THE ACCOUNTING REVIEW American Accounting Association

Vol. 87, No. 5 DOI: 10.2308/accr-50192

2012
pp. 17671789

Does Mandatory IFRS Adoption Improve

Information Comparability?
Rita W. Y. Yip
Lingnan University
Danqing Young
The Chinese University of Hong Kong

ABSTRACT: This study examines whether the mandatory adoption of International

Financial Reporting Standards (IFRS) in the European Union significantly improves
information comparability in 17 European countries. We employ three proxiesthe
similarity of accounting functions that translate economic events into accounting data,
the degree of information transfer, and the similarity of the information content of
earnings and of the book value of equityto measure information comparability. Our
results suggest that mandatory IFRS adoption improves cross-country information
comparability by making similar things look more alike without making different things
look less different. Our results also suggest that both accounting convergence and
higher quality information under IFRS are the likely drivers of the comparability
improvement. In addition, we find some evidence that cross-country comparability
improvement is affected by firms institutional environment.
Keywords: IFRS adoption; information comparability; institutional environment.
Data Availability: Data are available from commercial providers (Worldscope, Data-
Stream, and I/B/E/S).

I. INTRODUCTION

D
emand for internationally comparable accounting information has increased significantly
in recent years due to rapid growth in cross-country investment. One reflection of this
trend is the widespread adoption of International Financial Reporting Standards (IFRS),
including the mandatory adoption of IFRS in the European Union (EU) in 2005. Because
mandatory IFRS are some of the most important financial reporting regulations in recent years,
many studies have examined the various effects of their adoption (e.g., Capkun et al. 2008; Daske et

We thank John Harry Evans III (senior editor), Steven Kachelmeier (senior editor), two anonymous reviewers, and
workshop participants at The Chinese University of Hong Kong and the 2009 American Accounting Association Annual
Meeting for helpful comments and suggestions.
Editors note: Accepted by John Harry Evans III, with thanks to Steven Kachelmeier for serving as editor on a previous
version.
Submitted: November 2009
Accepted: April 2012
Published Online: April 2012

1767
1768 Yip and Young

al. 2008; Armstrong et al. 2010; Horton and Serafeim 2010; Clarkson et al. 2011). However, to the
best of our knowledge, the effect of IFRS adoption on cross-country information comparability has
not been thoroughly examined, although better comparability has been commonly cited as one of
the main benefits of IFRS adoption. The purpose of this study is, thus, to provide more empirical
evidence on this issue.
Information comparability is the quality of information that enables users to identify
similarities in and differences between two sets of economic phenomena (Financial Accounting
Standards Board [FASB] 1980, 9; International Accounting Standards Board [IASB] 2010, A36).
The Financial Accounting Standards Board further states that greater comparability of accounting
information, which most people agree is a worthwhile aim, is not to be attained by making unlike
things look alike any more than by making like things look different (FASB 1980, 42). These
statements assert that there are two equally important facets of information comparability: the
similarity facet, which indicates whether firms engaged in similar economic activities report similar
accounting amounts, and the difference facet, which indicates whether firms engaged in different
economic activities report dissimilar accounting amounts. Because improvement in one facet of
comparability does not automatically lead to improvement in the other facet, the overall benefit of
IFRS adoption on cross-country information comparability is contingent on whether adoption
improves both facets of comparability, or at least improves one without impairing the other.
It is intuitively appealing that mandatory IFRS adoption improves the similarity facet of
cross-country information comparability, and some empirical evidence from prior studies is
consistent with this intuition (e.g., Ashbaugh and Pincus 2001; Chi 2009; Barth et al. 2011; DeFond
et al. 2011). However, our view is that more research is required before a firm conclusion can be
drawn, as prior studies either use input-based comparability measures, such as accounting rule
variability and the number of accounting rules used on an announcement date (e.g., Chi 2009;
DeFond et al. 2011), or rely on samples of voluntary adopters that likely have different reporting
incentives from those of mandatory adopters (e.g., Ashbaugh and Pincus 2001; Barth et al. 2011).
More importantly, the effect of IFRS adoption on the difference facet of cross-country
comparability has not been addressed at all. This facet of comparability is important for mandatory
IFRS adoption because an overemphasis on uniformity may reduce comparability by making
unlike things look alike (IASB 2010, A36). For example, if IFRS allow fewer accounting choices
than local accounting standards, then their adoption could force firms to treat different economic
transactions in a more similar way, thus, diminishing the difference facet of comparability.1 In this
study, we test the effect of IFRS adoption on both facets of cross-country information
comparability.
Following previous comparability studies (e.g., Bradshaw et al. 2009; Barth et al. 2011;
DeFond et al. 2011; De Franco et al. 2011), we refer to firms in the same industry as similar firms
and those in different industries as different firms.2 We compare the cross-country information
comparability of the similarity facet among similar firms from different countries, and we compare
the cross-country information comparability of the difference facet among different firms from
different countries, across the pre- and post-IFRS periods. Because increased cross-country
comparability after IFRS, if any, could be affected by accounting convergence and/or higher quality

