Effect of Mandatory Adoption of IFRS on Earnings Predictability of Firms in the Financial Services Sector

Main Article Content

Godwin I. Ebirien
Lillian O. Nkanbia-Davies
Gospel J. Chukwu

Abstract

Aims: The paper empirically investigated the effect of mandatory adoption of International Financial Reporting Standards on earnings predictability of deposit money banks and insurance firms. 

Study Design: It adopted ex post facto research design.

Place and Duration of Study: The study was conducted in Nigeria and covered the period 2008 to 2014.

Methodology: The study used 196 firm-year observations obtained from annual reports of the deposit money banks and insurance firms quoted on the Nigerian Stock Exchange. It formulated two hypotheses and tested the hypotheses using random effect model of Generalized Least Square Method.

Results: The regression results revealed that the mandatory adoption of IFRS did not improve earnings predictability of firms in the services sector, based on earnings and cash flows. The results also showed that the earnings predictability in the post mandatory IFRS adoption period was not significantly different between DMBs and insurance firms.

Conclusions: Nigeria has relatively short IFRS experience and preparers are still contending with several evolving issues. The paper recommends sustained training for both the preparers, users and regulators so as to improve financial reporting and consequently enhance earnings predictability.

Keywords:
Earnings predictability, international financial reporting standard, financial services sector, Nigerian stock exchange.

Article Details

How to Cite
I. Ebirien, G., Nkanbia-Davies, L. O., & Chukwu, G. J. (2019). Effect of Mandatory Adoption of IFRS on Earnings Predictability of Firms in the Financial Services Sector. Journal of Economics, Management and Trade, 24(1), 1-12. https://doi.org/10.9734/jemt/2019/v24i130154
Section
Original Research Article

References

IASPlus. Use of IFRS by jurisdiction; 2017. (Accessed 25 September 2018)

Available:https://www.iasplus.com/en/resources/ifrs-topics/use-of-ifrs

Soderstrom NS, Sun KJ. IFRS adoption and accounting quality: A review. European Accounting Review. 2007;16(4): 675–702.

Armstrong C, Barth ME, Jagolinzer AD, Riedl EJ. Market reaction to the adoption of IFRS in Europe, The Accounting Review. 2010;85(1):31-61.

Ball R. International Financial Reporting Standards (IFRS): Pros and cons for investors. Accounting and Business Research, International Accounting Policy Forum. 2006;5-27.

Barth ME, Landsman WR, Lang MH. International accounting standards and accounting quality. Journal of Accounting Research. 2008;46(3):467-498.

Bartov E, Goldberg SR, Myungsun K. Comparative value relevance among German, U.S. and International Accounting Standards: A German stock market perspective. Journal of Accounting, Auditing and Finance. 2005;20(2):95-120.

Byard D, Li Y, Yu Y. The effect of mandatory IFRS adoption on financial analysts’ information environment. Journal of Accounting Research. 2011;49(1):69-96.

Daske H, Gebhardt G. International financial reporting standards and experts perceptions of disclosure quality. Abacus. 2006;42(3-4):461-98.

Ding Y, Hope OK, Jeanjean T, Stolowy H. Differences between domestic accounting standards and IAS: Measurement, determinants and implications. Journal of Accounting & Public Policy. 2007;26:1-38.

Daske H, Hail L, Leuz C, Verdi R. Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research. 2008;46:1085-1142.

Hung M, Subramanyam KR. Financial statement effects of adopting International Accounting Standards: The case of Germany. Review of Accounting Studies. 2008;12:623-657.

Jeanjean T, Stolowy H. Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption. Journal of Accounting and Public Policy. 2008;27:480 -494.

La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny RW. Law and finance. Journal of Political Economy. 1998;106:1113-1155.

Bakre OM. The unethical practices of accountants and auditors and the compromising stance of professional bodies in the corporate world: Evidence from corporate Nigeria. Accounting Forum. 2007;31:277-303.

Okike ENM. Management of crisis: The response of the accounting profession in Nigeria to the challenge to its legitimacy. Accounting, Auditing and Accountability Journal. 2004;17:705-730.

World Bank. Report on the observance of standards and codes in Nigeria; 2004. (Accessed 15 March, 2018)

Available:http://www.worldbank.org/ifa/rosc_aa.html

Lipe R. The relation between stock returns and accounting earnings given alternative information. The Accounting Review. 1990; 65:49-71.

Schiemann F, Guenther T. Earnings predictability, value relevance and employee expenses. The International Journal of Accounting. 2013;48(2):149-172.

Ashbaugh H, Pincus M. Domestic accounting standards, International Accounting Standards, and predictability of earnings. Journal of Accounting Research. 2001;39(3):417-424.

Imhoff E, Lobo G. The effect of ex ante earnings uncertainty on earnings response coefficients. The Accounting Review. 1992;67:427-440.

Ball R, Brown P. An empirical evaluation of accounting income numbers. Journal of Accounting Research. 1968;6:159-178.

Graham JR, Harvey CT, Rajgopal S. The economic implications of corporate financial reporting. Journal of Accounting and Economics. 2005;40:3-73.

Affleck-Graves J, Callahan C, Chipalkatti N. Earnings predictability, information asymmetry, and market liquidity. Journal of Accounting Research. 2002;40(3):561-583.

Francis J, LaFond R, Olsson PM, Schipper K. Costs of equity and earnings attributes. The Accounting Review. 2004;79:967-1010.

Hasan I, Park JC, Wu Q. The impact of earnings predictability on bank loan contracting; 2009.

