Our measures are designed to detect earnings smoothing and earnings management toward a target of positive earnings.

For Hypothesis 1, the measure for earnings smoothing is variability of earnings (Leuz et al., 2003; Lang et al., 2003; 2005). Earnings that are smoothed should be less variable than those that are not. We predict that ADOPT firms have less smooth earnings than NADOPT firms. Following Leuz et al. (2003), we use earnings smoothing measure as the variability of the change in net income scaled by total assets. A smaller variance is evidence consistent with earnings smoothing.

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (1)

Where

ADOPT(1,0) = an indicator variable set to one for ADOPT firms and zero for NADOPT firms; SIZE = the natural log of end of year market value of equity; LEV = end of year total liabilities divided by end of year total equity; GROWTH = percentage change in sales; EISSUE = percentage change in common stock; DISSUE = percentage change in total liabilities; VARNI = variability of the change in net income scaled by total assets.

A negative coefficient on VARNI suggests that ADOPT firms of new accounting standards are less likely to smooth earnings that NADOPT firms, while a positive coefficient on VARNI suggests that ADOPT firms are more likely to smooth earnings. We also include independent variables, other than VARNI, to control for differences in economic factors associated with firms adopting IFRS that might not be captured by the matched sample design. The control variables used in this study are those suggested by prior research to control for size, different ratios among total liabilities, book value, market value, and growth, including the natural log of end of year market value of equity (SIZE), end of year total liabilities divided by end of year total equity book value (LEV), percentage change in common stock (EISSUE), percentage change in total liabilities (DISSUE), and percentage change in sales (GROWTH) (Pagano et al., 2002; Lang et al.,2003; and Lang et al., 2005).

In Hypothesis 2, our approach to examining earnings management is to focus on targets toward which firms might manage earnings. A common target is to report small positive earnings (Burgstahler and Dichev, 1997 and Leuz et al., 2003). The notion underlying this measure is that management prefers to report small positive earnings rather than negative earnings. Our measure is the coefficient on small positive net income, SPOS, in the following regression:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (2)

Where

ADOPT(1,0) = an indicator variable set to one for ADOPT firms and zero for NADOPT firms; SIZE = the natural log of end of year market value of equity; LEV = end of year total liabilities divided by end of year total equity; GROWTH = percentage change in sales; EISSUE = percentage change in common stock; DISSUE = percentage change in total liabilities; SPOS = a dummy variable that equals one if net income scaled by total assets is between 0 and 0.01, and zero otherwise.

A negative coefficient on SPOS would suggest that NADOPT firms manage earnings toward small positive amounts more frequently than do ADOPT firms.

In Hypothesis 3, we consider timely loss recognition as one of the dimensions of earnings management. Ball et al. (2000) and Lang et al. (2003; 2005) suggest that one characteristic of higher quality earnings is that large losses are recognized as they occur rather than being deferred to future periods. This characteristic is closely related to earnings smoothing in that if earnings are smoothed, large losses should be relatively rare. Following these studies, we measure timely loss recognition as the coefficient on the percentage of large negative net income, LNEG, in the following regression:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (3)

Where

ADOPT(1,0) = an indicator variable set to one for ADOPT firms and zero for NADOPT firms; SIZE = the natural log of end of year market value of equity; LEV = end of year total liabilities divided by end of year total equity book value; GROWTH = percentage change in sales; EISSUE = percentage change in common stock; DISSUE = percentage change in total liabilities; LNEG = a dummy variable set to one for observations for which annual net income scaled by total assets is less than -0.20, and zero otherwise.

A positive coefficient on LNEG suggests that ADOPT firms recognize large losses more readily than NADOPT firms.

SAMPLE SELECTION

Our sample starts with all firms that have shares listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange for the period from 1994 to 2000, including 4252 observations from 913 firms in the Taiwan Economic Journal (TEJ) database. Excluding observations with missing data on firm's equity, sales, common stock shares, total liabilities, total assets and/or net income, our sample for the test of small positive net income and lagged negative earnings includes 3,298 firm-year observations, including 2809 observations from NADOPT firms and 489 observations from ADOPT firms. Since we further require that firms should have at least 3 year net income data to calculate earnings volatility, our sample for the test of earnings smoothing comprises 2,286 firm-year observations, including 1926 observations from NADOPT firms and 360 observations from ADOPT firms. Table 1 reports the sample selections schedule, including information on the numbers of observations for ADOPT and NADOPT firms.

