Mandatory IFRS Adoption and Analyst Forecast Accuracy: The Role of Financial Statement-based Forecasts and Analyst Characteristics

61 Pages Posted: 4 Jan 2015 Last revised: 7 Oct 2018

See all articles by Matthias Demmer

Matthias Demmer

Free University of Berlin (FUB) - Department of Business and Economics

Paul Pronobis

ESCP Europe - Department Financial Reporting and Audit (FRA)

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: September 28, 2018

Abstract

This study examines whether the improvement in analyst forecast accuracy around mandatory IFRS adoption is associated with the improvement in the accuracy of financial statement-based forecasts. We find significant out-of-sample improvement in financial statement-based forecast accuracy around mandatory IFRS adoption and significant improvement in analyst forecast accuracy only in countries that made concurrent improvements to financial reporting enforcement. We show that the improvement in analyst forecast accuracy is associated with the improvement in financial statement-based forecast accuracy around IFRS adoption. We also show that analyst forecasts, particularly for firms whose analysts forecast under favorable conditions (i.e., analysts who are less busy with more experience and resources), have a greater association with financial statement-based forecasts after mandatory IFRS adoption in countries with concurrent changes in enforcement. Furthermore, we document that analyst forecasts, particulary for firms whose analysts forecast under unfavorable conditions (i.e., analysts who are busier with less experience and resources), do not fully exploit the predictive ability of financial statements after IFRS adoption for firms in countries without concurrent changes in enforcement. Finally, we find that the analyst underreliance on financial-statement based forecasts is associated with year-ahead stock returns. These results are robust to controlling for disclosure quality and comparability. The findings are important for understanding the impact of mandatory IFRS adoption on the predictive ability of financial statements, and for understanding analysts’ use of financial statements around mandatory IFRS adoption.

Keywords: financial statement analysis, mandatory IFRS adoption, analyst forecasts, profitability forecasts

JEL Classification: M41, G17

Suggested Citation

Demmer, Matthias and Pronobis, Paul and Yohn, Teri Lombardi, Mandatory IFRS Adoption and Analyst Forecast Accuracy: The Role of Financial Statement-based Forecasts and Analyst Characteristics (September 28, 2018). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2544566 or http://dx.doi.org/10.2139/ssrn.2544566

Matthias Demmer

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany

Paul Pronobis (Contact Author)

ESCP Europe - Department Financial Reporting and Audit (FRA) ( email )

79, avenue de la RĂ©publique
Paris, 75011
France

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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