1
As an example, some local accounting standards allow firms to use the acquisition method for acquisitions and
the pooling method for mergers. However, IFRS allow only the acquisition method for all business combinations
that are not under common control. As such, firms are forced to account for acquisitions and mergers in the same
way.
2
The underlying logic is that firms in the same industry have similar operational properties and face similar
economic shocks, whereas firms in different industries may have different operational properties and face
different industry-specific shocks. This definition is also supported by the common practice of analysts using
firms in the same industry as benchmarks when analyzing a firms financial statements.

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Does Mandatory IFRS Adoption Improve Information Comparability? 1769

financial information under IFRS than under local accounting standards, we also examine the two
facets of within-country comparability to identify the possible drivers underlying the comparability
improvement. As IFRS adoption generally reduces firms accounting choices (e.g., Ashbaugh and
Pincus 2001; Hoogendoorn 2006), an increase in both cross- and within-country comparability
would suggest that both accounting convergence and higher quality information are the underlying
drivers, whereas only an increase in cross-country comparability would suggest that convergence is
the likely driver.
We employ three proxies for information comparability. The first is the similarity of accounting
functions measure developed by De Franco et al. (2011).3 With this approach, accounting is
essentially the mapping of economic transactions to financial statements, and information
comparability can be defined as the similarity of firms accounting functions that translate economic
transactions into accounting data. The second proxy is the degree of information transfer, as
measured by the association between the earnings surprise of an announcing firm and the
contemporaneous stock price movements of other firms. The intuition underlying this measure is
that an earnings announcement by a firm conveys information that has not previously been publicly
available, and investors can abstract such information and adjust stock prices for other firms with
comparable accounting. The third proxy is the similarity of the information content of earnings
(ICE) and the information content of the book value of equity (ICBV), as measured by the
long-window association between stock price and earnings and the book value of equity. Because
ICE and ICBV capture the extent to which accounting earnings and the book value of equity reflect
a firms economic performance, firms that engage in similar economic activities should have a
similar ICE and ICBV if their accounting systems are comparable.4
To test our research questions, we use data from 17 European countries in which listed firms
must use IFRS to prepare their consolidated financial statements since 2005. We find that the
comparability of accounting information for similar firms from different countries is significantly
greater in the post-IFRS period (20052007) than in the pre-IFRS period (20022004), using all of
the three comparability measures. However, using the measure of the similarity of accounting
functions and information transfer,5 we find that there are no discernible comparability changes
among different firms from different countries across the two periods. Further, the comparability
change in the similarity facet is greater than that in the difference facet. These results, thus, suggest
that IFRS adoption improves the similarity facet of cross-country information comparability
without discernibly impairing the difference facet of comparability. For within-country analysis, we
find that the similarity facet of comparability increases for the accounting function measure, but not
for the information transfer measure. However, the increase in the similarity facet of within-country
comparability does not statistically differ from that of cross-country comparability using both
measures. We, thus, interpret our results as consistent with the view that both accounting
convergence and information quality play an important role in the observed IFRS effects.
As a supplemental test, we examine whether the improvement in the similarity facet of
cross-country comparability is affected by firms institutional environment. We classify a firms
institutional environment by the common law versus code law origin of the legal system in its home
country, because a countrys legal origin can proxy for a variety of institutional features, such as

