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New insights into IFRS and New insights

into IFRS and
earnings quality: what conclusions earnings
quality
to draw from the
French experience?
Ramzi Benkraiem Received 21 May 2020
Revised 1 November 2020
Audencia Business School, Nantes, France 26 November 2020
Itidel Ben Saad Accepted 5 December 2020

ISG, Universit
e Gabes, Gabes, Tunisia, and

Faten Lakhal
Research Center, L
eonard de Vinci P^ole Universitaire, Paris La D
efense, France and
IRG, Universit
e Paris-Est, Cr
eteil, France

Abstract
Purpose – The purpose of this study is to examine the effect of International Financial Reporting Standards
(IFRS) on earnings quality in a continental European context (i.e. France) more than a decade after their
mandatory adoption. Furthermore, the authors investigate whether the IFRS effect depends on firm-specific
incentives.
Design/methodology/approach – The authors construct an aggregated measure that considers the main
qualitative information characteristics: reliability and relevance. They identify accruals quality, earnings
smoothing and the degree of conditional conservatism as attributes of reliability and use earnings persistence,
predictability, value relevance and timeliness to measure earnings relevance. To test the hypotheses, the
authors use a sample of French listed companies. The analyses are based on ordinary least squares (OLS) fixed
effects, the Newey–West estimator and the difference-in-difference approach. The authors also use cluster
analysis to identify firms with high incentives for earnings quality.
Findings – The results reveal a decrease in earnings quality that persisted for a decade after IFRS adoption.
This decrease is mainly due to a decline in earnings relevance, suggesting that the fair value principle worsened
earnings volatility. However, the results show that there is an improvement in earnings reliability after IFRS
adoption, suggesting that the international standards were able to constrain managerial opportunism.
Additionally, the findings reveal that firm-specific incentives can enhance the positive effect of IFRS, but the
incentives are not able to substitute for such effect.
Research limitations/implications – The IFRS effect depends on firm-specific incentives.
Practical implications – The authors prove that firm-specific incentives are important to accentuate the
positive effect of IFRS on earnings reliability and to mitigate the impact of IFRS on earnings relevance.
Originality/value – This paper makes several contributions to the literature. First, it addresses the relative
lack of attention to the main qualitative characteristics in measuring earnings quality, that is, earnings
reliability and earning relevance, and uses an aggregate earnings quality measure. Second, this paper uses a
cluster analysis to highlight the role of firm-specific incentives in shaping the effect of IFRS on earnings quality.
Keywords IFRS, Earnings quality, Aggregate measure, Relevance, Reliability, Firm incentives
Paper type Research paper

1. Introduction
Earnings quality is a fundamental concept in the accounting field (Dichev et al., 2013; Beyer
et al., 2014). According to Dechow et al. (2010), earnings quality is the level of useful
information about a firm’s performance provided to external users for decision-making. The
importance of earnings quality is triggered by its critical relation with the usefulness of the
financial information. In particular, investors, analysts and policymakers require accounting Journal of Applied Accounting
Research
information that helps them gauge the real economic performance of the company and then © Emerald Publishing Limited
0967-5426
make optimal decisions (Francis et al., 2004). DOI 10.1108/JAAR-05-2020-0094
JAAR Information quality and its ability to help users to make decisions, and specifically the
earnings quality component (McNichols, 2010; Walker, 2013; De Meyere et al., 2018), were
emphasized in corporate scandals that occurred in the beginning of the 21st century (Enron in
2001, WorldCom in 2002 and Satyam Computer Services in 2009, among others around the
globe). Since then, a range of studies showed that earnings quality is mainly determined by
institutional factors (Ball et al., 2000; Fan and Wong, 2002; Leuz et al., 2003; Haw et al., 2004;
Burgstahler et al., 2006) and firm-specific characteristics (Ball et al., 2003; Soderstrom and
Sun, 2007; Ball and Shivakumar, 2005; Burgstahler et al., 2006; Lang et al., 2006; Gaio, 2010).
Nevertheless, an alternative research strand relies heavily on accounting standards as the
primary source of earnings quality (Ball et al., 2003). More than a decade after International
Financial Reporting Standards (IFRS) were adopted, the impact of these standards is
receiving increasing attention from academics. Specifically, debate has arisen about the
power of IFRS to improve earnings quality. According to a data report issued by the IFRS
Foundation in 2018 [1], about 47,874 firms in more than 144 countries worldwide have
adopted IFRS. The objective of the IFRS, strongly inspired by the Anglo-Saxon Generally
Accepted Accounting Principles (GAAP), is to improve information quality. Accordingly, this
information must be primarily reliable and relevant to ensure its usefulness for decision-
making. Investors are suspicious about the ability of accounting earnings, left to managerial
discretion, to meet investors’ information needs. Thus, to achieve earnings quality, the
transition to international financial standards is the most appropriate guarantee (Regulation
(EC) No 1606/2002 of the European Parliament).
Since IFRS were adopted by European countries in 2005, a wide range of theoretical and
empirical studies examine its effectiveness in improving earnings quality after adoption
(Barth et al., 2008; Jeanjean and Stolowy, 2008; Chen et al., 2010; Lin et al., 2012; Cai et al., 2014;
Capkun et al., 2016; Houqe et al., 2016; Zeghal and Lahmar, 2018). However, the findings are
not unanimous. Previous literature shows that the impact of IFRS on earnings quality is
associated with institutional factors, such as investors’ protection and legal enforcement
(Cahan et al., 2009; Houqe et al., 2012, 2016; Landsman et al., 2012; Ahmed et al., 2013; Leuz
et al., 2003; Haw et al., 2004; Bassemir, 2018).
The purpose of this paper is to examine the effect of the international accounting
standards a decade after adoption on earnings quality for French firms and to investigate
how firm incentives may moderate this effect. This paper makes several contributions to the
literature. First, most studies investigating the effects of IFRS are based on the short history
of IFRS adoption (Br€ uggemann et al., 2013). Few studies use a longitudinal design (Garcia
et al., 2017; Persakis et al., 2017; Kouaib et al., 2018). With a short time frame, financial
statement producers may face difficulties due to the complexity of international standards.
For instance, in France, IFRS brought an innovative approach, and a new philosophy of
accounting standards, compared to French standards. A period of adaptation is necessary to
limit the heterogeneity of accounting practices. Furthermore, IFRS have recently undergone
significant changes. For example, the IAvSB’s conceptual framework, published by the
International Accounting Standard Committee (IASC) in July 1989 and adopted by the IASB
in April 2001, was revised with the US standard setter (FASB) and was published in 2010 [2].
In this version, attention is paid to investors as the primary users of financial information.
The requirement of additional disclosure on fair value in IFRS 13 indicates that standard
setters have recognized the problem with fair value estimates. As a result, the conclusions in
previous studies on the impact of IFRS adoption do not encompass these recent changes.
Second, this study addresses the relative lack of attention on earnings quality measurement.
Despite the increasing focus on earnings quality, there is no unique definition or a generally
accepted approach for measuring earnings quality. According to the conceptual framework of
IFRS, the primary characteristics of accounting information quality are relevance and
reliability. Both information characteristics help users in their decision-making. Previous
studies focus on single attributes of earnings quality, that is, earnings management (Jeanjean New insights
and Stolowy, 2008; Chen et al., 2010; Houqe et al., 2012; Doukakis, 2014), value relevance into IFRS and
(Elbakry et al., 2017; Kim, 2013; Gast
on et al., 2010) and conservatism (Chan et al., 2015; Zeghal
and Lahmar, 2018). This paper extends previous literature and uses an aggregate earnings
earnings
quality measure that includes reliability and relevance attributes. quality
Third, this study contributes to the literature by analyzing the role of firm-specific
incentives in determining the association between IFRS and earnings quality. Previous
studies examine the effects of institutional factors on the IFRS–earnings quality relation.
However, few studies investigate how the association between IFRS and earnings quality
depends on firm-specific incentives (Daske et al., 2013; Christensen et al., 2015). According to
Gaio (2010), firm characteristics explain 31.3% of the earnings quality variation, while
institutional factors explain only 8.5%. Studying firms’ incentives can shed more light on the
IFRS–earnings quality relation. Unlike previous studies (Christensen et al., 2015; Chan et al.,
2015), we focus on a panel of firm incentives and use cluster analysis to identify whether firms
have strong incentives for earnings quality.
Based on a sample of French listed companies, the results reveal that IFRS decrease
earnings quality. This decrease is due to the failure of the standards to improve earnings
relevance. However, IFRS have improved earnings reliability, suggesting that these
international standards are able to overcome the failures of local accounting systems and
limit accounting options. The difference-in-differences approach supports these findings.
We also use cluster analysis to identify firms with strong incentives to produce high-
quality reporting compared with their counterparts with weaker incentives. The results show
that IFRS have improved earnings reliability for all French firms. This means that firm
incentives mitigate the negative effect of IFRS on earnings relevance compared to those with
weaker incentives. The results suggest that earnings quality for all firms is affected after
IFRS adoption. Firm-specific incentives can further enhance the positive effect, but under no
circumstances can they substitute for the IFRS effect. This conclusion cripples the findings
presented by Christensen et al. (2015).
This paper is organized as follows: Section 2 presents the literature review and hypothesis
development. Section 3 describes the sample and methodology, and Section 4 presents the
results and discussion. Section 5 provides the conclusion.

