African Journal of Finance and Management

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Culture, legal origin and the predictive ability of IFRS earnings and cash flows

Shaban Ngole


This paper addresses the question whether the culture prevalent in African countries and mixed legal origins impact on the earnings and cash flows predictability role of International Financial Reporting Standards (IFRS). It studies five African countries, namely, South Africa, Kenya, Botswana, Egypt and Morocco for the period spanning from 2002 to 2009. The study employs financial data similar to Ngole (2016); however, the culture data are obtained from Hofstede (1980, 2001) and House et al. (2004). The legal origins’ classifications were obtained from La Porta et al. (1997, 1998) and data are analyzed using STATA. The paper extends the Kim and Kross (2005) model by introducing two dummy variables, namely, the conservative culture and legal origin dummies to capture the incremental impact of culture and legal origin on IFRS earnings and cash flows predictability. Generally, and consistent with predictions, the results indicate that conservative culture is associated with a reduction (an increase) in the predictive ability of cash flows (earnings). On the other hand, they do not provide support to the contention that IFRS increases the predictive ability of earnings and cash flows more in common law than in code law firms. The findings imply that while culture matter to the predictive ability of IFRS earnings and cash flows, legal origin is indifferent. Future research may use different constructs such as the rule of law as a measure of overall governance institutions, instead of the common-code law dichotomization. Also, future studies may increase the sample size in terms of firms and countries in order to increase the diversity of culture and legal origins.

Keywords: IFRS, earnings management, prediction, culture, legal origin

JEL Classification: G14. M40. M41

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