3
De Franco et al. (2011) also develop another comparability measure that captures the similarity of two firms
economic events and accounting functions at the same time. Because we examine whether IFRS adoption
improves the similarity of accounting functions, we do not use that measure here.
4
We summarize comparability measures for each test in Figure 1.
5
As explained in Similarity of ICE and ICBV in Section III, the similarity of ICE and ICBV measure is not
applicable for the sample of different firms from different countries and the sample of similar firms from the
same country.

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1770 Yip and Young

financial reporting incentives and the effectiveness of legal enforcement. We find that among
similar firms from countries with the same legal origin, nearly all of the comparability measures
increase after IFRS adoption. However, among similar firms from countries with different legal
origins, only one comparability measure increases. Overall, these results provide some evidence
that the institutional environment in the home countries of firms influences the effect of IFRS
adoption on information comparability.
This study contributes to the literature by providing empirical evidence on the association
between mandatory IFRS adoption and information comparability. We address the impact of IFRS
adoption on both the similarity and difference facets of comparability, whereas previous
comparability studies address only the former. Our results suggest that mandatory IFRS adoption
has an overall benefit in enhancing investors ability to compare firms with similar fundamentals
without discernibly reducing their ability to distinguish firms with different fundamentals. This
study also extends the literature on the importance of institutions by documenting that IFRS
adoption is more likely to improve comparability among firms with similar institutional
environments. All of the findings may have practical implications for regulators and investors in
countries considering IFRS adoption.
Section II discusses the literature and the differences between our study and previous studies.
Section III describes the information comparability measures employed, and Section IV presents the
empirical tests and their results. Section V presents supplemental and sensitivity tests, and Section
VI concludes.

II. MOTIVATION AND LITERATURE REVIEW

Globalization in the last two decades has significantly increased the economic interaction
among countries, which, in turn, has created demand for more internationally comparable
accounting information. There are several potential benefits associated with enhanced information
comparability. For example, both the FASB and the International Accounting Standards Board
argue that more comparable information enables global markets to operate with less friction.6
Several studies also suggest that greater information comparability facilitates international
transactions and minimizes exchange costs (e.g., Turner 1983; Weber 1992; Choi et al. 1999).
The importance of comparable financial information in the global economy has led to
growing research interest in information comparability. De Franco et al. (2011) develop two
measures of accounting comparability and test their construct validity. They also use U.S. data to
examine the benefits of comparability, finding that comparability is positively associated with
analyst following and forecast accuracy, and negatively associated with forecast optimism and
dispersion. Bradshaw et al. (2009) examine the association between accounting method variability
(as a proxy for information comparability) and analyst characteristics using U.S. data, finding that
a lower level of information comparability is associated with greater analyst forecast error and
dispersion.
Several recent studies examine issues related to accounting comparability resulting from IFRS
adoption. Using data from 26 countries from 1995 to 2006, Barth et al. (2011) find that the value
relevance of earnings and equity book value is more comparable among non-U.S. firms after the
application of the International Accounting Standards than when local accounting standards were
used. Beuselinck et al. (2007) investigate the determinants of earnings comparability as proxied
by the association between accruals and cash flows for the period 19902005 using data from 14
EU countries, finding that the association is not affected by mandatory IFRS adoption. DeFond et

