Abstract
This study investigates the impact of mandatory International Financial Reporting Standards (IFRS) adoption on the value relevance of financial reports in 13 European countries by comparing the earnings–returns relation pre- and post-IFRS mandatory adoption in 2005. It shows that the financial reporting convergence enhances the contemporaneous association between earnings and returns, consistent with investors' expecting net information quality benefits from the IFRS adoption. While the reduction of price leading return effects documented in Ali and Hwang (2000) is more pronounced for a country with less discrepancy between local generally accepted accounting principles and IFRS, the legal system and aggregate earnings management within that country do not significantly deteriorate the positive value-relevance reaction to mandatory IFRS adoption in Europe.
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