The implementation of IFRS in Europe: Some preliminary evidence

1
The implementation of IFRS in EuropeSome
preliminary evidence

• Bernard Raffournier
• University of Geneva

2

• Since 2005 all listed companies in the E.U. must
  comply with IFRS
• In Continental Europe, IFRS adoption represents a
  major change replacement of stakeholder-oriented
  accounting regulations by market-oriented
  standards heavily influenced by the Anglo-Saxon
  accounting model
• Aim of this presentation Review the empirical
  evidence on the economic consequences of IFRS
  adoption

3
The expected consequences of IFRS adoption

• Information asymmetry should decrease
• IFRS are more market-oriented
• IFRS disclosure requirements are larger
• Earnings management should decrease
• IFRS are more precise
• They admit a limited number of options
• Hidden reserves are prohibited

4

• Accounting data should be more value relevant
• Value relevance Ability of accounting data to
  reflect contemporaneous market prices or returns
• IFRS-based earnings should be more value
  relevant
• IFRS are more market-oriented
• Earnings management is more difficult under IFRS
• IFRS make a larger use of fair value
• The cost of capital should decrease

5
Effect on information asymmetry

• Has the bid-ask spread declined?
• YES
• Germany Leuz Verrecchia (JAR 2000), Gossen
  Sellhorn (WP 2006) Companies using IFRS exhibit
  smaller bid-ask spreads than those using German
  GAAP
• Europe Platikanova Nobes (WP 2006) On
  average, the bid-ask spread declines after IFRS
  adoption
• BUT
• Switzerland The effect is limited to small
  companies Dumontier Maghraoui (CCA 2006)

6

• Are analysts' forecasts more accurate?
• YES
• Ashbaugh Pincus (JAR 2001) Analyst forecast
  accuracy improves after IFRS adoption
• Hodgdon et al. (JIAAT 2008) Compliance with IFRS
  reduces analyst forecast errors
• Germany Ernstberger et al. (WP 2008) Forecast
  accuracy is higher for estimates based on IFRS or
  US GAAP data than for those based on German GAAP
  figures
• NO
• Germany Maghraoui (PhD 2008) Compliance with
  IFRS does not reduce the dispersion of analyst
  forecasts or forecast errors
• Europe Cuijpers Buijink (EAR 2005) Dispersion
  of analyst forecasts is higher for firms using
  IFRS or US GAAP than for those using local GAAPs

7
Effect on earnings management

• Does IFRS compliance restrict earnings
  management?
• NO
• Germany Van Tendeloo Vanstraelen (EAR 2005)
  IFRS adopters do not present different earnings
  management behavior compared to companies
  reporting under German GAAP
• Sweden Paananen (WP 2007) IFRS adoption does
  not reduce income smoothing.
• Germany Lin Paananen (WP 2008) Earnings
  management is higher in the post IFRS-adoption
  period
• YES
• Barth et al. (JAR 2008) In the post-adoption
  period, firms applying IFRS evidence less
  earnings management

8
Effect on the value relevance of accounting data

• Has value relevance of earnings increased
  following IFRS adoption?
• YES
• Barth et al. (JAR 2008) Firms applying IFRS
  exhibit more value relevant accounting figures
  than other companies
• Germany Bartov et al. (JAAF 2005) The value
  relevance of IFRS-based earnings is higher than
  that of German GAAP-based earnings
• Germany Jermakowicz et al. (JIFMA 2007) The
  value relevance of earnings is higher for DAX-30
  companies using IFRS or US GAAP
• NO
• Germany Hung Subramanyam (RAS 2007) IFRS
  adoption has no effect on the value relevance of
  book value and net income
• Sweden Paananen (WP 2008) The value relevance
  of accounting figures is not affected by IFRS
  adoption
• Germany Lin Paananen (WP 2008) The value
  relevance of equity and earnings decreases after
  IFRS adoption

9
Effect on the cost of capital

• Has the cost of equity capital declined after
  IFRS adoption?
• YES
• Germany Ernstberger Vogler (WP 2008) The cost
  of equity capital is lower for companies that
  adopted IFRS or US GAAP
• Kim Shi (WP 2007) The cost of equity capital
  is significantly lower for IFRS adopters
• NO
• Europe Cuijpers Buijink (EAR 2005) No
  evidence of a lower cost of equity capital for
  IFRS adopters
• Germany Daske (JBFA 2006) Voluntary IFRS
  adopters do not exhibit lower cost of equity
  capital
• Has the cost of debt declined after IFRS
  adoption?
• YES
• Kim et al. (WP 2007) IFRS adopters have lower
  interest rates, larger amount of loan facility,
  less restrictive loan covenants, and they attract
  more foreign lenders

10
Summary of the empirical evidence

• No clear conclusion can be drawn from these
  studies because
• The evidence is mixed
• Many studies were conducted in a single country
  (Germany in particular)
• Most studies deal with voluntary adoption

11
Explaining the conflicting evidence

• The impact of IFRS adoption is a function of the
  degree of compliance with IFRS
• Vogel et al. (WP 2008) There is considerable
  variation in the level of IFRS compliance among
  European companies (compliance index ranging from
  13 to 100)
• Daske et al. (WP 2007) "Serious" IFRS adopters
  experience stronger effects on the cost of
  capital and market liquidity than "label"
  adopters
• Hodgdon et al. (JIAAT 2008) Compliance with the
  disclosure requirements of IFRS enhances the
  ability of financial analysts to provide more
  accurate forecasts

12

• The impact of IFRS adoption is a function of the
  firm's incentives to comply with IFRS
• Germany Christensen et al. (WP 2008)
  Improvements in accounting quality are confined
  to firms with incentives to adopt IFRS
• Daske et al. (JAR 2008) The capital-market
  benefits of IFRS adoption occur only in countries
  where firms have incentives to be transparent and
  where legal enforcement is strong
• Wang Yu (WP 2008) Better accounting standards
  are helpful only in countries with proper
  reporting incentives i.e. in common-law
  countries, in countries with better shareholder
  protection and effective legal enforcement
• Kim Shi (WP 2007) The cost of capital-reducing
  effect of IFRS adoption is greater when the IFRS
  adopters are from countries with weak
  institutional infrastructures

13
Conclusion

• The adoption of IFRS will probably not be
  sufficient to standardize the quality of earnings
  throughout Europe
• Strong enforcement mechanisms (laws and corporate
  governance systems) also are necessary
• Adopting high quality standards might be a
  necessary condition for high quality information,
  but not a sufficient one (Ball et al., JAE 2003)