52 Pages Posted: 24 Apr 2011 Last revised: 21 Aug 2012
Date Written: August 20, 2012
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: 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
By Ray Ball