6
These arguments appeared in news releases by the FASB on February 27, 2006, and by the IASB on February
22, 2006.

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Does Mandatory IFRS Adoption Improve Information Comparability? 1771

al. (2011) examine the benefits of increased accounting uniformity as a proxy for comparability,
using data from 14 European countries. They find that foreign mutual fund ownership increases
among mandatory adopters in countries with strong implementation credibility. Li (2010) cites
enhanced comparability as the likely mechanism behind the cost of equity reduction in the EU
after IFRS adoption. Wu and Zhang (2010) find an increased use of relative performance
evaluation based on foreign peer firms accounting information among European firms in the
post-IFRS period.
Our study differs from these recent studies in two important ways. First, we address both the
similarity and difference facets of comparability, whereas the previous studies only address issues
related to the former. Second, we examine a different research question and, thus, use different
comparability measures, sample periods, and sample firms. For example, whereas we examine the
relation between comparability and mandatory IFRS adoption in 17 European countries, Barth et al.
(2011) examine the comparability of mandatory and voluntary non-U.S. IFRS adopters and U.S.
firms. Beuselinck et al. (2007) rely on a non-price-related comparability measure and data from the
year of switch only (2005), whereas we use three price-related measures and three post-IFRS years
of data.7 Li (2010) and DeFond et al. (2011) use input-based and non-firm-specific comparability
measures, whereas we employ output-based and firm-specific measures.8

III. SAMPLES AND COMPARABILITY MEASURES

Initial Sample
We collect data on listed firms in Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland, and the United Kingdom from the Worldscope database. The number of firms
included in the Worldscope database for each country is presented in Table 1, Panel A. We exclude
financial, insurance, and real estate firms (SIC codes 60006999) from the sample because they
have special operating properties and are subject to additional regulations. We also exclude firms
that adopted IFRS before 2005 and firms that do not report consolidated financial statements from
the sample. Finally, we restrict the sample to firms with a fiscal year ending in December to ensure
that each firm has the same sample period. Table 1, Panel B, summarizes the sample selection
procedure and the final sample size.

Comparability Measures and Related Samples

Similarity of Accounting Functions
This comparability measure was developed by De Franco et al. (2011), who argue that
accounting is essentially the mapping of economic transactions to financial statements, and that
accounting comparability can, thus, be defined as the similarity of accounting functions to translate
economic transactions into accounting data. We first estimate each firms accounting function by
applying the following equation:

7
Price-related comparability measures capture comparability from the perspectives of both investors and analysts.
Because investors and analysts together are likely to be the largest groups using reported accounting information
to make investment decisions, it is important to examine comparability from their perspectives.
8
Following De Franco et al. (2011), we classify comparability measures that are computed using reported
accounting data into the output-based category, and those that are based on accounting methods or accounting
policies into the input-based category. For the dichotomy of firm-specific and non-firm-specific, measures that
are computed using firm-level data are classified into the category of firm-specific, and those computed using
industry- or country-level data are classified into the category of non-firm-specific.

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TABLE 1
Sample Composition by Country and Initial Sample Procedures
Panel A: Sample Composition by Country from the Worldscope Database
Country Number of Firms
Austria 98
Belgium 153
Denmark 191
Finland 127
France 818
Germany 966
Greece 293
Ireland 64
Italy 281
Luxembourg 42
The Netherlands 171
Norway 206
Portugal 60
Spain 143
Sweden 419
Switzerland 273
United Kingdom 1,951
Total 6,256

Panel B: Initial Sample Selection Procedures

Number of firms obtained from Worldscope 6,256
Exclusions:
Financial institutions, insurance companies, and real-estate firms (1,538)
Fiscal year not ending in December (1,359)
Firms that voluntarily adopted IFRS before the mandatory requirement (573)
Firms without consolidated accounts (224)
Total number of firms in the initial sample 2,562
This table presents the sample composition by country and the initial sample selection procedure. Panel A presents the
sample composition by country for the 6,256 firms collected from the Worldscope database. Panel B presents the initial
sample selection procedure, which gives 2,562 firms.

