The economic effects of IFRS adoption in Korea

Abstract

This paper examines whether Korea's mandatory adoption of International Financial Reporting Standards (IFRS) is associated with higher earnings quality. Based on Korean listed companies, we compare earnings quality and market assessment in the pre-IFRS period (2007-2010) with those in the post-IFRS period (2011-2014). We find significant IFRS adoption effects by documenting smaller absolute values in discretionary accruals and real earnings management, higher accrual quality, stronger earnings persistence, and less frequent negative earnings. Thus, we provide evidence of improved earnings quality with Korea's mandatory IFRS adoption. Additionally, we document an increase in the value relevance of earnings, more accurate analysts' earnings forecasts, and higher audit fees and hours. These results show that investors and analysts view improvements in the information environment, and auditors' respond to the complex environment by demanding higher audit fees and making additional efforts after mandatory IFRS adoption.