Mandatory adoption of IFRS by EU listed firms and Comparability: Determinants and Analysts' Forecasts

In 2005, the EU adopted IFRS for all listed companies publishing consolidated financial statements in Europe. The transition from national accounting standards to IFRS was complex and costly but the main arguments for it included the improvement in comparability across companies and improvement in capital markets' efficiency. This study focuses on the comparability of the financial statements of EU listed firms, before (2003) and after (2005 & 2010) IFRS mandatory implementation, and on its determinants and consequences. We find significant convergence in firm's accounting practices (input comparability) after IFRS. Output comparability also significantly improves between the pre and post IFRS periods. However, neither of the two measures improves with IFRS familiarity (no significant difference between 2005 and 2010). Furthermore, we find that output comparability is not driven by the convergence in accounting choices. Our tests strongly suggest that output comparability is improved because of IFRS adoption and more comparable accruals in relation to industry peers. This suggests that more comparable accruals facilitate investors to value firms more accurately. In fact, we find that more comparable accruals facilitate lower analysts' forecast dispersion. Finally, we find that analysts' forecasts errors declining as output comparability increases, suggesting that output comparability increases the usefulness of accounting information.