ROAit ai bi RETit eit ; 1

where ROAit is the return on assets (an accounting performance measure) of firm i in period t, and is
calculated as net income divided by total assets, and RETit, a proxy for economic events, is the
stock return of firm i in period t. The coefficients (a i and bi ) represent the estimated accounting
function of a firm. Using semiannual data, we estimate each firms accounting function in the pre-
and post-IFRS periods separately.
The similarity of accounting functions of firm i and firm j is then computed as follows. First,
we translate firm is economic activity into accounting ROA using its own accounting function (a i
and bi ) and the corresponding firm js accounting function (a j and bj) for each semiannual year.
Thus, we obtain the two expected ROAs, EROAiit and EROAjit ; and the absolute value of their

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Does Mandatory IFRS Adoption Improve Information Comparability? 1773

difference for each semiannual year.9 This process yields six absolute value ROA differences for the
pre-IFRS period (20022004) and six differences for the post-IFRS (20052007) period. Second,
we translate firm js economic activity into accounting ROA using its own accounting function (a j
and bj) and firm is accounting function (a i and bi ), and obtain the two expected ROAs, EROAjjt
and EROAijt ; and the absolute value of their difference for each semiannual year. Similarly, there
are six differences for the pre-IFRS period and six differences for the post-IFRS period.10 Third, we
calculate the mean of the 12 differences in the pre-IFRS period (post-IFRS period) as the proxy for
the information comparability of firms i and j in the pre-IFRS period (post-IFRS period). We
multiply the mean by 1 so that a higher value represents greater comparability.
To generate a sample for a test of the similarity facet of cross-country comparability, we form
pairs of firms from the same industry, based on the three-digit SIC code, but different countries. We
rank the firms in each industry based on their total assets in 2006. For the largest firm, we choose a
foreign firm with the closest total assets as its pair. We also require the ratio of the smaller value of
total assets to the larger value in a pair to be greater than 50 percent. This procedure generates 133
pairs of firms. To form a sample to test the difference facet of cross-country comparability, we form
pairs from different industries and countries. We require one firm in the pair to be a manufacturing
firm (one-digit SIC code of 2 or 3) and the other to be a service firm (one-digit SIC code of 7 or 8).11
For each manufacturing firm, we choose a service firm in a different country that is closest in terms of
total assets. The ratio of the smaller value of total assets to the larger value must be greater than 50
percent. This procedure results in 148 pairs of firms. We employ the same procedure to form pairs
from the same country, and generate 61 pairs of similar firms and 125 pairs of different firms.

Degree of Information Transfer

Previous studies have found associations between the information released by announcing
firms and the returns of other firms in the same industry and country. For example, such information
transfer has been documented with respect to the news in the earnings announcements (Firth 1976;
Foster 1981; Clinch and Sinclair 1987; Han and Wild 1990; Hramnath 2002), stock split
announcements (Tawatnuntachai and DMello 2002), management earnings forecasts (Baginski
1987; Han et al. 1989), and corporate security offerings (Szewczyk 1992). Such transfers occur
because an announcement by a firm conveys information that has not previously been publicly
available, and the stock market responds by reevaluating the value of non-announcing firms and
adjusting their share prices accordingly. An important condition for information transfer through
earnings announcements is comparable accounting earnings. If earnings are not comparable, then
an earnings announcement by a firm is of little value in predicting the value of other firms, resulting
in a low degree of information transfer. As such, the degree of information transfer reflects the level
of information comparability.
We measure an earnings surprise for an announcing firm as the difference between reported
earnings and ex ante expected earnings. The ex ante expected earnings are proxied by the mean
analyst earnings forecast in the month immediately before the earnings release, which is obtained
from the I/B/E/S database.12 We calculate the abnormal stock returns of a non-announcing firm in

9
E(ROA)iti ai b iRETit and E(ROA) itj a j b jRETit.
10
E(ROA)jti ai b iRETjt and E(ROA) jtj a j b jRETjt.
11
Because we assume that similar (different) firms face similar (different) economic shocks and have similar
(different) operational properties, we use the three-digit SIC code to define similar firms to ensure that these firms
are fundamentally similar, and use the one-digit SIC code to define different firms to ensure that they are
fundamentally different.
12
Only annual earnings surprises are used in this test because the data on announcement date for semiannual or
quarterly earnings are not available for most sample firms.