Table 2 reports descriptive statistics for the ADOPT and NADOPT firms. In terms of the variables of interest, the ADOPT firms have significantly higher incidents of small positive earnings. Although these results do not control for other factors, they suggest that IFRS may provide more accounting choices and hence more earnings management opportunities through accounting accruals. As a result, ADOPT firms are more likely to manage earnings toward a target than NADOPT firms. In terms of control variables, the ADOPT firms are more mature, or have lower growth than the NADOPT firms (median 1.247 vs.1.919) and are somewhat larger than the NADOPT firms. Further, there is some evidence that the ADOPT firms are less likely to issue debt and equity, and more highly leveraged than NADOPT firms (although mean or median difference is insignificant).

RESULTS

Table 3 presents the Pearson correlation coefficient matrix. As predicted, ADOPT is significantly and positively related with SPOS (r = 0.0424 and p = 0.0150) and SIZE (r = 0.1803 and p < 0.0001), while significantly and negatively correlated with GROWTH (r = -0.1756 and p < 0.0001), EISSUE (r = -0.0462 and p = 0.008), and DISSUE (r=-0.0672 and p < 0.0001). The correlation between ADOPT and LNEG is positive but insignificant (r = 0.0033 and p = 0.8500) and the same is the one between ADOPT and VARNI (r = 0.0023 and p = 0.9128). None of the correlation among control variables are higher than 0.3, except that between SIZE and GROWTH (r = -0.3839 and p < 0.0001). The highest variance inflation factor (VIF) is less than 10 for each model, indicating that multicollinearity does not appear to be a problem.

Table 4 presents the logit regression results on the relationship between the adoption of IFRS and earnings smoothing. When factors like SIZE, GROWTH, DISSUE are controlled for, the coefficient on VARNI is positive and significant (Wald Chi-squares = 4.5400), the expected outcome from Hypothesis 1. Thus firms adopting IFRS appear to be more likely to smooth earnings compared with firms that do not. In addition, the findings of a positive coefficient for SIZE and negative coefficients for GROWTH and DISSUE are consistent with Barth et al. (2005), who report that firms adopting IFRS tend to have larger size, lower growth rate, and lower demand for capital. However, no significant results are found for other variables.

Table 5 reports the primary results on the relationship between the adoption of IFRS and the likelihood of reporting small positive earnings. The coefficient on SPOS is positive but insignificant (Wald Chi-squares = 0.2060), which is quite different from the positive correlation between ADOPT and SPOS in Tables 1 and 2. This divergence may indicate that the higher percentage of firms in ADOPT group reporting small positive earnings in the univariate test (Table 2) could be caused by the better financial status of these firms including larger size, more mature status (lower growth rate), and lower demand for capital compared to NADOPT firms, rather than by the adoption of IFRS, as suggested by the significant correlation between SPOS and these financial variables (see Table 3). The results on the control variables are consistent with those from the univariate tests: the coefficient for SIZE is significant and positive, while the coefficients of GROWTH and DISSUE are significant and negative. Our results are consistent with the findings of Barth et al. (2005), who report that firms adopting IFRS tend to have larger size, lower growth rate, and lower demand for capital. However, no significant results are found for other variables.

Table 6 presents the primary results on the relationship between the adoption of IFRS and timely recognition of negative earnings. The coefficient on LNEG is positive but insignificant (Wald Chi-squares = 0.4197). Given the correlation matrix of Table 3, it is possible that firms with smaller size, higher growth rate and more demand for capital tend to delay their annual reports if they have net losses. Surprisingly, there is no evidence indicating that firms adopting IFRS are less likely to delay negative earnings. Again, the results on the control variables are consistent with those from the univariate tests: the coefficient for SIZE is significant and positive, while the coefficients of GROWTH and DISSUE are significant and negative. No significant results are found for other variables.

The Likelihood Ratio Chi-squares for all models are significant. Pseudo R-squares are 7.24%, 7.55% and 7.53% for equations (1), (2) and (3) repsectively, which is compatible with what is reported by Barth et al. (2005).