2. Hypothesis development
2.1 Impact of IFRS on earnings quality
According to the agency theory and political perspectives, the accounting system helps
ensure that managers use the company’s resources properly. Nevertheless, opportunistic
managers may use accounting choices to manipulate earnings and to privilege their personal
interests (Jensen and Meckling, 1976; Gjesdal, 1981). IFRS are able to overcome the failures of
local accounting systems and managerial opportunism. The IASB has reduced alternative
accounting options and presented measures that may reflect a company’s real economic
situation (Barth et al., 2008). Ewert and Wagenhofer (2005) show the ability of an accounting
standard to limit earnings management and enhance earnings reliability. IFRS may then
ensure the disclosure of earnings exempt from error or bias.
IFRS also focus on the ability of accounting information to help the decision-making process of
potential users, such as investors, and then to enhance earnings relevance. According to
information theory, accounting information is relevant if it helps users make the right decision at
the right time (Barth, 1994; Barth and Landsman, 1995). This finding is based on the assumption
of market information efficiency, suggesting that market prices are able to incorporate at any time
all relevant and available information (past, present and future; Fama, 1965, 1970).
However, empirically, it seems that IFRS cannot bring about an identical effect on the
quality of corporate earnings for all countries that adopt the standards. Paananen and Lin
JAAR (2009), Lin et al. (2012) and Christensen et al. (2015) state that international financial standards
decrease the earnings quality of German companies after adoption. Christensen et al. (2015)
report a significant decrease for companies that originally adopt IFRS in 2005 after they
become mandated. Similarly, Elbakry et al. (2017) show an increase in the level of value
relevance of German companies. For French companies, Jeanjean and Stolowy (2008) find that
the level of earnings management worsens after companies adopt IFRS. However, Z
eghal
et al. (2011) argue that IFRS are superior in improving the quality of earnings, through a
decrease in earnings management for French companies.
Thus, it is unclear whether international accounting standards enhance or worsen the
quality of earnings. Previous studies explain this ambiguity by institutional factors that have
a major influence on earnings quality (Cahan et al., 2009; Haw et al., 2012; Houqe et al., 2012;
Landsman et al., 2012; Ahmed et al., 2013). Nevertheless, some authors document that the
IFRS effect depends on the divergence of local GAAP from international GAAP, regardless of
the country’s legal enforcement (Chen et al., 2010; Cai et al., 2014; Onali and Ginesti, 2014;
Houqe et al., 2016). Furthermore, this mixed evidence for the effect of IFRS can be driven by
the various proxies used for earnings quality, that is, earnings management (Jeanjean and
Stolowy, 2008; Chen et al., 2010; Houqe et al., 2012; Doukakis, 2014), value relevance (Gast
on
et al., 2010; Kim, 2013; Elbakry et al., 2017) and conservatism (Chan et al., 2015; Zeghal and
Lahmar, 2018). Table 1 presents a summary of the IFRS effects on individual earnings quality
attributes.
Given the mixed evidence for the effect of IFRS on earnings quality, we assume that IFRS
adoption influences the overall earnings quality measured by earnings reliability and
relevance. However, we do not predict a direction for the latter effect.
H1. IFRS affect earnings quality after a long period of mandatory adoption.

2.2 Heterogeneity of the IFRS effect: the role of firm-specific incentives

The impact of IFRS on earnings quality depends on institutional, legal and cultural factors
(Ball et al., 2000; Fan and Wong, 2002; Leuz et al., 2003; Haw et al., 2004; Burgstahler et al.,
2006). However, previous literature shows that this effect is also driven by firm-specific
incentives (Ball et al., 2003; Ball and Shivakumar, 2005; Lang et al., 2006; Soderstrom and Sun,
2007). For instance, Gaio (2010) shows that firm characteristics explain 31.3% of the variation
in earnings quality, while institutional factors explain only 8.5%.
Based on this literature, earnings quality differs among firms, subject to the same
accounting standard. Accordingly, the change in standards cannot bring an improvement in
earnings quality if firm-specific incentives remain constant. Daske et al. (2013) assume that
the economic consequences of adopting IFRS depend on managers’ incentives rather than on
the accounting standard itself.
Companies that are reluctant to disclose quality information tend to resist change and take
advantage of the flexibility of international standards. In contrast, firms with strong
incentives to prepare quality reporting disclose high-quality information. For instance,
Christensen et al. (2015) show that companies seeking external financing and with high
institutional investor ownership voluntarily adopt IFRS and improved earnings quality.
However, firms that persistently resist IFRS experienced a decrease in earnings quality. Chan
et al. (2015) find an increase in earnings quality only among the mandated adopters of IFRS
with a higher cost of debt and in countries less dependent on private debt or bank financing.
Consequently, we cannot expect a similar effect of IFRS on earnings quality for all
companies that adopt this international standard. This effect is highly dependent on the
company’s specific incentives. The second hypothesis then is as follows:
H2. The effect of IFRS on earnings quality depends on firm-specific incentives.
Authors Country Earnings quality measures Results
New insights
into IFRS and
Lin et al. (2012) Germany Earning management (EM), EQ decreases after adoption earnings
timely loss recognition, value
relevance quality
Christensen et al. Germany EM, timely loss recognition, EQ increases for firms that adopted
(2015) value relevance IFRS voluntarily and decreases for
firms that adopted IFRS compulsorily
Elbakry et al. Germany and Value relevance Value relevance increases after
(2017) UK adoption
Jeanjean and Australia, UK EM EQ decreases (increases especially in
Stolowy (2008) and France France)
Z
eghal et al. France EM EQ increases (EM decreases)
(2011)
Z
eghal et al. European EM, timeliness, value IFRS increase the EQ proxies based on
(2012) countries relevance and conservatism accounting data and decrease EQ
proxies based on market data
Ahmed et al. European income smoothing, reporting EQ decreases mainly for IFRS
(2013) countries aggressiveness and earnings adopters in strong enforcement
management countries
Houqe et al. European Abnormal accruals IFRS improve earnings quality in all
(2016) countries countries.
Cai et al. (2014) European EM EQ increases (EM decreases) for Table 1.
countries countries when they have a higher Summary of key
level of divergence from IFRS before findings for IFRS
IFRS adoption effects

3. Research design
3.1 Data and sample
The sample includes all French non-financial companies listed on the Paris Euronext stock
exchange, which adopted mandatory use of IFRS in 2005. Data required for the study are
available in the Worldscope and Datastream databases. The initial sample is 562 firms. Our
purpose is to investigate the effect of IFRS on earnings quality after the transition, so that firms
listed on the stock exchange after 2005 are dropped. We also eliminate firms using an
accounting framework other than French GAAP and firms with missing values for the
computation of different attributes of earnings quality [3]. The final sample includes 244 firms.
Data are collected over the period 2002–2015. The 2005 transition year is not included in the
sample period, given the specific accounting requirements that accompany first-time adoption [4].
Table 2 shows the industry distribution of the sample according to the Industry
Classification Benchmark (ICB). Table 2 shows the strong presence of the industrial sector,

ICB name Observations Number id Proportion Cumulative %

Basic materials 169 13 5.33 5.33

Consumer services 767 59 24.18 29.51
Consumer goods 598 46 18.85 48.36
Health care 143 11 4.51 52.87
Industrial 793 61 25 77.87
Oil and gas 78 6 2.46 80.33 Table 2.
Technology 533 41 16.8 97.13 Industry distribution
Telecommunications 26 2 0.82 97.95 according to the ICB
Utilities 65 5 2.05 100 classification
JAAR which represents 25.00% of the total sample. Firms in the consumer services sector are strongly
represented, with a proportion of 24.18%. Only two firms represent the telecommunications
sector, the smallest proportion of the overall sample (0.820%).

3.2 Variable definitions and measurements

3.2.1 The aggregate measure of earnings quality. Despite the importance of earnings quality,
it has neither a common definition nor a generally accepted approach for measurement
(Schipper and Vincent, 2003). Earnings quality is considered a multidimensional concept.
Recent researchers use various attributes to assess this variable. According to the IASB’s
conceptual framework, information quality is fundamentally reliable and relevant. These
two dimensions are complementary, because reliability gains more value if it allows
investors with privileged access to this information to make investment decisions. We then
calculate an aggregate of earnings quality as a measure that involves earnings reliability
and relevance.
3.2.1.1 Earnings reliability. Reliable earnings are free from accounting manipulation.
A number of empirical metrics were designed to detect whether earnings have a distortion
bias, that is, earnings management through accruals, income smoothing and conservative
earnings (Dechow et al., 2010; Christensen et al., 2015).
First, we measure the accruals quality with the standard deviation of the residuals
estimated from the Dechow and Dichev (2002) model and modified by McNichols (2002),
which is presented as follows:
AWCit ¼ α0:i þ α1:i CFOi:t−1 þ α2:i CFOi:t þ α3:i CFOi:tþ1 þ α4:i ΔREVi:t þ α5:i IMMOi:t
þ γ i:t ; (1)

