. and effects on comparability and capital markets as

. Literature review


Widespread use of IFRS has been implemented over the years. Prior to
2005, voluntary adoption was prevalent in the EU.  Much of the academic literature has focused on
voluntary and mandatory adoption in regards to accounting harmonisation.

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Focusing on the effect on accounting quality, economic consequences, and
effects on comparability and capital markets as well as its effects on
accounting numbers and their relevance.


2.1 voluntary adoption


In regards to voluntary adoption research has addressed determinants and
consequences of voluntary adoption. Gassen and Sellhorn (2006) study determinants
of voluntary adoption using a sample of German firms, they conclude that
institutional factors such as size, international exposure and dispersion of
ownership are evident. However it was found that German firms who adopted IFRS
experience lower levels of information asymmetry compared to German-GAAP firms,
this implies increased accounting quality. Similarly Cuijpers and Buijink
(2005) look at voluntary adoption of IFRS and non-local GAAP in EU, their
findings show that firms who have foreign listings, with more dispersed
operations and are larger in size are more likely to engage in voluntary
adoption. Ashbaugh (2001) focuses on analysing non-US firms with a choice
between IFRS and local GAAP are more likely to implement IFRS when they operate
in more foreign markets and seasoned equity offerings. Usually, due to
requiring less accounting policy changes from local GAAP.  It seems that much current debate acknowledges
that weak investor protection rights are a main driver. Lastly, Hope, Jin and
Kang (2006) find that countries with weak investor protection mechanisms in
place are more likely to switch to IFRS.


Research focused on the consequences of voluntary adoption
of IFRS, mainly addresses it effects on accounting quality, using measures such
as earnings management. For example Van Tendeloo and Vanstraelen (2005) base
their study on a sample of German firms, to investigate whether those adopting
IFRS are less likely to engage in earnings management, their findings show that
IFRS-adopters turn to use of discretionary accruals, further are more likely to
engage in earnings smoothing. However it’s not possible to associate adoption
with lower earnings management.  Contrary
to this, Barth et al (2008) provides research on whether adoption and
accounting quality correlate. Through examining firms from 21 countries using
IFRS, findings show less earning management, more timely loss recognition and
more value relevance of accounting numbers compared to those firms applying
non-U. S domestic standards, these factors generally show better accounting
quality. However schipper
(2005) argue that discretionary accruals are not comparable across countries especially
as studies have used jones (1991) model which isn’t   


Hung and Subramanyam (2007) provide an insight into
implications associated with adoption on financial statements. Focusing on a sample
of German firms, findings show that under IFRS, total assets and book value and
net income are significantly higher under IFRS. They also conclude evidence
that IFRS presents higher conditional conservatism is weak.  Furthermore, on the economic consequences of
adoption studies have focused on capital market responses. Daske et al (2007)
examine the importance of recognizing heterogeneity in the economic
consequences of IFRS adoption. They provide evidence, which is dependant on
whether voluntary adopters are commitment to the choice. Analysing whether
quality of adoption can affect capital markets. Findings show that firms classified,
as ”serious” adopters tend to experience larger costs of capital and
liquidity effects than those classified at ”label” adopters. However these
are of very small significance this suggest that IFRS reporting commitment is
low. To summarize, much research into voluntary adoption of IFRS provides mixed
findings on improvements in accounting.


2.2 mandatory adoption


Post 2005, EU regulators made adoption of IFRS mandatory,
with the intention for better comparability and transparency of financial
reporting throughout the EU (ICEAW, 2015), in turn improving accounting quality
and harmonisation. More recent studies have questioned whether this has
actually been fulfilled; unlike voluntary adoption firms haven’t got the
ability to see if benefits outweigh the costs therefore findings may differ.


In this sense, Gaston et al (2010) conducted a study on the
quantitative impact of first time adopters on accounting numbers and financial
ratios using samples from Spain and UK firms. Evidence has shown that impact
was significant in both countries but higher in the UK even though the local
GAAP in UK was previously similar to IFRS.


