Has the Accounting Directive Benefited Britain?

Abstract

This study contributes to examining the efficacy of the EU Accounting Directive (AD) in achieving its regulatory goals in the UK capital market. The main purpose of the AD was to simplify accounting requirements to lower firms’ administrative burdens, with a focus on lowering the business costs of small firms. Using a sample of UK firms, we find that while reported business costs decrease post AD adoption, small firms do not exhibit lower costs during this period. Upon AD adoption, the UK Government also argued that implementing AD provisions must not undermine firms’ accounting quality. Contrary to this expectation, we find that the post AD adoption period coincides with a period of lower earnings persistence, lower conservatism, increased smoothing and lower value relevance for UK firms. There also appears to be a shift from accruals management towards real activities manipulation during this time. The decline in accounting quality is exhibited in both small and non-small firms. This is the first study to examine the relationship between AD adoption and firms’ business costs and accounting quality. Overall, the evidence in our paper should assist UK policy makers in assessing the utility of the AD for UK.