The impact of mandatory IFRS adoption on financial analysts’ earnings forecasts in Spain

Abstract

This study contributes to investigation into the benefits of mandatory adoption of International Financial Reporting Standards (IFRS) in regard to Spanish GAAP for analysts’ earnings forecasts. In a sample of listed Spanish firms, we find that mandatory IFRS adoption led to improvements in the quality of the information provided to financial analysts in the post-adoption period. We provide evidence that the benefits of IFRS take time to materialise. We also observe that the expected benefits and costs of IFRS adoption in relation to financial analysts’ forecasts were not randomly distributed among Spanish firms. In terms of analysts’ earnings forecast error and dispersion after implementation of IFRS, benefits are concentrated mainly in firms audited by the Big 4 audit firms.

Esta investigación contribuye a analizar las ventajas económicas de la aplicación obligatoria de las IFRS con respecto a la normativa contable española sobre las características en las predicciones de los analistas financieros. Utilizando una muestra de empresa españolas cotizadas encontramos que la adopción obligatoria de las IFRS mejora la información ofrecida por los analistas financieros en el periodo posterior a la implantación de las mismas. Observamos que los beneficios de las IFRS precisan un tiempo para materializarse. Asimismo, se detecta que los beneficios y costes esperados con la adopción de las IFRS en relación con los pronósticos de los analistas financieros no son distribuidos aleatoriamente entre las empresas españolas. Dicha mejora, en términos de menor error y dispersión en los pronósticos de los analistas, tras la implantación de la normativa internacional se centra particularmente en empresas que son auditadas por las cuatro grandes firmas de auditoria (Big 4).

Keywords:

• analysts’ earnings forecast error and dispersion
• mandatory international financial reporting standards
• Spanish GAAP
• Big 4 audits

JEL classification:

• M41
• M49

Palabras claves:

• Error en el pronóstico de analistas
• Dispersión del pronóstico de analistas
• Aplicación obligatoria de las Normas Internacionales de Información financiera
• Normas contables españolas
• 4 grandes firmas de auditoría

JEL clasificación:

• M41
• M49

Acknowledgement

The authors would like to thank Juan Carlos Gómez Sala for his invaluable empirical contributions to this work and to two anonymous reviewers for their valuable commentaries, as they have all helped to improve the quality of the paper.

Notes

1. This restriction is necessary to capture dispersion in analysts’ earnings forecasts.

2. In view of the study objective, we think that a two-way panel model is appropriate, controlling simultaneously for fixed and temporary effects as follows:

(which is equivalent to the model with dummy variables: , where F_i, are (N − 1) individual dummy variables, i = 2, 3, …,N, and T_t are (T − 1) temporary dummy variables, t = 2, 3,..,T − 1). The above model is estimated with an incomplete panel using the “difference in difference” method, which requires units (in our case firms) in the two groups, known as treatment group (in our case firms that introduce IFRS) and comparison group (firms that do not introduce IFRS). In our sample, all the firms simultaneously introduced IFRS and so it is impossible to estimate a two-way panel model.

3. The PRETRANS variable is not in the regression to avoid exact multicolinearity problems.

4. We observe the results are the same when we the regression model includes the joined variable POST.

5. Although is true that some aspects of the Big 4 variable is an approximation to the size variable, however, we consider that the Big 4 go further than that. As Choi and Wong (2007) point out, auditors may plays a stronger governance role in weak legal environment, like Spain that have weak corporate governance mechanisms, and that high-quality auditor serves as a credible signal to reduce information asymmetry. In this sense, Verriest (2013) find that the association between Big 4 audits and earnings forecast properties is stronger in weak political environments.