(Accessed: 15 March 2018)

Available:http://ssrn.com/abstract=1898197

Abata AM. The impact of International Financial Reporting Standards (IFRS) on financial reporting practice in the Nigerian banking sector. Journal of Policy and Development Studies. 2015;9(2):169-184.

Dimitropoulos PE, Asteriou D, Kousenidis D, Leventis S. The impact of IFRS on accounting quality: Evidence from Greece. Advances in Accounting, Incorporating Advances in International Accounting. 2013;29:108-123.

Uwuigbe U, Emeni FK, Uwuigbe OR, Ataiwrehe CM. IFRS adoption and accounting quality: Evidence from the Nigerian banking sector. Corporate Ownership & Control. 2016;14(1-1):287-294.

Uwuigbe U, Uyoyoghene AL, Jafaru J, Uwuigbe OR, Jimoh R. IFRS adoption and earnings predictability: evidence from listed banks in Nigeria. Banks and Systems. 2017;12(1-1):166-174.

Ebirien GI, Nwanyanwu LA. Earnings quality of firms in the Nigerian financial services sector. European Journal of Accounting, Auditing and Finance Research. 2017;5(4):54-64.

Adeyemi M. An overview of the Insurance Act 2003, Issues in merger and acquisition for the insurance industry. In Ezekiel OC, editor. Being proceedings of the 2003 NIA Workshop on Insurance Act 2003. Lagos: Nigeria Insurance Association; 2005.

Jegede M. A comprehensive analysis of the Insurance Act 2003 and its implications on the Insurance business environment, issues in merger and acquisition for the insurance industry. In Ezekiel OC, editor. Being proceedings of the 2003 NIA Workshop on Insurance Act 2003. Lagos: Nigeria Insurance Association; 2005.

Chen H, Tang Q, Jiang Y, Lin Z. The role of International Financial Reporting Standards in accounting quality: Evidence from the European Union. Journal of International Financial Management and Accounting. 2010;3: 220-278.

Barth ME. Fair value accounting: Evidence from investment securities and the market valuation of banks. The Accounting Review. 1994;69(1):1-25.

Petroni KR, Wahlen JM. Fair values of equity and debt securities and share prices of property-liability insurers. The Journal of Risk and Insurance. 1995;62(4):719-737.

Eccher EA, Ramesh K, Thiagarajan SR. Fair value disclosures by bank holding companies. Journal of Accounting and Economics. 1996;22:79-117.

Evans ME, Hodder L, Hopkins PE. The predictive ability of fair values for future financial performance of commercial banks and the relation of predictive ability to banks' share prices. Contemporary Accounting Research. 2014;31:13-44.

Venkatachalam M. Value relevance of banks' derivatives disclosures. Journal of Accounting and Economics. 1996;22:327-355.

Barth ME. Relative measurement errors among alternative pension asset and liability measures. The Accounting Review. 1991;66:433-463.

Amir E. The market valuation of accounting information the case of postretirement benefits other than pensions. The Accounting Review. 1993; 68 (4):703-724.

Aboody D, Barth ME, Kasznik R. Revaluations of fixed assets and future firm performance: Evidence from the UK. Journal of Accounting and Economics. 1998;26:149-178.

Dichev ID, Tang VW. Earnings volatility and earnings predictability. Journal of Accounting and Economics. 2009;47:160-181.

Atwood TJ, Drake MS, Myers JN, Myers LA. Do earnings reported under IFRS tell us more about future earnings and cash flows? Journal of Accounting & Public Policy. 2011;30:103-121.

Yao D, Percy M, Stewart, J, Hu F. The usefulness of fair values in improving the predictive ability of earnings: Evidence from international banks; 2015.

(Accessed on 15 March 2017)

Available:http:// eprints.qut.edu.au95456

Njoku I, Adegboye K, Onuoha R. Poor perception: Bane of property insurance, Vanguard; 2012.

Onuoha R. Operators urge public to change perception on insurance, Vanguard; 2012.

Elliott, JA, Philbrick, DR. Accounting changes and earnings predictability. The Accounting Review. 1990;65(1):157-174.

Al-Dhamari RA, Ismail KNI. Governance structure, ownership structure and earnings predictability: Malaysian evidence. Asian Academy of Management Journal of Accounting and Finance. 2013; 9(1):1–23.

Ahmed AS, Duellman S. Accounting conservatism and board of director characteristics: An empirical analysis, Journal of Accounting and Economics. 2007;43(2/3):411-437.

Anderson RC, Mansi, SA, Reeb DM. Board characteristics, accounting report integrity, and the cost of debt. Journal of Accounting and Economics. 2004;37(3): 315-342.

Klein A. Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics. 2002;33:375-400.

De Angelo H, De Angelo L, Skinner D. Accounting choice in troubled companies. Journal of Accounting and Economics. 1994;17:113-43.

De Fond M, Jiambalvo J. Debt covenant violations and manipulation of accruals. Journal of Accounting and Economics. 1994;17:145-176.

Watts RL, Zimmerman JL. Positive accounting theory. Englewood Cliffs, NJ: Prentice-Hall; 1998.

Cameron AC, Trivedi PK. Microeconometrics Using Stata, Revised Edition. Texas: Stata Press; 2010.

Chukwu GJ, Okoye EI. Effect of International Financial Reporting Standards adoption on timely loss recognition: Evidence from Nigeria and South Africa. ICAN Journal of Accounting & Finance, Academic Conference Special Edition. 2016;1(1):59-70.