With:
AWCit ¼ ΔCAi:t  ΔCLi:t  ΔCashi:t  ΔDepri:t
CFOi:t ¼ NIi:t  ACCi:t
ACCi:t ¼ ΔCAi:t  ΔCLi:t  ΔCashi:t  ΔDepri:t þ ΔDEBTi;t ;

where NIi:t is the net income, ΔCAi:t is the change in the current assets of firm i at date t,
ΔCLi:t is the change in the current liabilities of firm i at date t, ΔCashi:t is the change in the
firm’s cash and cash equivalents at date t, ΔDepri:t is the change in the depreciation and
amortization of firm i at date t and ΔDEBTi;t is the change in the earnings quality of firm i at
date t. Because the accruals quality is inversely related to the reliability of the result, the
quality is calculated as follows: AQi;t ¼ −σ ðγ i:t Þ is calculated over a 5-year window from t–4
to t. The value of AQi;t shows that the earnings are reliable.
Second, following Barth et al. (2008) and Ahmed et al. (2013), we consider income
smoothing an account manipulation technique [5]. We refer to the Leuz et al. (2003) measure
that compares the variability of net income (measured by the standard deviation of the net
income normalized per the total assets) with the variability in the cash flows from operations
(the standard deviation of CFO normalized per the total assets):
σ ðNIit Þ
SMOOTHit ¼ :
σ ðCFOit Þ
The standard deviation is based on a 5-year window from t–4 to t. A statistically significant
value of SMOOTH reflects a reduction in income smoothing and an improvement in earnings
reliability.
 Third, according to Basu (1997), conservatism is the asymmetry of loss recognition New insights
(measured by negative returns) into profits (measured by positive returns) at the outcome into IFRS and
level. Basu’s (1997) model is presented as follows:
earnings
EARNi:t ¼ w0;i þ w1:i NEGi:t þ w2:i RETi:t þ w3:i RETi:t 3NEGi:t þ εi:t ; (2) quality
where EARNi:t is the net income per share normalized by the total assets of firm i at date t,
RETi:t is the market return of firm i for a period of 15 months (i.e. 3 months after the end of the
fiscal year) and NEGi:t is a dummy variable takes the value 1 if the return for firm i at date t
is negative, and 0 otherwise.
In accordance with Basu (1997) and Pope and Walker (1999), we measure conservatism as
follows: CONSERVi:t ¼ w2:i:twþw
2:i:t
3:i:t
.
The coefficients are estimated on a firm-year basis using a rolling regression with a
Newey–West [6] estimator over a 5-year window from t–4 to t [7]. A statistically significant
value of CONSERVi:t reflects a high level of conservatism, resulting in a high level of
reliability.
Thus, we obtain an aggregated measure of earnings reliability by averaging the decile
ranking of the different values of the three proxies for each year (assigning class 1 for the
lowest values, and class 10 for the highest values):
rAQi:t þ rSMOOTHi:t þ rCONSERVi:t
AgReliabi:t ¼ :
3

3.2.1.2 Earnings relevance. According to Dechow and Schrand (2004), information is relevant
if it influences users’ decision-making. We identify four proxies to measure earnings
relevance: two proxies based on accounting data (persistence and predictability) and two
proxies based on market data (value relevance and timeliness).
In line with Francis et al. (2004), we measure persistence by the estimated slope coefficient
of the following equation, based on Lev (1983) and Ali and Zarowin (1992):
NIi:t ¼ μ1:i þ μ2:i NIi:t−1 þ εi:t; (3)

where NIi:t is the income for firm i at date t.

Following the same rolling regression methodology, Equation (3) is estimated for each
firm-year. Persistence is detected from the estimated slope coefficient: PERSi;t ¼ μ2:i. A high
value of PERSi;t reflects high earnings relevance.
Lipe (1990) measures predictability by variance in earnings shocks. This is calculated as
the square root of the residual variance estimated from Equation (3). The PRED variable is
then calculated: pffiffiffiffiffiffiffiffiffiffiffiffiffiffi
PREDi:t ¼ − σ 2 ðεi:t Þ:

A high PRED value reflects the strong predictive capacity of the earnings.
Value relevance is estimated through the explanatory power of Ohlson model (1995):
Rit ¼ γ 0 þ γ 1 EPSi:t þ γ 2 ΔEPSi:t þ εi:t ; (4)

where Rit is the market return of firm i for a 15-month period (i.e. 3 months after the end of the
fiscal year), and EPSi:t is the earnings per share normalized by the share price at the
beginning of the period (Pi:t−1). This equation is estimated for each firm-year using the rolling
regression methodology. RELEV is an increasing function of the earnings quality:
RELEVi:t ¼ Ri;t:Equation4
2
:
JAAR The last proxy of earnings relevance is timeliness, which implies that information is provided
in financial statements on a timely basis (Ball et al., 2000). Timeliness is measured with the
explanatory power of Basu’s (1997) model Equation (2):
TIMELi;t ¼ Ri:t:

2
equation4 :

TIMEL is an increasing function of the earnings relevance.

We then calculate the aggregate measure of relevance as the average of the decile ranking
of the values calculated for these different proxies each year. Thus:
rPERSi:t þ rPREDi:t þ rRELEVi:t þ þrTIMELi:t
AgRelevi:t ¼ :
4
Finally, the proxy for earnings quality is an aggregate measure, AgEQi:t, calculated as the
sum of the aggregate measure of reliability and relevance. The proxy is the average of the
different rankings attributed to the seven proxies of earnings quality for each year (Gaio and
Raposo, 2014; Parte-Esteban and Garc
ıa, 2014):
rAQi:t þ rSMOOTHi:t þ rCONSERVi:t þ rPERSi:t þ rPREDi:t þ rRELEVi:t þ rTIMELi:t
AgEQi:t ¼ :
7

3.2.2 Measure of IFRS adoption: IFRS. We use a dichotomous variable that takes a value of 1
for the years after adoption (from 2006), and 0 for the period before the mandatory adoption,
that is, from 2002 to 2004. Following Ahmed et al. (2013), we do not consider the transition
year, because this year is characterized by different exemptions given by IFRS 1.
3.2.3 Firm incentives variables. Previous literature shows that large companies have a rich
information environment and a high number of analysts following (Schipper, 1991; Lang and
Lundholm, 1996). They then report high earnings quality (Lobo and Zhou, 2001; Easley et al.,
2002). Similarly, a firm’s profitability is positively associated with high earnings quality
(Singhvi and Desai, 1971; Balsam et al., 1995; Sloan, 1996). Earnings quality is also associated
with leverage, as creditors can monitor the company (Christensen, 2012; Christensen et al.,
2015). In addition, external financing needs constrain managers to report high earnings
quality (Daske et al., 2013).
We then include firm-specific incentives: firm size (SIZE: logarithm of total assets),
leverage (LEV: ratio of liabilities to total assets), firm performance (ROA: net income to total
assets) [8], foreign sales (INTERNAT: turnover from the ratio of foreign transactions to total
turnover) and analyst coverage (ANALYST: logarithm of the number of analysts of firm i at
date t (plus 1)).
3.2.4 Control variables. Following previous literature, we control for firm size (SIZE)
measured by the natural logarithm of the total assets (Francis et al., 2004; Cascino et al., 2010).
Information environment uncertainty is measured by the standard deviation of operating
cash flows (SDCFO) and the standard deviation of sales (SDSALES; Dechow and Dichev,
2002; Francis et al., 2004). The negative net income (NEG) is measured as the number of years
with negative net income over the total number of years for each firm (Dechow and Dichev,
2002). Audit quality (BIG4) is a dummy variable that takes 1 if the company is audited by
BIG4, and 0 if not. The debt ratio (LEV) is defined as the ratio of the total liabilities to the total
assets (Francis and Wang, 2008; Van Tendeloo and Vanstraelen, 2008; Z
eghal et al., 2011;
Christensen, 2012; Christensen et al., 2015). The market-to-book ratio (MTB) measures growth
opportunities and refers to the ratio of the market value of firm i at date t to its book value
(Watts, 2003). We also include the financial crisis (CRISIS) dummy variable that equals 1 for
the years 2008 and 2009, and 0 otherwise.
 We expect to find a positive association between earnings quality and firm size, growth New insights
opportunities, debt level and audit quality. However, the uncertainty of the operating into IFRS and
environment, the negative net income and the financial crisis are likely to decrease earnings
quality.
earnings
quality

4. Results and discussion

4.1 Univariate analysis
Table 3 shows that the mean (median) of the earnings quality for French companies is 5.262
(5.360). These earnings appear to have a higher score for relevance than for reliability.
Earnings reliability is, on average, 6.553 compared to the mean for reliability of 4.919.
The operational environment of the sampled firms shows variability in operating cash
flows averaging 0.057 (median 0.036) and 0.130 as the average (median 0.090) of the
variability in sales revenue. In addition, on average, one time over 5 years, a firm in the sample
achieves a negative net result, and 38% of the total samples are audited by a BIG4 auditor.
Table 4 shows differences in the means of earnings quality measures between the pre- and
post-IFRS periods. The results of the parametric and non-parametric tests show that earnings
reliability improves significantly after the transition to international standards. However,
earnings relevance records a statistically significant decrease during the post-IFRS period
compared to the pre-IFRS period. These results suggest that the adoption of international
financial standards limits discretionary accounting practices. However, this improvement is
not observed for earnings relevance.
According to Gujarati (2004), a serious multicollinearity issue exists if the correlation
coefficient is greater than or equal to 0.7. The Pearson correlation matrix between the
different variables presented in Table 5 does not reveal correlation coefficients above 0.7. To
further confirm the lack of the multicollinearity problem, we calculate the variance inflation
factor (VIF) values. The VIF is 3.12, far below the limit of 10.0. Therefore, we continue the

