Although we predict that application of IAS is associated with higher accounting quality, there are atleast two reasons why this may not be true. First, IAS maybe of lower quality than domestic standards. For example, limiting managerial discretion relating to accounting alternatives could eliminate the firm’s ability to report accounting measurements that are more reflective of its economic position and performance. In addition, the inherent flexibility in principles-based standards could provide greater opportunity for firms to manage earnings, thereby decreasing accounting quality. This flexibility has long been a concern of securities markets regulators, especially in international contexts (e.g., Breeden [1994])