Mandatory Adoption of IFRS and Analysts’ Forecasts: How Much Does Enforcement Matter?

58 Pages Posted: 5 Nov 2009 Last revised: 1 May 2013

See all articles by John P. Preiato

John P. Preiato

The University of Western Australia

Philip R. Brown

UWA Business School, M250; Financial Research Network (FIRN)

Ann Tarca

University of Western Australia

Date Written: March 21, 2013

Abstract

Differences in countries’ institutional settings are believed to impact on the extent to which benefits can be achieved from the adoption of International Financial Reporting Standards (IFRS). We investigate seven proxies that have been used to distinguish between institutional settings, including two self-constructed indexes that focus specifically on auditing and accounting enforcement (AUDIT and ENFORCE). Our measures are developed for 51 countries and three years: 2002 (that is, three years before IFRS were widely adopted in 2005); 2005; and 2008. To assess the merits of the proxies we focus on benefits manifest in firms’ information environments, as reflected in two properties of analysts’ earnings forecasts, namely their accuracy and the dispersion among them. Based on a sample of 357,034 firm-month observations available for 37 of the 51 countries, we find AUDIT and ENFORCE and the more general legal measure ‘rule of law’ of Kaufmann et al. (2010) have the strongest association with these two properties of analysts’ forecasts. We also find that AUDIT and ENFORCE provide additional explanatory power relative to ‘rule of law’. When our proxies and rule of law are included, both our measures are significant but the ‘rule of law’ proxy has explanatory power only in models based on dispersion. Thus we provide evidence of the importance of accounting enforcement in securing favourable capital market outcomes, which has not been demonstrated in the prior literature because researchers commonly use more general legal proxies for enforcement. The new AUDIT and ENFORCE proxies may be more useful than other proxies found in the literature when seeking to distinguish between countries according to the strength of their enforcement of accounting requirements.

Keywords: IInternational Financial Reporting Standards, IFRS, Analyst Forecast Accuracy, Enforcement of Accounting Standards, Audit Fees, Regulation, Rule of Law

JEL Classification: M41, M42, M48, K20

Suggested Citation

Preiato, John P. and Brown, Philip R. and Tarca, Ann, Mandatory Adoption of IFRS and Analysts’ Forecasts: How Much Does Enforcement Matter? (March 21, 2013). UNSW Australian School of Business Research Paper No. 2009 ACCT 01. Available at SSRN: https://ssrn.com/abstract=1499625 or http://dx.doi.org/10.2139/ssrn.1499625

John P. Preiato

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Philip R. Brown

UWA Business School, M250 ( email )

Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Ann Tarca (Contact Author)

University of Western Australia ( email )

Business School
35 Stirling Highway
Crawley WA 6009
Australia
+61 8 6488 3868 (Phone)
+61 8 6488 1047 (Fax)

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