Mandatory IFRS Adoption and Financial Statement Comparability
Harvard Business School
Alan D. Jagolinzer
University of Colorado - Leeds School of Business
Edward J. Riedl
Boston University - School of Management
August 20, 2012
Contemporary Accounting Research, Forthcoming
Harvard Business School Accounting & Management Unit Working Paper No. 11-109
This study examines whether mandatory adoption of International Financial Reporting Standards (IFRS) leads to capital market benefits through enhanced financial statement comparability. UK domestic standards are considered very similar to IFRS (Bae et al. 2008), suggesting any capital market benefits observed for UK-domiciled firms are more likely attributable to improvements in comparability (i.e., better precision of across-firm information) than to changes in information quality specific to the firm (i.e., core information quality). If IFRS adoption improves financial statement comparability, we predict this should reduce insiders’ ability to benefit from private information. Consistent with these expectations, we find that abnormal returns to insider purchases ― used to proxy for private information ― are reduced following IFRS adoption. Similar results obtain across numerous subsamples and proxies used to isolate IFRS effects attributable to comparability. Together, the findings are consistent with mandatory IFRS adoption improving comparability and thus leading to capital market benefits by reducing insiders’ ability to exploit private information.
Number of Pages in PDF File: 52
Keywords: IFRS, comparability, private information, insider trading
JEL Classification: G1, G3, M4working papers series
Date posted: April 24, 2011 ; Last revised: August 21, 2012
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