Financial Statement-Based Forecasts and Analyst Forecasts of Profitability: The Effect of Mandatory IFRS Adoption

Abstract

This study examines whether mandatory IFRS adoption is associated with an increase in the accuracy of financial statement-based models for forecasting profitability out-of-sample. The study also examines the relation between analyst forecast accuracy and financial statement-based forecast accuracy around mandatory IFRS adoption. We find significant improvement in financial statement-based forecast accuracy around mandatory IFRS adoption. We find significant improvement in analyst forecast accuracy around mandatory IFRS adoption only in countries that concurrently made substantial improvements to financial reporting enforcement. We also show that the improvement in analyst forecast accuracy is associated with the improvement in financial statement-based forecast accuracy and that analysts place more weight on financial statement-based forecasts after mandatory IFRS adoption in countries with concurrent changes in enforcement, while they place the same weight on financial statement-based forecasts after mandatory IFRS adoption in countries without concurrent enforcement changes. Finally, we document that financial statement-based forecasts provide incremental information over analyst forecasts for explaining year-ahead profitability for firms in countries that did not bundle mandatory IFRS adoption with concurrent changes in enforcement. These findings are important for understanding the impact of mandatory IFRS adoption on the predictive ability of financial statements and for understanding analysts’ use of financial statements around mandatory IFRS adoption.