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The Cross-Country Comparability of IFRS Earnings and Book Values: Evidence from France and Germany. Presented by Hollis A. Skaife David Lesar Chair of Business Associate Dean for Research and Phd Programs University of Wisconsin – Madison Co-authored with
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The Cross-Country Comparability of IFRS Earnings and Book Values: Evidence from France and Germany Presented by Hollis A. Skaife David Lesar Chair of Business Associate Dean for Research and Phd Programs University of Wisconsin – Madison Co-authored with Qing Liao and Thorsten Sellhorn 16 June 2011
Research Question Are earnings and book values measured under International Financial Reporting Standards (IFRS) comparable across France and Germany?
Motivation Increased comparability of financial information across countries is a stated goal of the IASB Prior research indicates that the properties of financial information, specifically earnings and book values, is conditional on country-level institutional factors (Alford et al. 1993; Ball, Kothari and Robin 2000; Brown and Tarca 2007; Bushman and Piotroski 2006; Lang, Ready and Yetman 2003; Nobes 1998; Pope and Walker 1999) Growing body of research questions whether the mandatory use of a common set of financial reporting standards will result in more comparable financial information across countries.
Comparable Financial Information Comparable financial information will not be achieved if a firm is forced to implement a standard that does not capture the underlying economics of a transaction (Ashbaugh and Pincus 2001). Comparable financial information results when all firms account for identical transactions in identical ways (Schipper 2003). Comparable financial information results when a firm accounts for a unique transaction in such a way that the firm’s financial statements communicate to users the economic consequences of the unique transaction relative to another firm’s unique transaction (Barth 2006).
Research Design Methodology We employ accounting-based valuation models to assess the comparability of summary accounting measures as under the efficient market hypothesis a dollar of reported book value and a dollar of reported earnings should be priced equivalently by investors if the accounting measure reflects the same underlying economic level and change in value, respectively.
Research Design Sample Our study focuses on France and Germany because these two countries represent the EU’s major economies and largest capital markets denominated in the Euro. France and Germany have some similar social-economic institutions that prior research indicates affect firms’ accounting measures. At the same time there exist institutional differences between France and Germany that can influence managers’ accounting implementation choices thereby affecting the comparability of financial information.
Summary of Results Our study provides evidence that French and German firms’ book values and earnings are similarly priced in the year following mandatory IFRS reporting. We provide evidence that German firms report more conservative earnings and book values in 2007 and 2008 relative to French firms. We document that German managers, on average, make more conservative accounting choices and estimates than French managers. We demonstrate that German firms report more smooth earnings relative to French firms.
Conclusions Findings suggest that earnings and book values are not directly comparable across France and Germany after 2006. Discretion is inherent in any set of financial reporting standards. Our findings suggest that investors must continue to engage in due diligence to understand the managerial choices that affect the measurement of IFRS earnings and book values.