Variables Mean St. dev. Q10 Q25 Median Q75 Q90

AgEQ 5.262 0.892 4.093 4.712 5.360 5.896 6.278

AgReliab 4.919 0.946 3.782 4.482 4.979 5.374 5.895
AgRelev 6.553 1.329 4.706 5.711 6.738 7.556 8.099
SIZE 19.998 2.329 17.174 18.270 19.764 2.472 23.73
SDCFO 0.057 0.072 0.013 0.020 0.036 0.066 0.113
SDSALES 0.130 0.122 0.031 0.052 0.090 0.161 0.279
NEG 0.145 0.320 0.000 0.000 0.000 0.000 0.800
LEV 0.690 2.273 0.372 0.500 0.625 0.744 0.834
MTB 1.824 1.762 0.555 0.930 1.460 2.350 3.555
0 1
BIG4 38% 62%
Note(s): This table presents descriptive statistics for different variables. AgEQ is the aggregate measure of
earnings quality, equal to the average of the ranking decile of the different attributes of earnings reliability and
relevance. AgReliab is the aggregate measure of earnings reliability, equal to the average of the ranking decile
of accruals quality, smoothing, and conservatism. AgRelev is the aggregate measure of earnings relevance,
which is the average of the ranking decile of persistence, predictability, value relevance and timeliness. The size
of the firm (SIZE) is measured by the natural logarithm of total assets. The variability of cash flows (SDCFO) is
measured by the standard deviation of cash flows. The variability of sales (SDSALES) is equal to the standard
deviation of sales. The frequency of negative net results (NEG) is the number of years with negative net income
over the total number of years. The debt ratio (LEV) is measured by the ratio of total liabilities to total assets.
The growth opportunity is measured by the ratio (MTB). BIG4 is a dummy variable equal to 1 for firms that are Table 3.
audited by a Big Four company. All financial variables are winsorized from 1 to 99% Descriptive statistics
JAAR analysis without serious multicollinearity problems that could bias the results of the
subsequent tests (Neter et al., 1996).

4.2 A multivariate analysis and discussion of the results

The research model is specified as follows:
AgFiabi;t X
AgEQi;t or ¼ γ 0: þ γ 1 IFRSi;t þ γ n CONTROLSi;t þ εi;t: (5)
orAgPerti;t

AgEQ is the aggregate measure of the earnings quality, AgReliab is the aggregate measure of
earnings reliability, AgRelev is the aggregate measure of the relevance and IFRS is the
dummy variable equal to 1 for the post-IFRS period.
We estimate Equation (5) with the ordinary least squares (OLS) estimator and introduce
INDUSTRY dummies to control the systematic difference between the sectors.
Heteroskedasticity and autocorrelation are corrected by introducing the robust standard
error and clustered at the firm level (Petersen, 2009). To confirm the results, we use the
Newey–West estimator (Gow et al., 2010).

Pre-IFRS Post-IFRS T student test MannWhitney

Variables N Mean N Mean Diff. t-stat Z p>jZj

AgEQ 732 5.289 2,440 5.292 0.003 (0.09) 0.689 0.491

AgReliab 732 4.625 2,440 5.014 0.389*** (8.92) 9.363 0.000
AgRelev 732 6.844 2,440 6.510 0.334*** (5.97) 5.212 0.000
Note(s): This table presents the mean difference between pre- and post-IFRS periods. AgEQ is the aggregate
measure of the earnings quality, equal to the average of the ranking decile of the different attributes of the
Table 4. reliability and relevance. AgReliab is the aggregate measure of earnings reliability, equal to the average of the
Mean differences ranking decile of accruals quality, smoothing and conservatism. AgRelev is the aggregate measure of the
between pre- and post- relevance which is the average of the ranking decile of persistence, predictability, value relevance and
IFRS periods timeliness. ***p < 0.001

Variables IFRS CRISIS SIZE MTB LEV SDCFO SDSALES NEG BIG4

IFRS 1
CRISIS 0.233* 1
SIZE 0.083* 0.012 1
MTB 0.053* 0.039* 0.051* 1
LEV 0.055* 0.011* 0.043* 0.017 1
SDCFO 0.214* 0.045* 0.440* 0.052* 0.191* 1
SDSALES 0.015 0.004 0.045* 0.013 0.013* 0.009* 1
NEG 0.024 0.046* 0.246* 0.021 0.015 0.160* 0.025 1
BIG4 0.001 0.001 0.326* 0.008 0.021 0.124* 0.027 0.035* 1
Note(s): This table presents the Pearson correlation matrix. IFRS is a dummy variable equal to 1 for years
2006–2015. CRISIS is a dummy variable equal to 1 for the years 2008 and 2009. The size of the firm (SIZE) is
measured by the natural logarithm of total assets. The variability of cash flows (SDCFO) is measured by the
standard deviation of cash flows. The variability of sales (SDSALES) is equal to the standard deviation of sales.
The frequency of negative net results (NEG) is the number of years with negative net income over the total
Table 5. number of years. The debt ratio (LEV) is measured by the ratio of total liabilities to total assets. The growth
Pearson correlation opportunity is measured by the ratio (MTB). BIG4 is a dummy variable equal to 1 for firms that are audited by a
matrix Big Four company. All financial variables are winsorized from 1 to 99%. *p < 0.01
 To investigate the role of firm-specific incentives in the IFRS and earnings quality relation, New insights
we use cluster analysis. This methodology splits the sample into two categories according to into IFRS and
specific features of the companies. As a result, we identify the group of observations that have
similar characteristics within the same group, and that are different when they belong to a
earnings
distinct group. We adopt the K-medoids partitioning approach, also known as partition quality
around medoids (PAM). This technique is based on identifying the most representative point
among all points (medoids) and presenting it as a cluster center (Batra, 2011). The next step is
to minimize the Euclidean distance between the individual variables of the different
individuals in the sample (Kaufman and Rousseeuw, 2009). Table 6 reports the results of this
cluster analysis.
We re-estimate Equation (5) for the subsample of firms in cluster 1 and cluster 2
separately. Cluster 1 presents firm-year observations with high firm-specific incentives
compared to firm-year observations for cluster 2. We use the Chow test to compare the effect
of IFRS on the earnings quality for both subsamples. The purpose of this test is to determine
whether the coefficients of two linear series are equal.
Table 7 reports the impact of IFRS on earnings quality. Column (1) of Table 7 shows a
negative and statistically significant coefficient of the IFRS variable for earnings quality at
the 1% level. The Newey–West estimator in column (2) reports similar findings. This result
suggests that earnings quality decreases following the mandatory adoption of IAS/IFRS by
French companies. This means that the IASB’s efforts to enhance IAS/IFRS do not provide
assurance of earnings quality even a decade after adoption for French companies.
For the control variables, Table 7 shows a positive and statistically significant correlation
between firm size and the aggregate measure of earnings quality, supporting existing
literature that large companies have better earnings quality. This result is valid for
companies with a high level of debt (LEV 0.013, p < 0.01) and strong growth opportunities. As
expected, increased variability in CFO operating cash flows and a high frequency of negative
net income affect the quality of the earnings negatively and statistically significantly. These
results are in line with those of Gaio (2010) and Parte-Esteban and Garc
ıa (2014). The results
also show that the financial crisis improves the earnings quality of French companies. This
result is similar to that of Arthur et al. (2015). French companies are able to improve the
quality of their earnings during the crisis period to restore investor confidence in a volatile
environment.
Table 8 reports the regression results for the impact of IFRS on the reliability and relevance
dimensions of earnings quality separately (columns (1) to (4)). The results show that the effect of
IFRS on the reliability aggregate is positive and statistically significant at the 1% level.

Median Mean Mean difference

Variables Cluster-1 Cluster-2 Cluster-1 Cluster-2 Diff t-student

SIZE 21.662 18.348 21.971 18.257 3.714*** (72.88)

LEV 0.656 0.598 0.642 0.609 0.037*** (4.57)
ANALY 3.303 1 3.046 0.756 2.284*** (8.60)
ROA 0.034 0.029 0.034 0.009 0.025*** (62.59)
INTERNAT 0.527 0.140 0.504 0.262 0.242*** (24.08)
N 1,408 1,764 1,408 1,764
Note(s): This table presents the results of the cluster analysis. The size of the firm (SIZE) is the natural
logarithm of the total assets. The debt ratio (LEV) is the ratio of total liabilities to total assets. The number of
analysts (ANALYST) is the natural logarithm of the number of analysts following the firm plus 1. Profitability
(ROA) is the ratio of net income to total assets. The firm’s internationalization (INTERNAT) is the turnover
from foreign transactions/total turnover. The t-student statistics are between brackets. All financial variables Table 6.
are winsorized from 1 to 99%. ***p < 0.01 Cluster analysis results
JAAR AgEQ
(1) (2)
Variables OLS Newey–West

