The Effect of Convergence to International Financial Reporting Standards on the Quality of Financial Reporting in Taiwan

This study analyzes the impact of convergence to International Financial Reporting Standards (IFRSs) on the quality of financial reporting using a sample of companies listed in Taiwan. We employ a long-window approach by comparing the value relevance of accounting information and the predictability of cash flows from the pre-convergence period (1988-1998) to the post-convergence period (1999-2009). By adopting a price level model, our results show that the value relevance of financial reporting significantly increases with time in both the pre-and post-convergence periods, while there is insignificant difference in this trend between the two periods. However, results using a price change model show increases in the explanatory power and the incremental explanatory power of book value in the post-convergence period. The ability of financial reporting information to predict future cash flows is also significantly enhanced from pre-to post-convergence period. Overall, the results indicate that IFRS convergence improves the financial reporting quality of firms in Taiwan. Additional analyses reveal that earnings management reduces the ability of earnings to predict future cash flows in both the pre-and post-convergence periods, while investors fail to take into account of this in the valuation process.