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1774 Yip and Young

the three days around the earnings release of the announcing firm (Day 1 to Day 1) using the
following model:

Uit RETit  ai bi RETmt ; 2

where Uit is the abnormal stock return of firm i on day t, and RETit and RETmt are the stock
return of firm i and the market return of firm is domestic market on day t, respectively.13 We
estimate the coefficients ai and bi separately for each fiscal year using data from Day 185 to
Day 6, where Day 0 is the earnings announcement date of the announcing firm. The cumulative
abnormal return of a non-announcing firm is the sum of its abnormal returns on the three days
surrounding the earnings release date of the announcing firm. To reduce the cross-sectional
correlation of prediction errors across clusters of non-announcing firms, we follow Baginski
(1987) and use the mean cumulative abnormal return of all of the non-announcing firms in the
empirical analyses.
To form a sample to test the similarity facet of cross-country comparability, we first identify all
of the industries at the three-digit SIC code level that contain at least two firms from different
countries. We rank the firms in each industry by their earnings announcement dates. To qualify as
an announcing firm, the firms earnings announcement window (Day 1 to Day 1) must not
overlap with that of any other firm, to avoid the situation of non-announcing firms reacting to more
than one earnings announcement on the same day. Each announcing firm is paired with all similar
foreign firms with later earnings announcement dates that are of a similar size to the announcing
firm (a ratio of the smaller total asset value to the larger value of greater than 50 percent). This
approach yields 744 pair-year observations. To form a sample to test the difference facet of cross-
country comparability, we match each announcing firm in the manufacturing sector with all of the
foreign service firms with later earnings announcements and similar total assets, and vice versa.
This sample contains 910 pair-year observations. For the two within-country samples, we
implement the same procedure to form pairs within the same country, resulting in 195 and 630 pair-
year observations for the tests of the similarity facet and difference facet of within-country
comparability, respectively.

Similarity of ICE and ICBV

We employ the Ohlson (1995) model, in which a firms market value is regressed on net
income and equity book value, to test if ICE and ICBV are similar for two sets of firms:
MVit b0 b1 NIit b2 BVit b3 Dx b4 Dx NIit b5 Dx BVit eit ; 3
where MVit is the total market value of equity at the end of the fiscal year, NIit is the net income,14
and BVit is the book value of equity.15 These three variables are scaled by the number of
outstanding common shares. The variable Dx is an indicator where x equals 1 when it is a country
indicator, and 2 when it is an industry sector indicator. A significant b4 and b5 indicate that firms
from different sets have a different ICE and ICBV, respectively, and, thus, a low degree of
information comparability.

13
The market return indices for Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, The Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom are
ATX, BEL, OMXC, OMXH, CAC, DAX, Athex, Ireland SE, MIB, LUX, AEX, OBX, PSI, IBEX, MX
Stockholm, Swiss Market, and FTSE, respectively.
14
In the Worldscope database, net income is defined as earnings (revenues less operating costs, depreciation,
interest, taxes, and other expenses) less preferred dividends for non-U.S. firms.
15
We use annual data to estimate Equation (3) because data on the semiannual book value of equity are missing for
most sample firms in the Worldscope database.

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Does Mandatory IFRS Adoption Improve Information Comparability? 1775

To examine the similarity facet of cross-country information comparability, we estimate

Equation (3) within each industry, as determined by three-digit SIC code, for every possible
combination of two countries in the pre- and post-IFRS periods separately. We assign an ICE
(ICBV) comparability score of 1 if b4 (b5 ) is insignificant (defined as a two-tailed p-value of more
than 5 percent), and 0 otherwise. We require at least three firms in an industry in a given country to
ensure that there are at least 18 observations in each regression. This process yields 210 regressions
and, hence, 210 comparability scores for ICE and ICBV in the pre- and post-IFRS periods,
respectively.
For the difference facet of within-country comparability analysis, we estimate Equation (3)
using a set of firms from the manufacturing sector (one-digit SIC code of 2 or 3) and the other set of
firms from the service sector (one-digit SIC code of 7 or 8), for every possible combination within a
country in the pre- and post-IFRS periods separately. This results in 64 comparability scores for
ICE and ICBV in each period. To estimate Equation (3), the sample firms must differ on only one of
the industry sector or country dimensions captured by indicator Dx. Thus, this approach is not
applicable to test either the difference facet of cross-country comparability, because sample firms
are from different industry sectors and countries, or to test the similarity facet of within-country
comparability, because sample firms are from both the same industry and the same country. Our
comparability measures for each test are summarized in Figure 1.