IFRS 0.234*** 0.234***

(0.043) (0.039)
SIZE 0.077*** 0.077***
(0.011) (0.009)
SDCFO 3.867*** 3.867***
(0.512) (0.448)
SDSALES 0.015 0.015
(0.118) (0.114)
NEG 0.120* 0.120**
(0.069) (0.057)
BIG4 0.070 0.070*
(0.049) (0.039)
LEV 0.013*** 0.013***
(0.003) (0.003)
MTB 0.003* 0.003*
(0.002) (0.002)
CRISIS 0.355*** 0.355***
(0.040) (0.042)
Constant 3.776*** 3.776
(0.263) (0.000)
Observations 3,172 3,172
R-squared 0.217
Industry effect Yes Yes
F-statistic 24.21 58.62
Note(s): This table represents the results of the OLS and Newey–West regressions for analyzing the impact of
IFRS on earnings quality. AgEQ is the aggregate measure of the quality of the earnings. IFRS is a dummy
variable equal to 1 for the years of adoption. SIZE is the firm size equal to the natural logarithm of the total
assets. SDCFO is the variability of operating cash flows equal to the standard deviation of operating cash flows.
SDSALES is the variability of sales equal to the standard deviation of sales. NEG is the frequency of negative
net results in relation to the total number of years. BIG4 is a dummy variable equal to 1 for firms that are
audited by a Big Four company. LEV is the debt ratio equal to the total liabilities/total assets. MTB is the
Table 7. market-to-book ratio that measures the firm’s growth opportunity. CRISIS is a dummy variable equal to 1 for
Impact of IFRS on the years 2008 and 2009. All financial variables are winsorized from 1 to 99%. Standard errors are in brackets.
earnings quality Robust standard errors are clustered at the firm level for the OLS regressions. ***p < 0.01, **p < 0.05, *p < 0.1

The Newey–West regression in column (2) confirms this result, suggesting that IFRS adoption
is associated with an increase in earnings reliability. This finding can be explained by the
limitations of accounting choices, such as the Research and Development (R&D) section. This
accounting choice is one source of earnings manipulation by managers through accruals. IFRS
limit this choice by capitalizing development costs, while research costs are recognized as
expenses (IAS 38). These empirical results are consistent with those of Houqe et al. (2016) and
Zeghal et al. (2012) and support Zeghal et al.’s (2011) findings for the French market.
However, column (3) of Table 8 shows a statistically significant decrease in earnings
relevance measured by persistence, predictability, value relevance and timeliness. This
finding suggests that the fair value associated with IFRS adoption leads to high earnings
volatility and weak earnings relevance. This finding is in line with the findings of Ahmed
et al. (2013) and Christensen et al. (2015). Therefore, investors can use other types of
information to make decisions, such as comprehensive income.
Overall, the impact of IFRS on the earnings quality of French companies does not support
the goals of these international standards. However, a closer look at the two dimensions
 AgReliab AgRelev
New insights
(1) (2) (3) (4) into IFRS and
Variables OLS Newey–West OLS Newey–West earnings
IFRS 0.203*** 0.203*** 0.592*** 0.592*** quality
(0.050) (0.045) (0.068) (0.062)
SIZE 0.072*** 0.072*** 0.093*** 0.093***
(0.016) (0.011) (0.017) (0.014)
SDCFO 5.764*** 5.764*** 2.388*** 2.388***
(0.735) (0.590) (0.633) (0.545)
SDSALES 0.022 0.022 0.052 0.052
(0.146) (0.126) (0.194) (0.189)
NEG 0.051*** 0.051*** 0.076*** 0.076***
(0.018) (0.013) (0.020) (0.017)
BIG4 0.014 0.014 0.146* 0.146**
(0.064) (0.043) (0.076) (0.062)
LEV 0.012** 0.012*** 0.008* 0.008**
(0.005) (0.003) (0.004) (0.004)
MTB 0.019 0.019 0.008 0.008
(0.018) (0.012) (0.017) (0.014)
CRISIS 0.003 0.003 0.658*** 0.658***
(0.047) (0.048) (0.067) (0.067)
Constant 4.156*** 3.410 5.301*** 4.722
(0.367) (0.000) (0.385) (0.000)
Observations 3,172 3,172 3,172 3,172
R-squared 0.300 0.121
Industry effect Yes Yes Yes Yes
F-statistic 25.35 533.3 29.33 339.8
Note(s): This table presents the OLS and Newey–West regression results for analyzing the impact of IFRS on
earnings reliability and relevance. AgReliab is the aggregate measure of the reliability of the result, equal to the
average of the ranking decile of the quality of accruals, smoothing and conservatism. AgRelev is the aggregate
measure of relevance, equal to the average of the ranking decile of persistence, predictability, value relevance
and timeliness. IFRS is a dummy variable equal to 1 for the years of adoption. SIZE is the firm size equal to the
natural logarithm of total assets. SDCFO is the variability of operating cash flows equal to the standard
deviation of operating cash flows. SDSALES is the variability of sales equal to the standard deviation of sales.
NEG is the frequency of negative net results in relation to the total number of years. BIG4 is a dummy variable
equal to 1 for firms that are audited by a Big Four company. LEV is the debt ratio equal to the total liabilities/
total assets. MTB is the market-to-book ratio that measures the firm’s growth opportunity. CRISIS is a dummy Table 8.
variable equal to 1 for the years 2008 and 2009. All financial variables are winsorized from 1 to 99%. Standard Impact of IFRS on
errors are in brackets. Robust standard errors are clustered at the firm level for OLS regressions. ***p < 0.01, earnings reliability and
**p < 0.05, *p < 0.1 relevance

separately shows that IFRS have enhanced earnings reliability, but the relevance is far from
being improved.
We now examine whether the IFRS effects depend on firm-specific incentives. Table 9
reports the heterogeneity of the impact of IFRS adoption on earning quality. Columns (1) and
(2) of Table 9 show a significant decrease in earnings quality for firms with strong incentives
to prepare high-quality reporting as well as for those with weak incentives. However, this
decrease is less statistically significant for firms in cluster 1. The Chow test result is
statistically significant, supporting that the incentives for high earnings quality could have
mitigated the negative effect of IFRS on earnings quality. The results show that IFRS
adoption is the primary determinant of earnings quality, and that firm-specific incentives
cannot substitute this effect.
In Table 10, the effect of IFRS on earnings reliability and relevance between firms in
cluster 1 and cluster 2 is compared. The results show that companies with high and low levels
JAAR AgEQ
(1) (2)
Variables Cluster1 Cluster2

IFRS 0.185*** 0.348***

(0.047) (0.053)
SIZE 0.036*** 0.112***
(0.013) (0.026)
SDCFO 2.992*** 3.811***
(0.937) (0.416)
SDSALES 0.115 0.212
(0.147) (0.173)
NEG 0.100 0.218***
(0.084) (0.066)
BIG4 0.059 0.027
(0.046) (0.048)
LEV 0.012** 0.017*
(0.005) (0.010)
MTB 0.005 0.011
(0.011) (0.014)
CRISIS 0.370*** 0.401***
(0.046) (0.065)
Constant 5.417*** 3,564***
(0.312) (0.515)
Observations 1,408 1,764
R-squared 0.182 0.246
Industry effect Yes Yes
F-statistic 8.022 26.65
Chow test p > χ 2 5 0.000
Note(s): This table represents the results of the OLS regressions for analyzing the heterogeneity of IFRS on
earnings quality. AgEQ is the aggregate measure of earnings quality. IFRS is a dummy variable equal to 1 for
the years of adoption. Cluster 1 is the group of firms with high firm-specific incentives. Cluster 2 is the group of
firms with low firm-specific incentives compared to cluster 1. SIZE is the firm size equal to the natural logarithm
of the total assets. SDCFO is the variability of operating cash flows equal to the standard deviation of operating
cash flows. SDSALES is the variability of sales equal to the standard deviation of sales. NEG is the frequency of
negative net results in relation to the total number of years. BIG4 is a dummy variable equal to 1 for firms that
Table 9. are audited by a Big Four company. LEV is the debt ratio equal to the total liabilities/total assets. MTB is the
Heterogeneity of the market-to-book ratio that measures the firm’s growth opportunity. CRISIS is a dummy variable equal to 1 for
impact of IFRS on the years 2008 and 2009. All financial variables are winsorized from 1 to 99%. Standard errors are in brackets.
earnings quality Robust standard errors are clustered at the firm level for OLS regressions. ***p < 0.01, **p < 0.05, *p < 0.1

of incentives for quality reporting benefit from improved earnings reliability. In addition,
firms in cluster 1 record a deterioration of earnings relevance, although the incentives are able
to mitigate the decrease after the firms adopt IFRS. The Chow test supports these
assumptions by rejecting the null hypothesis. The IFRS coefficients between the different
clusters are not equal.
These findings suggest that firm-specific incentives can further enhance the positive
effect of IFRS, but under no circumstances are incentives able to substitute for the IFRS effect.
This conclusion cripples the conclusion of Dask et al. (2013) and the findings of Christensen
et al. (2015) and Chan et al. (2015).

