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E-MailThe following post comes to from Francois Brochet of the Accounting and Management Unit at Harvard Business School, Alan Jagolinzer of the Accounting Department at the University of Colorado, and Edward Riedl of the Accounting and Management Unit at Harvard Business School.
In our paper, Mandatory IFRS Adoption and Financial Statement Comparability, which was recently made publicly available on SSRN, we examine the effect of mandatory IFRS adoption on financial statement comparability. To isolate the effects of comparability, we use firms domiciled in the UK as our setting. Prior academic and practitioner research argues that UK domestic standards are similar to those under IFRS. Thus, any effects of changing to IFRS for UK firms are more likely driven by changes in comparability of financial statements (such as between UK firms and non-UK firms) versus changes in information quality. To proxy for changes in the information environment, we use two measures: abnormal returns to insider purchases of stock, and abnormal returns to analyst recommendation upgrades. Both insiders and analysts represent sophisticated users likely to possess private information regarding the firm. If IFRS reduces private information by enhancing the comparability of financial statements, we predict that abnormal returns to insider purchases and analyst recommendation upgrades will be reduced following mandatory IFRS adoption in the UK. Empirical results are consistent with these expectations. We find that abnormal returns to both insider purchases as well as analyst recommendation upgrades decrease following IFRS adoption. These findings occur in univariate and multivariate analyses, and across 1-month, 3-month, and 6-month return windows.
To provide further robustness, we examine alternative partitions of firms to better isolate firms most likely affected by changes in comparability versus changes in information quality upon mandatory IFRS adoption. We define three groups of firms most likely affected by changes in comparability as: (i) those having ex ante high quality information environments (i.e., no R&D or low accruals); (ii) those having low amounts of reconciling items between UK standards and IFRS using data from Horton and Serafeim (2010); and (iii) those having high increases in comparability based on the measure from DeFond et al. (2011). Across all three groups of firms, we continue to find lower abnormal returns to insider purchases/analyst purchase recommendations subsequent to mandatory IFRS adoption, again consistent with improvements to comparability.
We conclude that these results are consistent with mandatory IFRS adoption reflecting benefits attributable to improved comparability. These results build on the substantial literature investigating the effects of IFRS adoption, by documenting that improvements to the information environment extend beyond those relating to information quality. Restated, benefits to IFRS adoption are not limited to countries exhibiting large differences between domestic standards and IFRS, or to firms exhibiting low information quality. Rather, improvements can also accrue in settings in which information quality is already high, and incumbent domestic standards are already similar to IFRS. These insights are likely of interest to continuing deliberations surrounding further IFRS adoption, including within the US and other countries.
The full paper is available for download here.
