Domestic Accounting Standards, International Accounting Standards, and the Predictability of Earnings

Posted: 31 Aug 2001  

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis

Morton Pincus

University of California, Irvine

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Abstract

We investigate (1) whether the variation in accounting standards across national boundaries relative to International Accounting Standards (IAS) has an impact on the ability of financial analysts to forecast non-US firms' earnings accurately, and (2) whether analyst forecast accuracy changes after firms adopt IAS. IAS are a set of financial reporting policies that typically require increased disclosure and restrict management's choices of measurement methods relative to the accounting standards of our sample firms' countries of domicile. We develop indexes of differences in countries' accounting disclosure and measurement policies relative to IAS, and document that greater differences in accounting standards relative to IAS are significantly and positively associated with the absolute value of analyst earnings forecast errors. Further, we show that analyst forecast accuracy improves after firms adopt IAS. More specifically, after controlling for changes in the market value of equity, changes in analyst following, and changes in the number of news reports, we find that the convergence in firms' accounting policies brought about by adopting IAS is positively associated with the reduction in analyst forecast errors.

Keywords: International Accounting Standards; IAS; Analyst earnings forecasts

JEL Classification: F3, M41, M44, M47

Suggested Citation

Skaife, Hollis Ashbaugh and Pincus, Morton, Domestic Accounting Standards, International Accounting Standards, and the Predictability of Earnings. Journal of Accounting Research, forthcoming. Available at SSRN: https://ssrn.com/abstract=270619

Hollis Ashbaugh Skaife

Graduate School of Management, UC-Davis ( email )

Graduate School of Management
1 Shields Ave
Davis, CA 95616
United States

Morton P.K. Pincus (Contact Author)

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States
949-824-4062 (Phone)
949-725-2812 (Fax)

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