4.3 Robustness checks

4.3.1 The difference-in-difference approach. Previous research on the effect of IFRS on the
quality of earnings uses the difference-in-difference (DID) methodology (Barth et al., 2008;
 AgReliab AgRelev
New insights
Variables Cluster1 Cluster2 Cluster1 Cluster2 into IFRS and
earnings
IFRS 0.183*** 0.133** 0.489*** 0.740***
(0.049) (0.062) (0.073) (0.084) quality
SIZE 0.047*** 0.045* 0.183*** 0.019*
(0.014) (0.026) (0.040) (0.019)
SDCFO 6.315*** 5.763*** 2.493*** 0.426
(1.308) (0.517) (0.516) (0.974)
SDSALES 0.233* 0.221 0.117 0.166
(0.135) (0.209) (0.276) (0.241)
NEG 0.480*** 0.159** 0.481*** 0.136
(0.092) (0.078) (0.101) (0.135)
BIG4 0.114*** 0.041 0.059 0.171**
(0.041) (0.050) (0.074) (0.074)
LEV 0.042 0.248** 0.033** 0.014*
(0.062) (0.123) (0.016) (0.009)
MTB 0.003 0.022 0.018 0.024
(0.010) (0.019) (0.021) (0.018)
CRISIS 0.040 0.013 0.725*** 0.671***
(0.049) (0.070) (0.100) (0.073)
Constant 5.045*** 4.270*** 6.478*** 3.770***
(0.353) (0.523) (0.454) (0.807)
Observations 1,408 1,764 1,408 1,764
R-squared 0.254 0.289 0.068 0.163
Industry effect Yes Yes Yes Yes
F-statistic 13.34 19.97 8.671 15.65
Chow test p > χ 2 5 0.000 p > χ 2 5 0.000
Note(s): This table presents the OLS and Newey–West regression results for analyzing the impact of IFRS on
earnings reliability and relevance. AgReliab is the aggregate measure of the reliability of the result, equal to the
average of the ranking decile of the accruals quality, smoothing and conservatism. AgRelev is the aggregate
measure of relevance, equal to the average of the ranking decile of persistence, predictability, value relevance
and timeliness. Cluster 1 is the group of firms with high firm-specific incentives. Cluster 2 is the group of firms
with low firm-specific incentives compared to cluster 1. IFRS is a dummy variable equal to 1 for the years of
adoption. SIZE is the firm size equal to the natural logarithm of the total assets. SDCFO is the variability of
operating cash flows equal to the standard deviation of operating cash flows. SDSALES is the variability of
sales equal to the standard deviation of sales. NEG is the frequency of negative net results in relation to the total
number of years. BIG4 is a dummy variable equal to 1 for firms that are audited by a Big Four company. LEV is Table 10.
the debt ratio equal to the total liabilities/total assets. MTB is the market-to-book ratio that measures the firm’s Heterogeneity of
growth opportunity. CRISIS is a dummy variable equal to 1 for the years 2008 and 2009. All financial variables impact of IFRS on
are winsorized from 1 to 99%. Standard errors are in brackets. Robust standard errors are clustered at the firm reliability and
level for OLS regressions. ***p < 0.01, **p < 0.05, *p < 0.1 relevance

Landsman et al., 2012; Ahmed et al., 2013; Chan et al., 2015; Christensen et al., 2015; Houqe
et al., 2016). This approach is used to examine whether the change in earnings quality during
the period after adoption is due to the adoption of IFRS or is a general trend for all companies.
We select a control sample composed of American non-financial firms that do not comply
with IFRS during the investigated period. Financial and stock market data are extracted from
the Worldscope and Datastream databases. The final control sample is composed of 2,892
firm-years over the years 2002–2015. French firms are the treatment sample. The dummy
variable Adopters equals 1 for French companies, and 0 for American companies, and IFRS
indicates the post-IFRS period as well as the years 2006–2015. The DID regression model is as
follows:
JAAR AgFiabi;t
AgEQi;t or ¼ β0: þ β1 IFRSi;t þ β2 Adoptersi;t þ β3 IFRSi;t *Adoptersi;t
orAgPerti;t
X
þ γ n CONTROLSi;t þ εi;t : (6)

AgEQ is the aggregate measure of the earnings quality, AgReliab is the aggregate measure of
earnings reliability, AgRelev is the aggregate measure of earnings relevance, IFRS is the post-
IFRS period and Adopters is the dummy variable that equals 1 for French firms.
Table 11 reports the results of the DID regressions (columns (1) to (4)). The DID coefficient
recorded in column (1) supports the previous result ((Adopters * IFRS) is 0.400, p < 0.01).
IFRS adoption is negatively associated with earnings quality for French companies. This
coefficient is also negative and statistically significant in column (3), suggesting that earnings
relevance decreases after IFRS adoption. The results also show that this decrease becomes
stronger during the second period and the years following the financial crisis of 2009
(column (2)). These findings support the main results.
4.3.2 Alternative periods of study. Given the specific accounting requirements for the first
adoption of international standards, we remove the year of transition to IFRS, as in Ahmed
et al. (2013). We also consider that the effective transition year is 2004, because companies are
required to submit comparative financial statements. Table 12 reports the results on the effect
of IFRS on earnings quality by with the year 2004 omitted (columns (1) and (2)) and the entire
period, including 2004 and 2005 (column (3)). The results remain qualitatively unchanged.
4.3.3 Individual attributes of earnings quality. We run the regression for each attribute of
earnings quality. Table 13 shows the results of the effect of IFRS on accruals quality
(columns (1) and (2)). The relation is positive and statistically significant at the 1% level.
This means that the accruals quality improves after IFRS adoption. This finding supports
the positive effect of IFRS on earnings reliability. Column (3) of Table 13 shows a
statistically significant positive relation between IFRS and the SMOOTH variable at the
5% level. Earnings smoothing after IFRS adoption decreases statistically significantly.
Finally, the results reveal a non-statistically significant relation between IFRS and
accounting conservatism.
Table 14 shows that earnings persistence decreases in the decade after the transition to
the use of the international standards. This result may be due to the variability in income
after the application of fair value. The use of the international standards by French
companies also reduces the predictive power of earnings (columns (3) and (4)). Column (5) of
Table 14 shows that IFRS have a negative and significant effect at the 1% level on the value
relevance. The timeliness measure does not make a difference but supports these results
de facto.
4.3.4 Accruals-based earnings management. We use an alternative measure of earnings
reliability and examine the effect of IFRS on discretionary accruals using the Kothari et al.
(2005) model [9] as follows:
 
1
TAit ¼ α1 þ α2 ΔREVit þ α3 PPEi;t þ α4 ROAit þ εit ; (7)
ATt−1

where TA is the total accruals scaled by the total assets in the beginning of the year, total
accruals is the net income minus the cash flow from operations, AT is the total assets in the
beginning of the year, ΔREVi is the variation in revenue scaled by the total assets in the
beginning of the year, PPE is property, plant and equipment scaled by the total assets in
the beginning of the year and ROA is the profitability ratio measured as net income scaled by
total assets in the beginning of the year.
 (1) (2) (3) (4)
New insights
Variables AgEQ AgEQ AgRelev AgRelev into IFRS and
earnings
Adopters 0.882*** 0.950*** 1.925*** 1.673***
(0.118) (0.113) (0.085) (0.091) quality
IFRS 0.048 0.162**
(0.096) (0.081)
IFRS1 0.030 0.235**
(0.104) (0.113)
IFRS2 0.171* 0.161*
(0.095) (0.088)
IFRS*Adopters 0.400*** 0.434***
(0.100) (0.095)
IFRS1*Adopters 0.152 0.021
(0.110) (0.128)
IFRS2*Adopters 0.385*** 0.210**
(0.100) (0.102)
SIZE 0.072*** 0.074*** 0.079*** 0.083***
(0.011) (0.011) (0.011) (0.010)
SDCFO 5.795*** 5.489*** 3.028*** 2.670***
(0.691) (0.676) (0.406) (0.396)
SDSALES 0.093 0.108** 0.103** 0.128***
(0.057) (0.054) (0.048) (0.047)
NEG 0.010 0.005 0.085 0.092
(0.065) (0.063) (0.053) (0.058)
BIG4 0.120 0.081*** 0.125* 0.128**
(0.049) (0.030) (0.071) (0.049)
LEV 0.022*** 0.006*** 0.009** 0.008***
(0.003) (0.002) (0.004) (0.002)
MTB 0.013** 0.01 0.015 0.023*
(0.002) (0.008) (0.016) (0.013)
CRISIS 0.481*** 0.492*** 0.580*** 0.566***
(0.038) (0.037) (0.066) (0.058)
Constant 5.148*** 5.012*** 3.628*** 3.527***
(0.288) (0.282) (0.252) (0.254)
Observations 6,061 6,061 6,061 6,061
R-squared 0.460 0.457 0.200 0.180
Industry effect Yes Yes Yes Yes
Country effect Yes Yes Yes Yes
Note(s): This table summarizes the regression results of the DID approach. AgEQ is the aggregate measure of
the earnings quality. AgRelev is the aggregate measure of relevance, equal to the average of the ranking decile
of persistence, predictability, value relevance and timeliness of the result. ADOPTERS is a dummy variable
equal to 1 if the firm operates in the French market, and 0 otherwise. IFRS is a dummy variable equal to 1 for the
post-adoption years. IFRS1 is a dummy variable equal to 1 for the years 2006–2008. IFRS2 is a dummy variable
equal to 1 for the years 2009–2015. SIZE is the firm size equal to the natural logarithm of total assets. SDCFO is
the variability of operating cash flows equal to the standard deviation of operating cash flows. SDSALES is the
variability of sales equal to the standard deviation of sales turnover. NEG is the frequency of negative net
results in relation to the total number of years. BIG4 is a dummy variable equal to 1 for firms that are audited by
a Big Four company. LEV is the debt ratio equal to the total liabilities/total assets. MTB is the market-to-book Table 11.
ratio that measures the firm’s growth opportunity. CRISIS is a binary variable equal to 1 for the years 2008 and IFRS effect on earnings
2009. All financial variables are winsorized from 1 to 99%. Robust standard errors clustered at the firm level are quality and relevance:
in brackets. ***p < 0.01, **p < 0.05, *p < 0.1 DID approach

