The Effect of IFRS Adoption on the Predictive Ability of Aggregate Accruals for Economic Growth

Abstract

Using aggregate-level difference-in-differences analysis across 34 countries, I find that the extent to which aggregate accruals predict change in Gross Domestic Product (GDP) is greater for countries that adopted International Financial Reporting Standards (IFRS) than for countries that did not. I do not find a similar change in the predictive ability of aggregate cash flows following IFRS adoption. IFRS adoption also enables aggregate accruals to better predict a component of GDP (corporate profits) and factors related to GDP change (change in corporate investment and unemployment rate). The results are more pronounced for adopting countries with greater differences between local accounting standards and IFRS and for adopting countries with stronger enforcement. These findings support the view that IFRS adoption improves the measurement and recognition of firms’ fundamentals, and suggest that a change in accounting standards can reduce imperfections in accounting measurements of real output from business activities. These inferences have implications for accounting standard setters, users of financial statements, and policy-makers interested in understanding and predicting macroeconomic activity.