Investor perception of the international accounting standards quality: inferences from Germany

The paper analyses whether the adoption of the IAS regime implies an improvement of the firms’ earnings quality. Referring to a sample of German listed companies reporting under the IAS and German GAAP (HGB) in 2000-2004 years, we first examine whether IAS adopters are less subject to earnings management. Our findings show that, in general, the IAS subsample exhibits a level of earnings management lower or equal to the HGB adopters. The general evidence supports the position of the International Accounting Standard Board and of that part of the academic literature stating the IAS’s better quality. Secondly, we investigate whether investors perceive a lower level of uncertainty and information asymmetry for earnings under the IAS regime, after controlling for the level of the discretionary accruals. We find that the IAS adoption entails a lower information asymmetry, but this benefit decreases with the firm size. This means that investors perceive the benefits of higher-quality accounting standards as partially offset by a greater managerial discretion in the small and medium size firms. Therefore, the improvement of the enforcement mechanisms (in addition to the Standard’s quality) should be a major concern for IASB and other regulators.