Value Of Equity And Net Income Before And After Mandatory Transition From Gaap

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The research paper aims to examine the combined value relevance of book value of equity and net income before and after the mandatory transition from GAAP to IFRS in Greece. The reason the authors, culture and socio-economic context (Tsoulavatas et al),2012. The transition offers the opportunity to examine the change from a debt and tax oriented accounting standards to a shareholder oriented accounting standards. Greece was chosen to verify the hypotheses in the research paper as the country provides an example of the changes in the point of view of accounting standards from debt and tax oriented accounting leads to conservatism and profit smoothing while shareholder oriented accounting focus on more value relevant financial statements but leads to greater volatility. Greece was a good example in showing the difference of each phenomenon as the country was
Theory and Hypotheses:
There were two theories that the authors tested were:
a) Lower value relevance has been reported for debt-oriented and tax influenced accounting systems (Ali & Hwang, 2000; King & Langli, 1998)
b) Reporting quality would improve under IFRS as the adoption of the standards listed above would reduce creative accounting practices and this would cause significantly negative impact on shareholders’ equity. Polychroniadis(2002)
The first theory claims investors have a more difficult time comparing values in financial statements under GAAP in debt-oriented and tax-influenced accounting systems

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