We thank Phil Berger, Kevin Chen, Peter Chen, Patricia Dechow, Steve Fortin, Darren Henderson, Charles Hsu, Kai Wai Hui, Pavlo Kalita, S.P. Kothari, Steven Matsunaga, Kirill Novoselov, Shiheng Wang, Michael Welker, Yong Yu, Guochang Zhang, an anonymous referee, and the workshop participants at the 2011 FARS mid-year meeting, 2011 CAAA annual conference, Hong Kong University of Science and Technology, and the 2011 HKUST Accounting Research Symposium for their useful comments. We thank Rencheng Wang for excellent research assistance.
Mandatory IFRS Adoption and the Contractual Usefulness of Accounting Information in Executive Compensation
Article first published online: 30 APR 2012
Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2012
Journal of Accounting Research
Volume 50, Issue 4, pages 1077–1107, September 2012
How to Cite
OZKAN, N., SINGER, Z. and YOU, H. (2012), Mandatory IFRS Adoption and the Contractual Usefulness of Accounting Information in Executive Compensation. Journal of Accounting Research, 50: 1077–1107. doi: 10.1111/j.1475-679X.2012.00453.x
- Issue published online: 23 JUL 2012
- Article first published online: 30 APR 2012
- Accepted manuscript online: 2 MAR 2012 02:17PM EST
- Received 1 September 2010; accepted 14 January 2012
We examine how the mandatory adoption of International Financial Reporting Standards (IFRS) in continental Europe affects the contractual usefulness of accounting information in executive compensation, as reflected in pay-performance sensitivity (PPS) and relative performance evaluation (RPE). The empirical evidence indicates a weak increase in accounting-based PPS in the post-adoption period, primarily driven by countries with large differences between IFRS and their previously adopted local accounting standards. We also document a significant increase in accounting-based RPE using foreign peers after the adoption. Additional analysis shows that the increase in RPE is greater for firms with more foreign sales, and for those with lower availability of domestic peers of comparable size. The overall results are consistent with the compensation committees in those countries perceiving earnings after IFRS adoption to be of higher quality and comparability. Our paper highlights an important benefit of IFRS largely ignored by the literature, that is, the higher earnings quality and comparability brought by the adoption of IFRS facilitate executive compensation contracting.