Other research has focused on qualitative characteristics of
reporting including comparability of financial reports. Comparability is
usually defined using the quality of information provided, allowing investors
to make more informed decisions between two sets of phenomena
(FASB 2008). Horton, Serafeim, and Serafeim (2008) studied the effects of mandatory
adoption in the EU on information environment of firms and how it affects
analyst forecast accuracy. Their findings conclude that the firms which saw the
largest improvements in information environment where those who voluntarily
adopted IFRS earlier and non-financial firms who adopted IFRS mandatorily.

Likewise, Tan, Wang and Walker (2011) also studied analyst’s coverage and
documents that they see an increase as IFRS adoption eliminates the differences
between the firm’s countries and the analysts. This allows for improved
comparability in turn increase in harmonisation between users. Contrary Beuselinck
et al (2007) examined comparability of accounting earnings in 14 EU countries.

It was found that the business cycle stage and firm reporting incentives that
arise of capital markets, labour markets and debt financing affects accruals
measurement; these factors are all increased by institutional framework. These
results suggest that mandatory adoption doesn’t necessarily reach expectations
of comparability in the EU.


has been conducted to investigate accounting quality after mandatory adoption using
measures of timely loss recognition and earnings management. For example
Christensen, Lee and Walker (2007) assess incentives of IFRS adoption and
quality changes. Results show that improvements are evident in firms who have
incentives to adopt. Similarly, Ahmed et al (2013) examine preliminary effects
of mandatory adoption in 20 EU countries. Results are many driven by firms in
strong enforcement countries, but evidence shows that overall accounting
quality declined after mandatory adoption.


current research has focused on economic consequences of mandatory adoption,
including capital market reactions and analyst forecasts.

et al (2007) examine European stock market reactions to 16 events associated
with adoption of IFRS, analysing investors expectation in terms of cost and
benefits. Results find positive reactions to events from firms with high
quality pre-adoption information; these are consistent with investors
expectations net convergence benefits from IFRS adoption. However net benefits
proved to be less significant in countries where enforcement mechanisms are
less rigorous.


et al (2008) investigates economic consequences of IFRS adoption in 26
countries, analysing the effects of market liquidity, cost of capital and
Tobin’s Q in 26 countries. Findings show that market liquidity increases around
the time of IFRS introduction, also a documented decrease in cost of capital
and increase in equity valuations. However capital market benefits are only
prevalent in countries where legal enforcement is strong and firms have
incentives to be transparent. These benefits are also most recognised in firms
that voluntarily switch to IFRS. Relatedly, Hail and Leuz (2007) also assess
capital market effects of IFRS mandatory adoption and document similar results
of a decrease in cost of capital, suggested improvement in market liquidity.

However it is reported that EU enforcement regimes could play an important role
in these improvements.


regards to analyst’s forecasts and accuracy in relation to IFRS, Byard et al
(2008) investigate mandatory adoption and its effects on analyst’s information
environment. Using a control sample of firms who have adopted IFRS voluntarily.

They find that forecast errors and dispersion decrease relative to the control
group in those firms adopting mandatory IFRS in countries domiciled with strong
enforcement mechanisms and local GAAP that differs significantly from IFRS.

However, those countries with weak enforcement mechanisms only see a decrease
in firms, which hold incentive for greater transparency in financial reporting.

This suggests that enforcement regimes and firm level incentives play an
important role in determining impact of mandatory adoption.


et al (2008) also assess differences between accounting standards across
different countries and foreign analysts following forecast accuracy. They find
that differences in GAAP between two countries are negatively associated with
foreign analysts following and forecast accuracy. Rather, results suggest that
differences in GAAP are related to economic costs for financial analysts.




1.1 Data



of sample was based on two countries; UK and Germany. As stated earlier both
Germany and UK are governed by EU regulation, which made IFRS mandatory from 2005
for all listed companies (European Union, 2002). Prior
to 2005 some listed companies had choice between local GAAP and IFRS voluntary
adoption. Using FTSE 100



select UK companies and Frankfurt stock exchange DAX for German listed


In order to obtain comparable data, the focus
was fiscal year 2003 prior to mandatory adoption and 2008-post mandatory