The implementation of IFRS in Europe: Some preliminary evidence

Bernard Raffournier

University of Geneva

 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

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



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

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)

  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

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

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 IFRS-based earnings is higher than that of German GAAP based earnings

et al.

(JAAF 2005): The value relevance of Germany: Jermakowicz relevance of earnings is higher for DAX-30 companies using IFRS or US GAAP

et al.

(JIFMA 2007): The value 

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

Effect on the cost of capital

 Has the cost of equity adoption?

  capital declined after IFRS

YES

:  Germany: Ernstberger & Vogler (WP 2008): The cost of equity capital is lower for companies that adopted IFRS or US GAAP 

NO

: Kim & Shi (WP 2007): The cost of equity capital is significantly lower for IFRS adopters   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

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

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

 The impact of IFRS adoption is a function of the firm's incentives to comply with IFRS  Germany: Christensen IFRS

et al

. (WP 2008): Improvements in accounting quality are confined to firms with incentives to adopt   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 effective legal enforcement

i.e.

in common law countries, in countries with better shareholder protection and  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

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)