IFRS diffusion and earnings quality: Moderating role of firm size and IFRS specialists

The study investigates the learning curve impact of International Financial Reporting Standards (IFRS) adoption on earnings quality. In other words, the study investigates how IFRS affects the quality of earnings over time. The study also examines the moderating role of firm size and IFRS specialists/experts on the issue. We use firm-level data of Bombay Stock Exchange listed firms and analyze it through the “Difference in Difference” technique. We find that the association between IFRS and earnings quality changes favorably as the introduction grows longer. In particular, we find that earnings quality is lower during the initial years of IFRS adoption, however, it improves in the later years of adoption, consistent with the notion of diffusion and learning curve theory. Our subsequent tests suggest that small firms are taking more time to percolate through the IFRS system, however, it does not hold when small firms hire IFRS specialists/experts to migrate their older accounts to IFRS, consistent with the notion of resource dependency theory of innovation. Overall, IFRS is found to be a continuous improvement process in emerging nations whose benefit can be derived in the initial years by providing sufficient infrastructural and institutional support, particularly to small firms. Our findings are robust to the problem of endogeneity and offer real-world ramifications for regulatory authorities, accounting-standard setters, and investors.