Analysts’ Earnings Adjustments and Changes in Accounting Standards

Accounting

Further details

Abstract

We investigate how financial analysts’ processing of earnings information is affected by changes in accounting standards; specifically, we measure the extent to which analysts make adjustments to reported earnings before and after European firms’ transition to International Financial Reporting Standards (IFRS). We find a marked decrease in the absolute level of earnings adjustments following IFRS transition, both for mandatory adopters (in 2005) and voluntary early adopters (in varying prior years). We develop a statistical approach to track the type and number of line items analysts adjust for, and we provide evidence that this number has decreased after the IFRS adoption, similar to the magnitude of the adjustments. Results are not driven by financial reports being mechanically more comparable after the introduction of IFRS. The IFRS transition effect is larger in countries with stronger legal enforcement and countries whose domestic accounting standards are more dissimilar to IFRS, although the main IFRS effect is not contingent on these factors. Overall, we interpret the results as consistent with analysts perceiving IFRS earnings to be of higher quality for forecasting and valuation purposes than domestic GAAP earnings.