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The Value Relevance of Accounting Income Reported by DAX-30 German Companies


  • This work is part of a research project on Convergence of National Accounting Practices with International Financial Reporting Standards in the EU conducted with the support of the European Institute of Advanced Studies in Management (EIASM) in Brussels, Belgium. We sincerely appreciate comments from reviewers and participants of the American Accounting Association 2006 Annual Conference. This paper received the “Best Paper Award” at the 10th World Congress of Accounting Educators held in Istanbul, Turkey, November 2006. We especially appreciate comments from Thierry Vongphanith, Institutional Equities – Strategy Research, Brown Brothers Harriman & Co., and the SAS programming by Ron Howren of the University of Missouri.


International Financial Reporting Standards (IFRS) are required for consolidated financial statements of all European Union (EU) publicly traded companies starting from the December 2005 fiscal year end [Regulation (EC)]; and endorsed by the International Organization of Securities Commission (IOSCO) for its member countries beginning in 2000. We examine the challenges and benefits, including value relevance, of the adoption of IFRS by DAX-30 companies, the German premium stock market. Based on a survey sent to DAX-30 company executives, we find most companies agreeing that implementing IFRS should improve the comparability of financial statements. The complex nature, high cost of adopting and lack of guidance for implementing IFRS, as well as increased volatility of earnings after adopting IFRS, are listed among the most important challenges of conversion to IFRS. We use regression to measure another benefit: the value relevance of book values of earnings and equity in explaining market values of DAX-30 companies during the period 1995–2004. Using 265 observations, we find that adopting IFRS or US Generally Accepted Accounting Principles or cross-listing on the New York Stock Exchange significantly increases the value relevance of earnings relative to market prices.