Does Mandatory IFRS Adoption Improve the Information Environment?

by Joanne Horton, George Serafeim & Ioanna Serafeim

Overview — Created by the International Accounting Standards Board, the International Financial Reporting Standards (IFRS) comprise several principles designed to help public companies increase transparency in their financial reports. But are they worth the hefty compliance costs associated with them? This paper investigates whether adopting the IFRS improves the information environment for firms in which the standards are legally required. Research was conducted by Joanne Horton at the London School of Economics, George Serafeim at Harvard Business School, and Ioanna Serafeim at the Greek Capital Market Commission. Key concepts include:

  • Consensus forecast errors decrease significantly after mandatory IFRS adoption at firms that mandatorily adopt the International Financial Reporting Standards, relative to early voluntary IFRS adopters and firms that continue to report under local GAAP.
  • The extent of the error decrease is associated with the differences between the IFRS and the firm's existing generally-accepted accounting principles.
  • The decrease in forecast errors is driven both by improved comparability across companies and better information being communicated in the reports.

Author Abstract

We examine the effect of mandatory International Financial Reporting Standards ('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 errors decrease is associated with the firm-specific differences between local GAAP and IFRS. Exploiting individual analyst level data and isolating settings where investors 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 are robust to variations in the measurement of information environment quality, forecast horizon, sample composition and tests of earnings management.

Paper Information