The Effect of the Mandatory Application of IFRS on the Value Relevance of Accounting Data: Some Evidence from Greece

Abstract

In this study we tested the effect of the mandatory adoption of IFRS upon the value relevance of earnings and book values using data from the Athens Stock Exchange that covered a period of two years before and two years after the mandatory adoption of IFRS. Greece is a code-law country with strong tax conformity, bank orientation and conservative accounting rules which have a negative effect on the value relevance of financial statements. As IFRS adoption promotes fair value accounting and weakens the link between taxation and accounting rules we expect earnings and book value to become more value relevant ceteris paribus. We report that the adoption of IFRS positively affected the value relevance of consolidated net income and book value although it had no effect on their unconsolidated counterparts and that consolidated accounting numbers are by far more value relevant than unconsolidated ones in both periods and, unexpectedly, this superiority is more pronounced after IFRS adoption. We also report that disaggregating net income increases the explanatory power of the earnings – book value capitalization (EBVC) model. Finally, we report that although the overall explanatory power of the model increases, the incremental explanatory power of both net income and financial income decreases. These last findings question the expected benefits of specific IFRS rules concerning the measurement of these income components. Nevertheless, assuming that the total impact of IFRS adoption is captured by the overall explanatory power of the models which actually increased, we conclude that mandating IFRS may prove beneficial even in an unfavorable context.