Overall,we find that firms are less likely to smooth earnings in the post-adoption period. However, we did not find that firms evidence any lower tolerance of losses or more timely loss recognition when adopting IFRS. Thus, our results suggest only marginal improvement in accounting quality associated with the adoption of IFRS. Our results also suggest that strong enforcement mechanisms of IFRS be implemented to ensure its positive role in improving the quality of accounting information overall.

CONCLUSIONS AND LIMITATIONS

We investigated the impact of the adoption of international accounting standards (IFRS) by firms in the emerging market of China in their practice of earnings management. Based on our review of the existing literature on the subject, we developed three hypotheses as likely outcomes of the adoption of IFRS. As expected in the first hypothesis, the results of our study indicate that firms adopting IFRS are less likely to smooth earnings compared to non-adopting firms.

The second hypothesis expected that adopting firms would be less likely to manage earnings upwards to avoid reporting losses compared to firms reporting under local GAAP. Our findings did not find any evidence for such an improvement in practice. This observation may suggest that non-adopting firms could manipulate earnings up through vehicles other than accounting accruals. For instance, earnings could be managed up through non-core operating earnings or related third party transactions (Chen and Yuan, 2004). This observation, therefore, might imply a need for a stricter enforcement of IFRS.

The third hypothesis expected the adopting firms to be more likely to recognize losses in a timely manner. Our observation from the study did not find any difference in the way adopting and non-adopting firms delay their reports. While the difference in the timeliness of accounting disclosure between adopting and non-adopting firms may be obscured by the dual accounting information systems used by firms issuing both domestic shares and foreign shares, it is also possible that adopting IFRS may not be a determinant of timeliness in reporting accounting information of Chinese firms.

Overall our investigation suggests some improvements in the quality of accounting information associated with the adoption of IFRS. Because of the relatively newer environment of the introduction of IFRS in China, our findings may also imply that a stronger enforcement mechanism for the implementation of IFRS be instituted to ensure its positive impact on the quality of accounting information. These conclusions are in agreement with Eccher and Healy (2003), who also posit a modest performance from the adoption of IFRS and the lack of effective controls and infrastructure to monitor reporting under IFRS.

While our study encompasses an empirical investigation of any association between adoption of IFRS and earnings management, it is undertaken in the context of the emerging market of China. As a country-specific study, as pointed out by Barth et al. (2005), the conclusions from our study are probably difficult to extrapolate to other countries exhibiting different socio-economic and socio-political characteristics. This constitues a limitation of our study.

REFERENCES

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Burgstahler, D., and I. Dichev. 1997. Earnings Management to Avoid Earnings Decreases and Losses. Journal of Accounting and Economics 24: 99-126.

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Haiyan Zhou, The University of Texas--Pan American Yan Xiong, California State University--Sacramento Gouranga Ganguli, The University of Texas--Pan American

Table 1. Descriptive Information on Sample Selection

Sample Selection Procedure Number of Number of
 Firms Observations

Firm's financial information for the 913 4252
 period of 1994 - 2000 is available
 from the TEJ database
Less: Firm's equity, sales, common 954
 stock shares, total liabilities,
 total assets and/or net income
 is missing
Final sample size for analysis of 3298
 small positive net income and
 lagged negative earnings
Include: ADOPT firms 489
 NADOPT firms 2809
Less: Firm has less than 3 year 1012
 net income data to calculate
 earnings volatility
Final sample size for analysis 2286
 of earnings smoothing
Include: ADOPT firms 360
 NADOPT firms 1936

Table 2. Descriptive Statistics of Independent Variables

Variables Sample Number Mean Median Std. Dev.

SIZE Adopt = 0 2809 6.9237 6.8653 0.8734
 Adopt = 1 489 7.3716 *** 7.3944 0.8320
GROWTH Adopt = 0 2809 2.3403 1.9189 1.6330
 Adopt = 1 489 1.5383 *** 1.2471 1.3581
EISSUE Adopt = 0 2809 0.1377 0.0737 0.7047
 Adopt = 1 489 -0.4673 *** 0.0400 11.9671
DISSUE Adopt = 0 2809 0.3322 0.1502 0.8826
 Adopt = 1 489 0.1742 *** 0.0896 0.3971
LEV Adopt = 0 2809 2.2256 0.9444 33.4670
 Adopt = 1 489 3.3702 1.0720 34.0039
VARNI Adopt = 0 1926 0.0474 0.0243 0.0686
 Adopt = 1 360 0.0478 0.0246 0.0658
SPOS Adopt = 0 2809 0.0968 0 0.2958
 Adopt = 1 489 0.1329 ** 0 0.3398
LNEG Adopt = 0 2809 0.0231 0 0.1504
 Adopt = 1 489 0.0245 0 0.1549

