Mandatory IFRS adoption and its impact on analysts' forecasts

Abstract

This paper examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) on financial analysts' ability to translate accounting information into forward looking information. In particular, we investigate whether the switch to IFRS has an impact on (1) the ability of analysts to forecast earnings accurately and (2) the agreement among analysts regarding forecasted earnings. The study is set in the European Union, in the year preceding the switch to IFRS and the first year after the switch. We document increased forecast accuracy and agreement after the switch to IFRS. These findings are robust to changes in model specifications. Overall, our results are consistent with the notion that the adoption of IFRS has improved the quality of financial reports and, more specifically the quality of earnings. Our results contribute to the understanding of the effect of the use of a uniform, high quality accounting language on the usefulness of financial information to financial market participants.