Effect Of Mandatory IFRS Adoption Research Articles

Does mandatory IFRS adoption improve information quality in low investor protection countries?

We examine the effect of mandatory IFRS adoption on the information quality of financial reporting in France, Germany and Sweden. These three Western European civil law countries are characterized as low investor protection by the World Economic Forum's 2012/2013 Global Competitiveness Report. Using data for 2003 and 2011, we find significant improvement in both forecast accuracy and forecast dispersion following mandatory IFRS adoption in all three countries. Furthermore, the effect on information quality is greater the lower the strength of investor protection. These results suggest that mandatory IFRS adoption in low investor protection countries leads to an improvement in information quality. A tentative implication of the results is that standard setters should not delay IFRS adoption pending regulators implementing a high investor protection.

Accounting Conservatism in Europe and the Impact of Mandatory IFRS Adoption: Do Country, Institutional and Legal Differences Survive?

We study the effect of mandatory IFRS adoption in Europe in 2005 on conditional conservatism. We capture conditional conservatism with a modified version of the Khan and Watts (2009) measure (C_Score) that also controls for potential shifts in unconditional conservatism and cost of capital. From a sample of 13,711 firm-year observations drawn from 16 European countries spanning the 2000-2010 period, we document an overall decline in the degree of conditional conservatism after the adoption of IFRS. We show that the decline in conditional conservatism is less pronounced for countries with high quality audit environments and strong enforcement of compliance with accounting standards using the Brown et al. (2014) index. As asset impairment tests are a key mechanism ensuring conditional conservatism in the IFRS framework, we further examine these. We show that firms booking an asset impairment present a smaller decline in the degree of conditional conservatism relative to firms that do not. We also demonstrate that firms that do not book an asset impairment when evidence suggests the probable need to do so experience a more pronounced reduction in conditional conservatism. We argue that IFRS are conceptually conditionally conservative but that inappropriate application of conditional conservatism principles is likely to prevent financial reporting from reaching the level of conservatism targeted by the IASB.

Proper Inferences or a Market for Excuses? The Capital-Market Effects of Mandatory IFRS Adoption

Barth and Israeli (2013) raise five serious concerns regarding the research design and interpretation of Christensen, Hail, and Leuz (2013). They claim: (i) the evidence stands in stark contrast to Daske, Hail, Leuz, and Verdi (2008) and fails to replicate its prior findings; (ii) the research design using fixed effects leaves out main effects and two-way interactions which likely biases the estimated liquidity effects around IFRS adoption and changes in enforcement; (iii) the vast majority of sample observations do not contribute to the identification which is misleading in terms of the scope and the conclusions that can be drawn from the study; (iv) the timing of IFRS adoption and enforcement changes is measured imprecisely leading to low power tests; and (v) the evidence from Japan is irrelevant to the study. In this note, we show that all five claims are incorrect or misleading. Our discussion also more broadly describes how to properly interpret the fixed-effect specifications in Christensen, Hail, and Leuz (2013). Since studies in accounting, finance, and economics make extensive use of fixed-effect models, a correct understanding of this research design is important to avoid interpretational mistakes. More generally, we discuss that proper empirical identification and inferences are important to international accounting and IFRS studies so that this area of research does not become a market for excuses.

The effect of mandatory IFRS adoption on accounting conservatism of reported earnings

Purpose The authors aim to analyze whether the adoption of IFRS accounting standards in Chilean capital markets affects the earnings conservatism of the firms that adopt them.

IFRS Adoption and Management Earnings Forecasts of Australian IPOs

We provide new evidence on the role of management earnings forecasts disclosed in Australian IPOs prospectuses. In particular, our study examines the effect of mandatory IFRS adoption on IPO earnings forecasts. We find that the introduction of IFRS is characterised with higher forecast errors relative to the previous AGAAP period. The magnitude of the forecast errors is associated with firm-size, forecast horizon, and industry classification. Contrary to prior studies the level of earnings forecasts accuracy has historically improved. This is attributed to management continuous efforts to identify potential level of future earnings. The results are robust to variations in the measurement of information environment quality, forecast horizon and sample composition.

The Effect of IFRS Adoption and Investor Protection on Earnings Quality Around the World

This study examines the effects of mandatory IFRS adoption and investor protection on the quality of accounting earnings in forty-six countries around the globe. The results suggest that earnings quality increases for mandatory IFRS adoption when a country's investor protection regime provides stronger protection. This study extends the current literature that shows that accounting practices are influenced by country-level macro settings. The results highlight the importance of investor protection for financial reporting quality and the need for regulators to design mechanisms that limit managers' earnings management practices.

Comparability Effects of Mandatory IFRS Adoption

The mandatory adoption of IFRS by many countries worldwide fuels the expectation that financial accounting information might become more comparable across countries. This expectation is opposed to an alternative view that stresses the importance of incentives in shaping accounting information. We provide early evidence on this debate by investigating the effects of mandatory IFRS adoption on the comparability of financial accounting information around the world. Using two comparability proxies based on De Franco et al. [2011], our results suggest that the overall comparability effect of mandatory IFRS adoption is marginal at best. To investigate the reasons for this finding, we first hand-collect data on IFRS compliance for a sample of German and Italian firms and find that firm-, region-, and country-level incentives systematically shape accounting compliance. We then use the identified compliance incentives to explain the variance in the comparability effect of mandatory IFRS adoption and find it to vary systematically with firm-level incentives, suggesting that only firms with high compliance incentives experience substantial increases in comparability.

