The Impact of IFRS Adoption on the Value Relevance of Book Value and Earnings

Journal of Contemporary Accounting and Economics, Forthcoming

46 Pages Posted: 24 May 2010 Last revised: 15 Apr 2011

See all articles by Peter Clarkson

Peter Clarkson

University of Queensland - Business School; Simon Fraser University (SFU) - Beedie School of Business; Financial Research Network (FIRN)

J. Douglas Hanna

Southern Methodist University (SMU) - Accounting Department

Gordon D. Richardson

University of Toronto - Rotman School of Management

Rex Thompson

affiliation not provided to SSRN

Date Written: April 14, 2011

Abstract

In this study, we investigate the impact of IFRS adoption in Europe and Australia on the relevance of book value and earnings for equity valuation. Using a sample of 3,488 firms that initially adopted International Financial Reporting Standards (IFRS) in 2005, we are able to compare the figures originally reported for the 2004 fiscal years to the IFRS figures that were provided in 2005 as the 2004 IFRS comparative figures. As part of the inquiry, we introduce a cross-product term, equal to the product of EPS and BVPS, into the traditional linear pricing models. The estimated coefficient on the cross-product term is statistically significant and negative, as theory suggests in the presence of important nonlinearities. Further, there is increased nonlinearity in the data subsequent to IFRS adoption, with the increase being most pronounced for firms in Common Law countries. With nonlinear effects controlled for, there is no observed change in price relevance for firms in either Code Law or Common Law countries, contradicting the results from the linear pricing models. The results also suggest that the distribution of measurement errors becomes more similar across Code Law and Common Law countries after the adoption of IFRS, removing one difference between these groups. Thus, IFRS enhances comparability, an inference that would not be possible had we confined the analysis only to linear pricing models.

Keywords: IFRS, Value Relevance, Nonlinear Pricing Model

JEL Classification: G12, M41

Suggested Citation

Clarkson, Peter and Hanna, J. Douglas and Richardson, Gordon D. and Thompson, Rex W., The Impact of IFRS Adoption on the Value Relevance of Book Value and Earnings (April 14, 2011). Journal of Contemporary Accounting and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1614362

Peter Clarkson (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

Financial Research Network (FIRN) ( email )

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

J. Douglas Hanna

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-2234 (Phone)
214-768-4099 (Fax)

Gordon D. Richardson

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-8601 (Phone)
416-971-3048 (Fax)

Rex W. Thompson

affiliation not provided to SSRN

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