Definition of variables:

ADOPT(1,0) is an indicator variable set to one for ADOPT
firms and zero for NADOPT firms, SIZE is the natural
log of end of year market value of equity, LEV is end of
year total liabilities divided by end of year total equity
book value, GROWTH is percentage change in sales, EISSUE
is percentage change in common stock, DISSUE is percentage
change in total liabilities, VARNI is variability (standard
deviation) of the change in net income scaled by total
assets, LNEG is an indicator variable set to one for
observations for which annual net income scaled by total
assets is less than -0.20, and zero otherwise, and SPOS
is an indicator variable that equals one if net
income scaled by total assets is between 0 and 0.01.

*, **, *** Statistically significant at 0.10, 0.05,
and 0.01, respectively.

Table 3. Pearson Correlation Coefficient Matrix
for Independent and Control Variables

 ADOPT SIZE GROWTH EISSUE DISSUE

ADOPT 1.0000
 0.0000
SIZE 0.1803 1.0000
 0.0001 0.0000
GROWTH -0.1756 -0.3839 1.0000
 0.0001 0.0001 0.0000
EISSUE -0.0462 0.0079 0.0092 1.0000
 0.0080 0.6518 0.5961 0.0000
DISSUE -0.0673 -0.0074 0.0349 0.0272 1.0000
 0.0001 0.6713 0.0455 0.1186 0.0000
LEV 0.0121 -0.0106 0.0071 -0.0058 -0.0124
 0.4870 0.5442 0.6819 0.7378 0.4754
SPOS 0.0424 0.0287 -0.0855 -0.0029 -0.0863
 0.0150 0.0997 0.0001 0.8671 0.0001
LNEG 0.0033 -0.0981 0.0461 -0.1329 -0.0407
 0.8500 0.0001 0.0081 0.0001 0.0197
VARNI 0.0023 -0.2258 0.2309 -0.1082 -0.0256
 0.9128 0.0001 0.0001 0.0001 0.2213

 LEV SPOS LNEG VARNI

ADOPT

SIZE

GROWTH

EISSUE

DISSUE

LEV 1.0000
 0.0000
SPOS -0.0106 1.0000
 0.5427 0.0000
LNEG 0.0332 -0.0522 1.0000
 0.0566 0.0027 0.0000
VARNI 0.0589 -0.0120 0.3784 1.0000
 0.0049 0.5673 0.0001 0.0000

Table 4. Logit Analysis of IFRS Adoption and Earnings Smoothing

Variables Coefficient Wald [x.sup.2]

INTERCPT -3.3712 *** 32.0556
SIZE 0.3438 *** 22.0188
GROWTH -0.3909 *** 39.4570
EISSUE 0 0.2568
DISSUE -0.5692 *** 13.7164
LEV 0 0.4131
VARNI 1.9144 *** 4.5400
Likelihood Ratio Chi-Square 144.197 ***
Pseudo R-square 7.24
N 2296

Table 5. Logit Analysis of IFRS Adoption and
Recognition of Small Positive Earnings

Variables Coefficients Wald [chi square]

INTERCPT -3.5511 *** 54.4907
SIZE 0.3709 *** 37.7110
GROWTH -0.4008 *** 54.9103
EISSUE 0 0.8277
DISSUE -0.4874 *** 15.4599
LEV 0.0010 0.6430
SPOS 0.0705 0.2060
Likelihood Ratio Chi-Square 207.361
Pseudo R-square 7.55
N 3298

Table 6. Logit Analysis of IFRS Adoption and
Timely Recognition of negative Earnings

Variables Coefficeint Wald [chi square]

INTERCPT -3.5491 *** 54.1922
SIZE 0.3721 *** 37.7125
GROWTH -0.4035 *** 56.1697
EISSUE -0.0687 0.7258
DISSUE -0.4913 *** 15.8086
LEV 0.0010 0.6310
LNEG 0.1062 0.0902
Likelihood Ratio Chi-Square 207.246
Pseudo R-square 7.53
N 3298

*, **, *** Statistically significant at 0.10, 0.05,
and 0.01, respectively.