Table 15 reports the effect of IFRS on discretionary accruals [10]. The results support our
findings de facto. Adoption of IFRS reduces earnings management and, consequently,
increases earnings reliability. These results are in line with those of Kouaib et al. (2018).
JAAR Excluding 2004 Excluding 2004 The overall period
(1) (2) (3)
Variables AgEQ AgEQ AgEQ

IFRS 0.372*** 0.268***

(0.048) (0.041)
IFRS1 0.316***
(0.047)
IFRS2 0.241***
(0.049)
SIZE 0.073*** 0.075*** 0.075***
(0.011) (0.011) (0.011)
SDCFO 4.190*** 3.853*** 3.883***
(0.541) (0.532) (0.535)
SDSALES 0.070 0.039 0.038
(0.117) (0.116) (0.116)
NEG 0.151** 0.171** 0.162**
(0.069) (0.068) (0.068)
LEV 0.043 0.031 0.029
(0.088) (0.086) (0.087)
BIG4 0.066 0.065 0.066
(0.048) (0.048) (0.048)
MTB 0.002 0.000 0.003
(0.010) (0.010) (0.010)
CRISIS 0.392*** 0.127** 0.392***
(0.040) (0.052) (0.040)
Constant 4.468*** 4.303*** 4.302***
(0.242) (0.240) (0.240)
Observations 3,172 3,172 3,416
R-squared 0.224 0.218 0.217
I effect Yes Yes Yes
F-statistic 30.22 27.60 29.14
Note(s): This table provides the results of OLS regressions testing the effect of IFRS on earnings quality.
AgEQ is the aggregate measure of the quality of the earnings. IFRS is a dummy variable equal to 1 for the years
2005–2015, and 0 otherwise. IFRS1 is a dummy variable equal to 1 for the years 2005–2008. IFRS2 is a dummy
variable equal to 1 for the years 2009–2015. SIZE is the firm size equivalent to the natural logarithm of the total
assets. SDCFO is the variability of operating cash flows that equals the standard deviation of operating cash
flows. SDSALES is the variability of sales equal to the standard deviation of sales. NEG is the frequency of
negative net results in relation to the total number of years. BIG4 is a dummy variable that equals to 1 for firms
that are audited by a Big Four company. LEV is the debt ratio equal to the total liabilities/total assets. MTB
measures the opportunity for growth. CRISIS is a dummy variable equal to 1 for the years 2008 and 2009. All
Table 12. financial variables are winsorized from 1 to 99%. The study period is from 2002 to 2015. Robust standard errors
Alternative periods clustered at the firm level are in brackets. ***p < 0.01, **p < 0.05

4.3.5 Pre- and post-IFRS adoption periods: Pseudo-panel data. The sample covers the period
2002–2015. The pre-IFRS adoption period spans 3 years (2002–2004), and the post-IFRS
adoption covers 10 years (2006–2015). To overcome the pre- and post-period gap, we use
pseudo-panel data (Deaton, 1985). Pseudo-panel data are constructed as follows: First,
we define cohorts using individual characteristics that are stable over time. For the
analysis, we choose the accounting standards (French GAAP or IFRS) as a cohort.
Second, for every cohort, we calculate the mean value for each variable for each firm.
These mean values become the observations in the pseudo-panel data. As a result, we are
able to estimate the IFRS adoption effect on the mean value of earnings quality for
each firm.
 AQ SMOOTH CONSERV
(1) (2) (3) (4) (5) (6)
Variables OLS Newey–West OLS Newey–West OLS Newey–West

IFRS 0.356*** 0.356*** 0.158** 0.158* 0.087 0.087

(0.089) (0.082) (0.069) (0.086) (0.070) (0.075)
SIZE 0.190*** 0.190*** 0.010 0.010 0.040** 0.040**
(0.028) (0.019) (0.016) (0.020) (0.017) (0.019)
SDCFO 14.910*** 14.910*** 2.773*** 2.773*** 0.470 0.470
(1.651) (1.288) (0.711) (0.866) (0.620) (0.708)
SDSALES 0.329** 0.329** 0.157 0.157 0.221 0.221
(0.161) (0.157) (0.216) (0.223) (0.261) (0.263)
NEG 0.386*** 0.386*** 1.120*** 1.120*** 0.210** 0.210**
(0.123) (0.096) (0.120) (0.136) (0.094) (0.100)
BIG4 0.035 0.035 0.101 0.101 0.080 0.080
(0.124) (0.072) (0.063) (0.080) (0.070) (0.077)
LEV 0.004 0.004 0.058*** 0.058*** 0.007 0.007
(0.009) (0.007) (0.011) (0.013) (0.005) (0.005)
MTB 0.005 0.005 0.005 0.005 0.000*** 0.000***
(0.005) (0.004) (0.004) (0.005) (0.000) (0.000)
CRISIS 0.094* 0.094 0.089 0.089 0.008 0.008
(0.053) (0.059) (0.078) (0.088) (0.077) (0.080)
Constant 5.008*** 5.008 0.233 0.233 1.472*** 1.472
(0.615) (0.000) (0.369) (0.000) (0.368) (0.000)
Observations 3,172 3,172 3,172 3,172 3,172 3,172
R-squared 0.574 0.115 0.011
Industry effect Yes Yes Yes Yes Yes Yes
F-statistic 125.1 227.9 15.33 51.21 4.408 9.575
Note(s): This table presents the results of the OLS and Newey–West regressions for analyzing the impact of IFRS on the attributes of earnings reliability. The quality of
accruals (AQ) is the standard deviation of the regression residuals from the modified DD model (2002) (multiplied by (1)). Income smoothing (SMOOTH) is the ratio of the
standard deviation of net income (normalized by total assets) and operating cash flows (normalized by total assets). Conservatism (CONSERV) is the ratio of negative and
positive yield coefficients estimated from Basu (1997). IFRS is a binary variable equal to 1 for the years 2006–2015, and 0 otherwise. The size of the firm (SIZE) is measured
by the natural logarithm of the total assets. The variability of cash flow (SDCFO) is measured by the standard deviation of cash flow. The turnover variability (SDSALES)
equals the standard deviation of the turnover. The frequency of negative net results (NEG) is the number of years with negative net results over the total number of years.
BIG4 is a dummy variable equal to 1 for firms that are audited by a Big Four company. The leverage ratio (LEV) is measured by the ratio of total liabilities to total assets.
The growth opportunity is measured by the ratio (MTB). The CRISIS is a dummy variable that equals 1 for years 2008 and 2009. The attributes are estimated with their
ranking decile values. All financial variables are winsorized from 1 to 99%. Standard errors are in parentheses. Robust standard errors are clustered at the firm level for
OLS regressions. ***p < 0.01, **p < 0.05, *p < 0.1
earnings
New insights

quality
into IFRS and

individual attributes of
IFRS effect on
Table 13.

earnings reliability
 JAAR

Table 14.
IFRS effect on

earnings relevance
individual attributes of
PERS PRED RELEV TIMMEL
(1) (2) (3) (4) (5) (6) (7) (8)
Variables OLS Newey–West OLS Newey–West OLS Newey–West OLS Newey–West

