International Accounting Standards and Accounting Quality

We compare characteristics of accounting amounts for firms that apply International Accounting Standards (IAS) to a matched sample of firms that do not to investigate whether applying IAS is associated with higher accounting quality and lower equity cost of capital. We find that firms applying IAS evidence less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do those applying domestic GAAP. Firms applying IAS have higher variance of the change in net income, a higher ratio of the variances of the change in net income and change in cash flows, a significantly less negative correlation between accruals and cash flows, and a lower frequency of small positive net income. They have a significantly higher frequency of large negative net income and generally higher value relevance of accounting amounts. Differences between firms applying IAS and those applying domestic GAAP in the period before IAS firms adopt IAS do not explain the differences in accounting quality. Firms applying IAS generally exhibit higher accounting quality than when they previously applied domestic GAAP. The increase in accounting quality for IAS firms is generally greater than that for firms applying domestic GAAP throughout the sample period. W