The information content of annual earnings announcements and mandatory adoption of IFRS

This study examines whether the information content of earnings announcements – abnormal return volatility and abnormal trading volume – increases in countries following mandatory IFRS adoption, and conditions and mechanisms through which increases occur. Findings suggest information content increased in 16 countries that mandated adoption of IFRS relative to 11 that maintained domestic accounting standards, although the effect of mandatory IFRS adoption depends on the strength of legal enforcement in the adopting country. Utilizing a path analysis methodology, we find evidence of three mechanisms through which IFRS adoption increases information content: reducing reporting lag, increasing analyst following, and increasing foreign investment.

Comparability Effects of Mandatory IFRS Adoption

We investigate the effects of mandatory IFRS adoption on the comparability of financial accounting information. Using two comparability proxies based on De Franco et al. [2011] and a comparability proxy based on the degree of information transfer, our results suggest that the overall comparability effect of mandatory IFRS adoption is marginal. We hypothesize that firm-level heterogeneity in IFRS compliance explains the limited comparability effect. To test this conjecture, we first hand-collect data on IFRS compliance for a sample of German and Italian firms and find that firm-, region-, and country-level incentives systematically shape IFRS compliance. We then use the identified compliance determinants to explain the variance in the comparability effect of mandatory IFRS adoption and find it to vary systematically with firm-level compliance determinants, suggesting that only firms with high compliance incentives experience substantial increases in comparability. Moreover, we document that firms from countries with tighter reporting enforcement experience larger IFRS comparability effects, and that public firms adopting IFRS become less comparable to local GAAP private firms from the same country.

Mandatory IFRS adoption and accounting comparability

The adoption of IFRS by many countries worldwide fuels the expectation that financial accounting might become more comparable across countries. This expectation is opposed to an alternative view that stresses the importance of incentives in shaping accounting information. We provide early evidence on this debate by investigating the effects of mandatory IFRS adoption on the comparability of financial accounting information around the world. Our results suggest that while mandatory adoption of IFRS increases the comparability of some prominent balance sheet line items across countries, it has no clear effect on the cross-country comparability of earnings attributes. To provide a rationale for these mixed findings, we investigate the IFRS measurement and disclosure compliance choices for a hand-collected sample of German and Italian firms. We find that predictable country-, region-, and firm-level incentives continue to shape the outcome of the financial reporting process and thus limit the crosssectional comparability of financial accounting information. Overall, our results suggest that the mandatory adoption of IFRS has a limited impact on accounting comparability and that accounting information continues to be shaped by both reporting standards and incentives.

Earnings Comovement and Accounting Comparability: The Effects of Mandatory IFRS Adoption

We examine changes in cross-country financial statement comparability around mandatory IFRS adoption and the effects of these changes on firms’ information environments, as captured by analyst properties and bid-ask spreads. First, we show that cross-country earnings comovement is negatively associated with favorable properties of the firm-level information environment. In contrast, we show that cross-country accounting comparability is positively associated with favorable properties of the information environment. We further document that, whereas IFRS adoption increased cross-country earnings comovement, it did not increase accounting comparability relative to a control sample of non-adopting firms. Finally, we show directly that the increases in earnings comovement experienced by IFRS adopters have negative effects on firms’ information environments. This finding provides novel evidence that increases in earnings comovement associated with IFRS adoption diminished financial statement users’ ability to extract information from cross-country firm comparisons.

Does Mandatory IFRS Adoption Improve the Information Environment?

More than 120 countries require or permit the use of International Financial Reporting Standards (‘IFRS’) by publicly listed companies on the basis of higher information quality and accounting comparability from IFRS application. However, the empirical evidence about these presumed benefits are often conflicting and fail to separate between information quality and comparability. In this paper we examine the effect of mandatory IFRS adoption on firms’ information environment. We find that after mandatory IFRS adoption consensus forecast errors decrease for firms that mandatorily adopt IFRS relative to forecast errors of other firms. We also find decreasing forecast errors for voluntary adopters, but this effect is smaller and not robust. Moreover, we show that the magnitude of the forecast errors decrease is associated with the firm-specific differences between local GAAP and IFRS. This finding suggests that it is IFRS adoption rather than a correlated unobservable factor that is causing forecast errors to decrease. Exploiting individual analyst level data and isolating settings where analysts would benefit more from either increased comparability or higher quality information, we document that the improvement in the information environment is driven both by information and comparability effects. These results suggest that mandatory IFRS adoption has improved the quality of information intermediation in capital markets and as a result firms’ information environment by increasing both information quality and accounting comparability.

Determinants of Risk Premiums on Corporate Bonds

ECONOMISTS have long agreed that the rate of interest on a loan depends on the risks the lender incurs. But how lenders estimate these risks has been left largely to conjecture. This paper presents and tests a hypothesis about the determinants of risk premiums on corporate bonds. By risk premium is meant the difference between the market yield on a bond and the corresponding pure rate of interest. My hypothesis is as follows: (1) The average risk premium on a firm's bonds depends first on the risk that the firm will default on its bonds and second on their marketability. (2) The "risk of default" can be estimated by a function of three variables: the coefficient of variation of the firm's net income over the last