Essays on the U.S. GAAP-IFRS Convergence Project, the Nature of Accounting Standards, and Financial Reporting Quality

In this dissertation, I examine the changes to the nature of the accounting paradigms of U.S. GAAP and International Financial Reporting Standards (IFRS) over the course of the U.S. GAAP and IFRS convergence project. I further examine whether the changes to the nature of IFRS following convergence impacts the financial reporting quality. The motivation for this study is to provide an initial review of the progress of the convergence process between U.S. GAAP and IFRS that aims to converge both sets of standards towards more principles-based paradigms. The ultimate goal of the convergence process was the development of globally recognized high quality financial reporting standards (FASB, 2002) and the development of principles-based accounting standards was identified as an essential component of such a goal. Extant literature and professional practice agree that U.S. GAAP is more rules-based whereas IFRS is more principles-based. Thus, both the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) agreed that the convergence process would be an ideal vehicle to converge both sets of standards towards more principles-based paradigm. I document that over the course of the convergence project, the underlying accounting paradigm of U.S. GAAP has remained consistent whereas the accounting paradigm of IFRS has become more rules-based. Amendments to existing International Standards and newer standards added over the course of the convergence have moved IFRS towards a more rules-based nature which was not the intended outcome of the convergence process. I further examine if the changes in rules vs. principles-based nature of IFRS has impacted the accounting quality. Using a firm level instrument developed in Folsom et al. (2016) that measures the extent to which firms rely on principles- vs rules-based accounting, standards I find a relation between firm reliance on principles-based standards and earnings persistence. I also find an association between firm reliance on principles-based standards and earnings ability to predict future cash flows as well as concurrent returns. More, importantly the results of my study provide initial evidence that these associations are significantly manifested in the post-convergence period