The Effect of the Mandatory K-IFRS Adoption on Earnings Management - The Evidence from Korea.

This paper examines whether the mandatory adoption of K-IFRS affects the earnings quality of Korean firms by comparing earnings managements measured with absolute discretionary accruals and real activities earnings managements of pre-IFRS and post-IFRS periods. Using samples of 7,417 firmyear observations from 2006 to 2012, it is found that the accruals earnings management decreased after the mandatory K-IFRS adoption, but real activities earnings management increased. This implies that listed companies would switch from the accrual-based to the real-based earnings management after the mandatory K-IFRS adoption. One implication to accounting information users is that they cannot benefit from the K-IFRS adoption in terms of higher accounting quality. The accounting regulators’ efforts to increase earnings quality by reducing the managerial discretion may cause unintended consequence of the increasing real activities earnings management.