Mandatory IFRS Adoption and Financial Statement Comparability

Abstract

This study examines whether mandatory adoption of International Financial Reporting Standards (IFRS) leads to capital market benefits through enhanced financial statement comparability. UK domestic standards are considered very similar to IFRS (Bae et al. 2008), suggesting any capital market benefits observed for UK-domiciled firms are more likely attributable to improvements in comparability (i.e., better precision of across-firm information) than to changes in information quality specific to the firm (i.e., core information quality). If IFRS adoption improves financial statement comparability, we predict this should reduce insiders' ability to benefit from private information. Consistent with these expectations, we find that abnormal returns to insider purchases-used to proxy for private information-are reduced following IFRS adoption. Similar results obtain across numerous subsamples and proxies used to isolate IFRS effects attributable to comparability. Together, the findings are consistent with mandatory IFRS adoption improving comparability and thus leading to capital market benefits by reducing insiders' ability to exploit private information. JEL Descriptors: G1, G3, M4

Manager's Discretionary Power and Comparability of Financial Reports: An Analysis of the Regulatory Transition Process in Brazilian Accounting

“…Yip and Young (2012) also used ROA in the same way as calculated in this research. Both in this research and in other studies adopting similar adaptations (Yip & Young, 2012;Lang et al 2010;Cascino & Gassen, 2012;Brochet et al, 2013) no significant bias was noticed in relation to the original measurement by DeFranco et al (2011).…”

“…As a measurement of output, the comparability obtained by means of this model has some advantages, such as increased robustness in statistical analysis, lower bias of the researcher, and higher reliability in data collection. Moreover, it was widely used in recent studies on the theme (DeFranco et al, 2011;DeFond et al, 2011;Barth, Landsman, Lang & Williams, 2012;Brochet, Jagolinzer & Riedl, 2013;Lang, Maffett & Owens, 2010;Fang, Li, Xin & Zhang, 2012;Neel, 2013;Peterson, Schmardebeck & Wilks, 2012;Yip & Young, 2012;Barth et al, 2013;Sohn, 2011;Cascino & Gassen, 2012;Kim, Kraft & Ryan 2013), and this already guarantees an external validation to it.…”

“…The second accounting measurement that covers more manager discretionary decisions is net profit, which, despite the possibility of being affected by leverage-related problems, constitutes a measurement that may be compared throughout the period before and after adopting the international standard. Net profit was also employed in other studies, such as Yip and Young (2012) and Brochet et al (2013). Yip and Young (2012) also used ROA in the same way as calculated in this research.…”

A Review of the IFRS-Adoption Literature

“…The capital market benefits from improved comparability arise through greater transnational information transfers engendered by EU-wide IFRS adoption. Examining a sample of 663 large and relatively more profitable UK firms, Brochet et al (2013) find a significant reduction in abnormal returns associated with insider purchases in the post-IFRS-adoption period. This finding supports the view that IFRS adoption improves reporting comparability for outside investors and thereby lowers the degree of information asymmetry between insiders and outsiders, limiting the ability of insiders to exploit their private information.…”

“…To isolate the capital market benefits arising from improvements in comparability (defined as the precision of information transferred across firms) as opposed to improvements in information quality (defined as the precision of firm-specific information), Brochet et al (2013) exploit the UK 29 Wang (2014) and Yip and Young (2012) exclude financial firms from their samples. Wang (2014) also excludes utilities.…”