Mandatory IFRS Adoption and the Usefulness of Accounting Information in Predicting Future Earnings and Cash Flows

51 Pages Posted: 10 Apr 2017 Last revised: 11 Jun 2021

See all articles by Siyi Li

Siyi Li

California State University, Fullerton - Department of Accounting

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy

Sophia Wang

California State University, Fullerton

Date Written: April 7, 2017

Abstract

We examine whether the mandatory adoption of International Financial Reporting Standards (IFRS) has changed the usefulness of accounting information in predicting future earnings and cash flows out-of-sample. Using a sample of firms from European Union countries that mandatorily adopted IFRS in 2005, we find the out-of-sample earnings and cash flows forecasts become significantly more accurate after IFRS adoption. Improvements in earnings forecast accuracy vary with the strength of legal enforcement but not with the strength of securities regulation and differences between domestic accounting standards (DAS) and IFRS while improvements in cash flow forecast accuracy do not vary with institutional characteristics. Total accruals are useful in the prediction of earnings both before and after IFRS adoption and their usefulness does not vary with institutional characteristics. However, total accruals are useful in the prediction of cash flows only after IFRS adoption and their usefulness does not depend on institutional characteristics. Accrual components do not have incremental predictive ability over total accruals. Earnings are (not) more informative about future cash flows than cash flows alone in countries with weak (strong) enforcement/regulation and high (low) DAS differences from IFRS. Portfolios of stocks based on the out-of-sample forecasts generate higher hedge returns after IFRS adoption, which corroborates the detected forecast accuracy improvements. Overall, an important dimension of accounting quality, predictive ability of future earnings and cash flows, has improved after mandatory IFRS adoption.

Keywords: IFRS, out-of-sample prediction, earnings, cash flows

JEL Classification: M41, G15, G17, G18

Suggested Citation

Li, Siyi and Sougiannis, Theodore and Wang, Sophia, Mandatory IFRS Adoption and the Usefulness of Accounting Information in Predicting Future Earnings and Cash Flows (April 7, 2017). Available at SSRN: https://ssrn.com/abstract=2948775 or http://dx.doi.org/10.2139/ssrn.2948775

Siyi Li (Contact Author)

California State University, Fullerton - Department of Accounting ( email )

P.O. Box 34080
Fullerton, CA 92834-6848
United States

Theodore Sougiannis

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

360 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217-244-0555 (Phone)
217-244-0902 (Fax)

Sophia Wang

California State University, Fullerton ( email )

P.O. Box 34080
Fullerton, CA 92834-6848
United States

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