Mandatory IFRS Adoption and Accounting Conservatism

Using a large sample of listed firms from 17 European countries that mandatorily adopted IFRS over the period 2005-2008, we examine the effect of mandatory IFRS adoption on accounting conservatism defined using Basu’s (1997) differential timeliness (DT) measure. An important distinction of our study is that we avoid the common criticisms of the DT measure by comparing the difference in the DT measure under local accounting standards and IFRS for the same firm in the same IFRS reconciliation year. We find no evidence that the mandatory IFRS adoption changes the degree of accounting conservatism for non-financial firms, independent of the firms’ countries of domicile. For financial firms domiciled in strong legal enforcement countries, we find some weak evidence that the mandatory IFRS adoption increases the degree of accounting conservatism. In contrast, for financial firms domiciled in weak legal enforcement countries, we find that the mandatory IFRS adoption results in a decrease in accounting conservatism.