International Financial Reporting Standards and Accounting Comparability
This thesis includes three papers that consider the effects of IFRS adoption on accounting comparability in the European Union (EU). In the first paper, I use actual financial statement data to create a measure of distance (my accounting measure of comparability) from local GAAP to IFRS prior to the adoption of IFRS in 2005. Specifically, I identify 27 accounting items and I examine recognition and disclosure practices of 296 firms listed on Euronext before and after 2005. In contrast to prior work, which conducted such analyses at a de jure level, this de facto level analysis of accounting differences provides evidence about firms' actual reporting choices in their annual reports. This analysis is particularly important when accounting standards (both local GAAPs and IFRS) allow a variety of methods for recognition and disclosure.
My tests suggest that the change in comparability due to the adoption of IFRS is not uniform. In jurisdictions where local GAAP was more distant from IFRS the increase in comparability was larger than the increase in comparability that occurred in jurisdictions where local GAAP was closer to IFRS prior to IFRS adoption. This result is important because it provides a refined measure that can be used to appraise the actual IFRS effect on various outcome variables.
In the second study I predict that, if IFRS adoption has led to positive market effects, there would be larger IFRS adoption effects among firms domiciled in countries where local GAAP was further from IFRS prior to 2005 than among firms domiciled in countries where local GAAP was closer to IFRS prior to 2005. I exploit my measure of distance (developed in the first paper) to examine whether firms domiciled in Euronext countries where the distance between local GAAP and IFRS was greater prior to IFRS adoption exhibited larger improvements in the usefulness of their earnings announcements. I measure usefulness as the short-term price and volume reactions to earnings announcements. My analysis proceeds in two steps. First, I confirm an increase in absolute returns and volume reactions, similar to observations in prior research (e.g., Landsman et al., 2011). Second, and more importantly, I find that these increased reactions are not due to IFRS adoption per se, but rather to the inclusion of concurrent information in firms' press releases, most prominently statement of cash flows information. A potential explanation for this result is the regulators' recommendation to expand disclosures in firms' press releases in 2005. I cannot rule out, however, that IFRS had an effect, because the greater consistency in rules and format for the statement of cash flows may have led to an increase in the disclosure of cash flow information in firms' press releases.
In my third study I expand my sample to all European Union countries and I investigate how cross-border earnings information transfer (my market measure of comparability) changed after IFRS adoption. I explore this effect through two intermediate and complementary effects: accounting uniformity and reporting quality. First, I examine whether an increase in accounting uniformity has led to a greater transfer of market information. Using a sample of firms in the European Union 2001 - 2010, I find support for the presence of a positive change in earnings information transfer after IFRS adoption. Second, I exploit differences across countries in accounting distance and legal enforcement to consider a separate (but related) effect of IFRS on reporting quality. I measure reporting quality as value relevance (the explanatory power of the two summary accounting variables, earnings and book value of equity, in price regressions). I find that IFRS had a positive effect on reporting quality, but only in countries that exhibited strong enforcement and large accounting distance prior to IFRS adoption. In the final test, I partition the countries into groups according to the change in reporting quality after IFRS adoption. I fail to find significant differences in comparability across groupings: the increase in comparability in countries that experienced a positive change in reporting quality is not distinguishable from the change in comparability occurred in countries that did not exhibit an increase in reporting quality around IFRS adoption.
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