We study the market reaction to the mandatory adoption of International Financial Reporting Standards (IFRS) in Spain by examining the value relevance of the information contained in the IFRS reconciliation adjustments in relation to the local generally accepted accounting principles (GAAP). The two-staged IFRS disclosure in the transition period is specific to Spain: the aggregated numbers of accounting differences are disclosed in stage 1, and the IFRS individual adjustments on book value of equity and earnings are disclosed in stage 2. This unique reporting timeline provides an opportunity for the market both to assess the impact of those new accounting policies adopted by firms and to assess differences when compared to the previous GAAP. We find no evidence of increased value relevance after IFRS adoption. However, our results from the incremental value relevance test show that investors consider the individual reconciliation adjustments in the second stage to be valuable and significant, specifically in relation to marked-to-market adjustment to financial instruments, adjustments to intangibles, provisions and impairment adjustments to property, plant and equipment, adjustments to inventories, and adjustments to pension benefits. Moreover, the results are significantly higher for low leverage firms. Our findings indicate that the market prices the informativeness of the reconciliation adjustments once the transition to IFRS disclosure cycle is complete.
We implement the most common empirical specifications, with different approaches to control for scale problems, used in studies on the value relevance of accounting information. We study whether the results offered by these specifications are consistent with the residual income valuation model and with the Burgstahler and Dichev option‐style valuation framework. Undeflated and per‐share specifications offer results that are more in line with both benchmarks. Other deflated specifications and approaches deviate, to different extents, from the expectations of both frameworks. We interpret these deviations as signs of misspecification.
We also appreciate valuable comments and suggestions from two anonymous referees of the Working Paper series at the Bank of Spain that contributed to improve the paper.
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