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Mandatory IFRS Adoption and Financial Statement Comparability

52 Pages Posted: 24 Apr 2011 Last revised: 21 Aug 2012

Francois Brochet

Boston University - Department of Accounting

Alan D. Jagolinzer

University of Cambridge Judge Business School

Edward J. Riedl

Boston University - Questrom School of Business

Date Written: August 20, 2012

Abstract

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.

Keywords: IFRS, comparability, private information, insider trading

JEL Classification: G1, G3, M4

Suggested Citation

Brochet, Francois and Jagolinzer, Alan D. and Riedl, Edward J., Mandatory IFRS Adoption and Financial Statement Comparability (August 20, 2012). Contemporary Accounting Research, Forthcoming; Harvard Business School Accounting & Management Unit Working Paper No. 11-109. Available at SSRN: https://ssrn.com/abstract=1819482 or http://dx.doi.org/10.2139/ssrn.1819482

Francois Brochet (Contact Author)

Boston University - Department of Accounting ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Alan D. Jagolinzer

University of Cambridge Judge Business School ( email )

Trumpington Street
University of Cambridge
Cambridge, CB2 1AG
United Kingdom

Edward J. Riedl

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)

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