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Mandatory IFRS Adoption and the Contractual Usefulness of Accounting Information in Executive Compensation

Journal of Accounting Research, Forthcoming

49 Pages Posted: 6 Feb 2012  

Neslihan Ozkan

University of Bristol - School of Economics, Finance and Management, UK

Zvi Singer

HEC Montreal

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: February 5, 2012

Abstract

We examine how the mandatory adoption of IFRS in Continental Europe affects the contractual usefulness of accounting information in executive compensation, as reflected in pay-performance sensitivity (PPS) and relative performance evaluation (RPE). The empirical evidence indicates a weak increase in accounting-based PPS in the post-adoption period, primarily driven by countries with large differences between IFRS and their previously adopted local accounting standards. We also document a significant increase in accounting-based RPE using foreign peers after the adoption. Additional analysis shows that the increase in RPE is greater for firms with more foreign sales, and for those with lower availability of domestic peers of comparable size. The overall results are consistent with the compensation committees in those countries perceiving earnings after IFRS adoption to be of higher quality and comparability. Our paper highlights an important benefit of IFRS largely ignored by the literature, i.e., the higher earnings quality and comparability brought by the adoption of IFRS facilitate executive compensation contracting.

Keywords: IFRS adoption, pay-performance sensitivity, relative performance evaluation, comparability of financial statements

JEL Classification: D8, J33, M41, M48

Suggested Citation

Ozkan, Neslihan and Singer, Zvi and You, Haifeng, Mandatory IFRS Adoption and the Contractual Usefulness of Accounting Information in Executive Compensation (February 5, 2012). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1999898

Neslihan Ozkan

University of Bristol - School of Economics, Finance and Management, UK ( email )

United States

HOME PAGE: http://www.bristol.ac.uk/accounting/staff/ozkan.html

Zvi Singer

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
514-340-1847 (Phone)

Haifeng You (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

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