The implementation of
IFRS in Europe:
Some preliminary
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 stakeholderoriented accounting regulations by marketoriented 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
Information asymmetry should decrease:
are more market-oriented
 IFRS disclosure requirements are larger
Earnings management should decrease:
are more precise
 They admit a limited number of options
 Hidden reserves are prohibited
Accounting data should be more value
 Value
relevance: Ability of accounting data to
reflect contemporaneous market prices or
 IFRS-based earnings should be more value
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?
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
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
 NO:
Germany: Van Tendeloo & Vanstraelen (EAR 2005): IFRS
adopters do not present different earnings management
behavior compared to companies reporting under German
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 et al. (JAAF 2005): The value relevance of
IFRS-based earnings is higher than that of German GAAPbased earnings
 Germany: Jermakowicz et al. (JIFMA 2007): The value
relevance of earnings is higher for DAX-30 companies using
 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 capital declined after IFRS
 Germany: Ernstberger & Vogler (WP 2008): The cost of
equity capital is lower for companies that adopted IFRS or
 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?
 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
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
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 commonlaw 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
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
Adopting high quality standards might be a
necessary condition for high quality information,
but not a sufficient one (Ball et al., JAE 2003)