Mandatory Adoption of IFRS and Analysts’ Forecasts: How Much Does Enforcement Matter?

Differences in countries’ institutional settings are believed to impact on the extent to which benefits can be achieved from the adoption of International Financial Reporting Standards (IFRS). We investigate seven proxies that have been used to distinguish between institutional settings, including two self-constructed indexes that focus specifically on auditing and accounting enforcement (AUDIT and ENFORCE). Our measures are developed for 51 countries and three years: 2002 (that is, three years before IFRS were widely adopted in 2005); 2005; and 2008. To assess the merits of the proxies we focus on benefits manifest in firms’ information environments, as reflected in two properties of analysts’ earnings forecasts, namely their accuracy and the dispersion among them. Based on a sample of 357,034 firm-month observations available for 37 of the 51 countries, we find AUDIT and ENFORCE and the more general legal measure ‘rule of law’ of Kaufmann et al. (2010) have the strongest association with these two properties of analysts’ forecasts. We also find that AUDIT and ENFORCE provide additional explanatory power relative to ‘rule of law’. When our proxies and rule of law are included, both our measures are significant but the ‘rule of law’ proxy has explanatory power only in models based on dispersion. Thus we provide evidence of the importance of accounting enforcement in securing favourable capital market outcomes, which has not been demonstrated in the prior literature because researchers commonly use more general legal proxies for enforcement. The new AUDIT and ENFORCE proxies may be more useful than other proxies found in the literature when seeking to distinguish between countries according to the strength of their enforcement of accounting requirements.