International Earnings Comparability

Abstract

We investigate the comparability of accounting earnings for 14 EU countries in the period 1990-2005. Although prior studies have documented international differences in financial reporting properties, there is hardly any large-scale international evidence on the underlying fundamentals driving these differences. The European Union is a particularly interesting setting to study because of the substantial efforts to create a single economic market across countries. We focus on the accruals - cash flow association as in Ball and Shivakumar (2005; 2006) and show that accruals measurement is substantially affected by the business cycle stage and firm specific reporting incentives. Incentives arise from the equity capital market, debt financing and labor markets. These incentives are further intensified by the design of a country's institutional framework, such as stock market development, importance of bank financing and labor union membership. In addition, our results suggest that the mandatory introduction of IFRS in 2005 did not instantly bring about the expected improvement in earnings comparability across Europe. Our results provide important insights for the ongoing debate on standards versus incentives.

Keywords: accruals - cash flow, international accounting, reporting incentives

JEL Classification: G15, G32, K22, M41, M43, M47