Comparative Evidence on the Value Relevance of IFRS-Based Accounting Information in Germany and the UK

Elbakry, A., Nwachukwu, J. C., Abdou, H. A. and Elshandidy, T. (2017) 'Comparative Evidence on the Value Relevance of IFRS-based Accounting Information in Germany and the UK’, Journal of International Accounting, Auditing and Taxation. In press. DOI: 10.1016/j.intaccaudtax.2016.12.002

43 Pages Posted: 16 Dec 2016

See all articles by Ashraf Elsayed Elbakry

Ashraf Elsayed Elbakry

Swansea University - School of Management

Jacinta Nwachukwu

Coventry University

Hussein Abdou

The Lancashire School of Business & Enterprise; Department of Management, Faculty of Commerce, Mansoura University

Tamer Elshandidy

Bradford University Management School

Date Written: December 16, 2016

Abstract

This paper uses panel cointegration with a corresponding vector error correction model (VECM) to investigate the changes in the value relevance of accounting information before and after the mandatory adoption of IFRS in Germany and the UK under three different valuation models. First, a basic Ohlson model, where our results indicate that despite the value relevance of the book values of equity has declined, it has been replaced by the increasing prominence of earnings in both Germany and the UK after the switch to the IFRS. Second, a modified model, which shows that the incremental value relevance of both earnings and book values are considerably higher in the long term for firms in the UK than in Germany. Third, a simultaneous addition of accounting and macroeconomic variables in an extended model, which indicates a significant rise in the relative predictive power of the book value of equity in the UK compared with the more noticeable impact on the value relevance of earnings in Germany. Collectively, the results of these models indicate that: (i) the explanatory power of linear equity valuation models is higher in UK than in the Germany, (ii) a long-run Granger-causal relationship exists between accounting variables and share prices in common law countries like the UK. Nevertheless, the implications of our findings lie in the knowledge that the potential costs of switching to the IFRS is completely nullified within three years by the benefits arising from a reduction in information asymmetry and earning mismanagement among firms which are listed on the stock exchanges of both common law and code law-based EU countries.

Keywords: Modified Ohlson model, Value relevance, IFRS, Germany-GAAP, UK-GAAP, Cointegration, vector error correction model

JEL Classification: G10, G14, G15, G38, M40

Suggested Citation

Elbakry, Ashraf Elsayed and Nwachukwu, Jacinta and Abdou, Hussein and Elshandidy, Tamer, Comparative Evidence on the Value Relevance of IFRS-Based Accounting Information in Germany and the UK (December 16, 2016). Elbakry, A., Nwachukwu, J. C., Abdou, H. A. and Elshandidy, T. (2017) 'Comparative Evidence on the Value Relevance of IFRS-based Accounting Information in Germany and the UK’, Journal of International Accounting, Auditing and Taxation. In press. DOI: 10.1016/j.intaccaudtax.2016.12.002. Available at SSRN: https://ssrn.com/abstract=2886351

Ashraf Elsayed Elbakry

Swansea University - School of Management ( email )

Haldane Building
Singleton Park
Swansea, SA2 8PP
United Kingdom

Jacinta Nwachukwu

Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom

Hussein Abdou (Contact Author)

The Lancashire School of Business & Enterprise ( email )

The Lancashire Law School
Corporation Street
Preston, PR1 2HE
United Kingdom
00441772894700 (Phone)

Department of Management, Faculty of Commerce, Mansoura University ( email )

Mansoura, 35516
Egypt

Tamer Elshandidy

Bradford University Management School ( email )

Bradford University Management School
Emm Lane
Bradford, BD9 4JL
United Kingdom

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