Accepted by Michael Welker. We are grateful to Hollis Ashbaugh-Skaife, Wayne Landsman, Christian Leuz, Richard Macve, Theodore Sougiannis, and Martin Walker. as well as seminar participants at the 3rd MAFG/LSE/MBS Conference: The Challenges of Global Financial Reporting, at The London School of Economics for many helpful comments.
Does Mandatory IFRS Adoption Improve the Information Environment?*
Version of Record online: 5 JUL 2012
© 2012 The Canadian Academic Accounting Association
Contemporary Accounting Research
Volume 30, Issue 1, pages 388–423, Spring 2013 (March)
How to Cite
Horton, J., Serafeim, G. and Serafeim, I. (2013), Does Mandatory IFRS Adoption Improve the Information Environment?. Contemporary Accounting Research, 30: 388–423. doi: 10.1111/j.1911-3846.2012.01159.x
- Issue online: 18 MAR 2013
- Version of Record online: 5 JUL 2012
- Accepted manuscript online: 3 FEB 2012 12:18PM EST
More than 120 countries require or permit the use of International Financial Reporting Standards (IFRS) by publicly listed companies on the basis of higher information quality and accounting comparability from IFRS application. However, the empirical evidence about these presumed benefits is often conflicting and fails to distinguish between information quality and comparability. In this paper we examine the effect of mandatory IFRS adoption on firms’ information environment. We find that after mandatory IFRS adoption consensus forecast errors decrease for firms that mandatorily adopt IFRS relative to forecast errors of other firms. We also find decreasing forecast errors for voluntary adopters, but this effect is smaller and not robust. Moreover, we show that the magnitude of the forecast error decrease is associated with the firm-specific differences between local GAAP and IFRS. This finding suggests that it is IFRS adoption rather than a correlated unobservable factor that is causing forecast errors to decrease. Exploiting individual analyst level data and isolating settings where analysts would benefit more from either increased comparability or higher quality information, we document that the improvement in the information environment is driven both by information and comparability effects. These results suggest that mandatory IFRS adoption has improved the quality of information intermediation in capital markets, and as a result firms’ information environment, by increasing both information quality and accounting comparability.