Analyst Following and Forecast Accuracy After Mandated IFRS Adoptions

Authors


  • We are grateful for comments from a very helpful anonymous referee, the editor, and workshop participants at the University of Wisconsin, the University of Waterloo, McMaster University, and the Hong Kong University of Science and Technology. We are grateful for financial support from the Social Sciences and Humanities Research Council of Canada. Welker is grateful for financial support from the KPMG fellowship at Queen's University. Wang is grateful for financial support from Hong Kong Research Grants Council (Project No. DAG08/09.BM08).

ABSTRACT

This study investigates how accounting harmonization affects one particular group of financial statement users—financial analysts. We find that mandatory International Financial Reporting Standards (IFRS) adoption attracts foreign analysts, particularly those from countries that are simultaneously adopting IFRS along with the covered firm's country and those with prior IFRS experience. We also find that mandatory IFRS adoption improves foreign analysts’ forecast accuracy. The change in analyst following increases with the distance between prior local Generally Accepted Accounting Principles (GAAP) and IFRS and with the extent to which IFRS adoption eliminates GAAP differences between the firm's country and the analyst's country. IFRS adoption also attracts more local analysts, particularly those with prior IFRS experience and with an international portfolio prior to mandated IFRS adoption in their home country. Local analysts’ forecast accuracy is not affected by IFRS adoption. Overall, our results suggest that accounting harmonization brings comparability benefits that enhance the usefulness of accounting data.

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