The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS

In the paper, The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS, forthcoming in the Journal of Accounting & Economics as published by Elsevier, we examine whether the information content of earnings announcements increased in countries that mandated adoption of IFRS compared to countries that retained domestic accounting standards. We address this research question using a sample of 20,517 earnings announcements from 16 countries that mandated adoption of IFRS and 11 countries that retained domestic accounting standards. We measure information content of earning announcements based on abnormal trading volume and return volatility around firms’ earnings announcements.

Findings from the univariate comparisons indicate that firms from IFRS adopting countries experienced a greater increase in abnormal return volatility and abnormal trading volume than firms from non-IFRS adopting countries. Findings from the multivariate tests generally confirm those from the univariate tests. In particular, findings from country-level and firm-level estimations indicate that firms in IFRS adopting countries experienced a greater increase in abnormal return volatility and abnormal trading volume than firms from non-IFRS adopting countries. These results are robust to examining the full sample of firm-years, excluding firms from the U.K. and Japan, and examining random samples of firms from each country.

Taken as a whole, the results are consistent with an increase in the information content of earnings following mandatory adoption of IFRS. In addition, we examine the role of legal enforcement on the increased information content of earnings following mandatory IFRS adoption. We find that firms from countries with strong enforcement experienced a greater change in information content than firms from countries with weak enforcement. This supports the central role that underlying legal institutions have on the actual effects of changes in accounting standards. Finally, we examine mechanisms through which mandatory IFRS adoption increased information content. We find evidence of both direct and indirect effects, with indirect effects arising through reducing the reporting lag, increasing analyst following, and increasing foreign portfolio investment.

This study provides one piece of evidence in the larger mosaic of evidence concerning the effects of IFRS adoption. This study is not intended to resolve the debate about the desirability of IFRS, nor does it speak to the desirability of individual standards. Such determinations need to evaluate all of the costs and benefits of various policy alternatives and interested readers should consult Ball (2007), Barth, Landsman, and Lang (2008), Leuz and Wysocki (2008), and Soderstrom and Sun (2007) for discussion of these issues. However, given that the information content of earnings is one of the most heavily researched attributes of accounting in the literature, it is surprising that no research has examined, until now, the changes in the information content associated with adoption of IFRS. We speculate that the reason for the lack of evidence may be attributable to data limitations. Until recently, machine-readable data on earnings announcement dates were not available for firms beyond those in a few developed countries.

The full paper is available for download here.