IFRS 0.250** 0.250*** 0.355*** 0.355*** 1.127*** 1.127*** 0.601*** 0.601***

(0.110) (0.090) (0.102) (0.094) (0.117) (0.116) (0.179) (0.156)
SIZE 0.026 0.026 0.198*** 0.198*** 0.054** 0.054** 0.110*** 0.110***
(0.023) (0.018) (0.036) (0.022) (0.025) (0.026) (0.039) (0.034)
SDCFO 1.245* 1.245** 9.915*** 9.915*** 1.454* 1.454* 0.837 0.837
(0.723) (0.625) (1.369) (1.106) (0.769) (0.782) (1.219) (1.096)
SDSALES 0.192 0.192 0.305 0.305 0.352 0.352 0.070 0.070
(0.238) (0.236) (0.236) (0.224) (0.395) (0.392) (0.470) (0.460)
NEG 0.067 0.067 1.783*** 1.783*** 0.365** 0.365** 0.506** 0.506**
(0.118) (0.111) (0.199) (0.149) (0.175) (0.170) (0.249) (0.203)
BIG4 0.015 0.015 0.297* 0.297*** 0.117 0.117 0.166 0.166
(0.100) (0.078) (0.152) (0.092) (0.110) (0.114) (0.183) (0.151)
LEV 0.009** 0.009 0.017 0.017* 0.021*** 0.021*** 0.023*** 0.023**
(0.004) (0.006) (0.013) (0.009) (0.005) (0.007) (0.008) (0.010)
MTB 0.007* 0.007* 0.003 0.003 0.002 0.002 0.003*** 0.003***
(0.004) (0.004) (0.003) (0.003) (0.005) (0.005) (0.000) (0.000)
CRISIS 0.011 0.011 0.105 0.105 1.284*** 1.284*** 1.232*** 1.232***
(0.093) (0.092) (0.087) (0.093) (0.103) (0.115) (0.163) (0.165)
Constant 2.967*** 2.967 6.163*** 6.163 7.279*** 7.279 4.653*** 4.653
(0.541) (0.000) (0.817) (0.000) (0.671) (0.000) (0.881) (0.000)
Observations 3,172 3,172 3,172 3,172 3,172 3,172 3,172 3,172
R-squared 0.198 0.416 0.054 0.035
Industry effect Yes Yes Yes Yes Yes Yes Yes Yes
Note(s): This table presents the results of the OLS and Newey–West regressions for analyzing the impact of IFRS on the attributes of earnings relevance. Persistence
(PERS) is the slope coefficient of the AR1 model of net income. Predictability (PRED) is the square root of the variability of the error term of the AR1 model of net income
(multiplied by 1). The value-relevance RELEV is the determination coefficient (R2) of the regression of the market return over 15 months and the change in net income.
Timeliness (TIMEL) is the coefficient of determination (R2) of the regression of Basu’s model (1997). IFRS is a binary variable equal to 1 for the years 2006–2015, and
0 otherwise. The size of the firm (SIZE) is measured by the natural logarithm of the total assets. The variability of cash flow (SDCFO) is measured by the standard
deviation of cash flow. The turnover variability (SDSALES) equals the standard deviation of the turnover. The frequency of negative net results (NEG) is the number of
years with negative net results over the total number of years. BIG4 is a dummy variable equal to 1 for firms that are audited by a Big Four company. The leverage ratio
(LEV) is measured by the ratio of total liabilities to total assets. The growth opportunity is measured by the ratio (MTB). The CRISIS dummy variable equals to 1 for years
2008 and 2009. The attributes are estimated with their ranking decile values. All financial variables are winsorized from 1 to 99%. The study period is 2002–2015.
Standard errors are in parentheses. Robust standard errors are clustered at the firm level for OLS regressions. ***p < 0.01, **p < 0.05, *p < 0.1
 (1)
New insights
Variables DA into IFRS and
earnings
IFRS 0.024**
(0.009) quality
SIZE 0.011***
(0.001)
LEVERAGE 0.001***
(0.000)
ROA 0.002***
(0.000)
GROWTH 0.012***
(0.001)
Constant 0.260***
(0.015)
Observations 7,595
R-squared 0.149
Industry effects Yes
Year effects Yes
Note(s): This table presents the results of the OLS regression for analyzing the impact of IFRS on
discretionary accruals. DA is discretionary accruals measured by the Kothari et al. (2005) model. IFRS is a
binary variable equal to 1 for the years 2006–2015, and 0 otherwise. SIZE is the natural logarithm of total assets,
LEVERAGE is the total liabilities to total assets, and ROA is the profitability ratio (net income to total assets). Table 15.
The growth opportunity is measured by the ratio MTB. All financial variables are winsorized from 1 to 99%. IFRS effect on
The study period is 2002–2015. Robust standard errors clustered at the firm level are in parentheses. discretionary
***p < 0.01, **p < 0.05 accruals (DA)

Table 16 reports regression results of the pseudo-panel data. The findings remain qualitatively
unchanged. IFRS decrease earnings quality and, specifically, earnings relevance.

5. Conclusion
The purpose of this study is to examine the effect of IFRS on earnings quality a decade after
their adoption in France. This study also investigates whether the IFRS effect is driven by
firm-specific incentives. As earnings quality is a multidimensional concept, we construct an
aggregated measure that considers the main qualitative information characteristics, that is,
reliability and relevance. Relying on Francis et al. (2004), we identify the quality of accruals,
earnings smoothing and the degree of conditional conservatism as attributes of reliability.
We use earnings persistence, predictability, value relevance and timeliness to measure
earnings relevance. The aggregate measure is the average of the rankings assigned to these
seven attributes.
Based on a sample of French listed companies, the results show that IFRS adoption is
negatively associated with earnings quality. The results also show that the negative effect of
IFRS is observed only for earnings relevance. However, earnings reliability improves after
IFRS adoption in France. In addition, using cluster analysis, the findings show that the
international accounting standards are the primary determinant of earnings quality. Firm-
specific incentives can further enhance the positive effect of IFRS, but the incentives are not
able to substitute the IFRS effect. This finding cripples the conclusion of Dask et al. (2013) and
the findings of Christensen et al. (2015) and Chan et al. (2015).
Practically, these results are relevant for political organizations (the IASB and French
legislators) and investors. Accounting earnings cannot be sufficient to make a decision.
Political organizations must make more effort to promote the relevance of this accounting
figure. Investors should detect accounting numbers, such as comprehensive income, research
 JAAR

estimation
Table 16.
Pseudo-panel data
(1) (2) (3)
Variables Mean_AgEQ Mean_AgReliab Mean_AgRelev

IFRS 0.062*** 0.100*** 0.947***

(0.004) (0.023) (0.042)
Mean_SIZE 0.019*** 0.060*** 0.174***
(0.001) (0.006) (0.009)
Mean_SDCFO 0.330*** 5.034*** 2.607***
(0.038) (0.350) (0.409)
Mean_SDSALES 0.064** 0.381** 0.860***
(0.028) (0.149) (0.311)
Mean_NEG 0.120* 0.051*** 0.076***
(0.069) (0.018) (0.020)
BIG4 0.033*** 0.047** 0.348***
(0.003) (0.019) (0.036)
Mean_LEV 0.012 0.030 0.135
(0.008) (0.055) (0.091)
Mean_MTB 0.002* 0.027*** 0.055***
(0.001) (0.007) (0.014)
Constant 0.183*** 3.195*** 2.346***
(0.020) (0.126) (0.212)
Observations 488 502 488
R-squared 0.343 0.430 0.303
Firms fixed effects Yes Yes Yes
F-statistic 138.22 94.28 110.61
Note(s): This table reports the regression results of pseudo-panel data. A cohort is the accounting standards (French GAAP or IFRS). Mean_AgEQ is the mean value of
the aggregate measure of earnings quality for each firm in each cohort. Mean_AgReliab is the mean value of the aggregate measure of earnings reliability for each firm in
each cohort. Mean_AgRelev is the mean value of the aggregate measure of earnings relevance for each firm in each cohort. IFRS is a dummy variable equal to 1 if the mean
values are from the IFRS cohort, and 0 otherwise. The mean size of the firm Mean_SIZE is the mean size of the firm in each cohort. Mean_ SDCFO is the mean value of the
variability of the cash flow of the firm in each cohort. Mean_SDSALES is the mean value of the turnover variability of the firm in each cohort. Mean_NEG is the mean
value of the frequency of negative net results of each firm in each cohort. The BIG4 dummy variable equals 1 if a firm in each cohort is audited by a Big Four auditor.
Mean_LEV is the mean value of the leverage ratio of the firm in each cohort. Mean_MTB is the mean value of the growth opportunity of the firm in each cohort. All
financial variables are winsorized from 1 to 99%. Robust standard errors clustered at the firm level are in parentheses. ***p < 0.01, **p < 0.05, *p < 0.1
and development expenses and the value of intangible assets that may affect a firm’s New insights
real value. into IFRS and
This study offers new research perspectives. Future studies could analyze the ability of
accounting standards to determine earnings quality with institutional and firm-specific
earnings
incentives. In addition, studies could consider the governance structure, as well as quality
the characteristics of the board of directors and the ownership structure, to better explore the
relation between IFRS and earnings quality. It would be also interesting to compare the
relevance of net income to other accounting figures.

Notes
1. https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#analysis
2. On March 29, 2018, the IASB published its revised Financial Reporting Conceptual Framework and
the document “Amendments to References to the Conceptual Framework in IFRS.” It is applicable
as of January 1, 2020.
3. A firm is included in the sample at date t if data for the firm are available from t–4 to t. Consequently,
and to mitigate the difference that may exist between the different attributes of the earnings quality,
we include only companies with consecutive data available for the computation of the companies’
different attributes. Data are collected from 1998 to 2016.
4. IFRS 1 provides a set of exemptions for first-time adoption. Exemptions affect IFRS 2 and IFRS 3;
IAS 16; IAS 38; IAS 40; IAS 19; IAS21; IAS 32 and IAS 39.
5. The literature on earnings management presents a debate over whether smoothing is a desirable or
undesirable attribute of earnings quality.
6. According to Francis et al. (2004), the rolling approach allows us to present firm-specific data for
each period t. This cannot be valid if we apply the cross-sections approach. In fact, each firm differs
from others even if they operate in the same sector of activity. We use a Newey–West estimator to
address the problem of autocorrelation of residuals.
7. We align with Francis et al. (2003) and Cai et al. (2014) with the choice of the 5-year window.
8. Size, debt structure and profitability are also used as control variables.
9. We use a cross-section estimation to regress the Kothari et al. (2005) model. We drop observations of
less than 10 for each industry (two-digit SIC codes).
10. We use the following control variables: SIZE (natural logarithm of total assets) and Leverage (total
liabilities to total assets). The growth opportunity is measured by the ratio MTB, and ROA is the
profitability ratio (net income to total assets).

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Corresponding author
Ramzi Benkraiem can be contacted at: rbenkraiem@audencia.com

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