IV. RESULTS

Results Using the Similarity of Accounting Functions Measure

We perform multivariate Regression (4) for four samples: similar firms from different
countries, different firms from different countries, similar firms from the same country, and different
firms from the same country:
Compit b0 b1 IFRSt b2 TA Ratioi b3 Com Codei b4 Listingi IDi ; 4
where Compit is the comparability of pair i in period t, and IFRSt is an indicator that equals 1 if t is
the post-IFRS period, and 0 otherwise. A significant b1 indicates that information comparability
changes between the pre- and post-IFRS periods. The variable TA_Ratioi is the ratio of the smaller
value of total assets to the larger value of the two firms in a pair in 2006. Com_Codei is an indicator
that equals 1 when the home countries of the two firms in the pair have different legal origins, and 0
otherwise, and Listingi is an indicator that equals 1 if the two firms in a pair are both listed on at
least one of the same stock exchanges, and 0 otherwise. These variables control for differences in
firm size, institutional environment, and stock listing between the two firms, all of which may affect
firms reporting incentives and, hence, the comparability of their accounting information. These
variables are all winsorized at the top and bottom 1 percent. IDi is an industry indicator of a pair.
For within-country analysis, we exclude Com_Code and Listing because they take the same value
for all of the observations. For difference facet of comparability analysis, IDi is excluded because
each of the pairs consists of one manufacturing firm and one service firm. Following the discussion
and practices in prior studies (e.g., Gow et al. 2010; DeFond et al. 2011), we adjust the standard
errors by country clusters in the within-country analyses.
Table 2, Panel A, presents descriptive statistics for the four samples. The mean and median of
Comp between cross-country similar and different firms, within-country similar and different firms,
cross- and within-country similar firms, and cross- and within-country different firms do not
statistically differ except that the mean of cross-country similar firms is smaller than that of cross-

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FIGURE 1
Summary of Empirical Analyses and Comparability Measures

* The third proxy (similarity of the information content of earnings and book value of equity) is not applicable in this sample.

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Does Mandatory IFRS Adoption Improve Information Comparability? 1777

TABLE 2
Results of the Tests Using the Similarity of Accounting Functions Measure

Panel A: Descriptive Statistics for the Variables in the Various Samples

Variable n Mean Median Minimum Maximum Std. Dev.
Sample of Similar Firms from Different Countries
Compit 266 0.282 0.038 2.950 0.002 1.138
IFRSt 266 0.500 0.500 0.000 1.000 0.501
TA_Ratioi 266 0.810 0.838 0.500 0.995 0.153
Com_Codei 266 0.459 0.000 0.000 1.000 0.499
Listingi 266 0.045 0.000 0.000 1.000 0.208
Sample of Different Firms from Different Countries
Compit 296 0.094 0.030 0.729 0.002 0.071
IFRSt 296 0.500 0.500 0.000 1.000 0.500
TA_Ratioi 296 0.957 0.982 0.576 1.000 0.075
Com_Codei 296 0.628 1.000 0.000 1.000 0.484
Listingi 296 0.007 0.000 0.000 1.000 0.082
Sample of Similar Firms from the Same Country
Compit 122 0.142 0.040 1.157 0.001 0.278
IFRSt 122 0.500 0.500 0.000 1.000 0.502
TA_Ratioi 122 0.794 0.812 0.501 0.986 0.155
Sample of Different Firms from the Same Country
Compit 250 0.112 0.041 0.696 0.005 0.177
IFRSt 250 0.500 0.500 0.000 1.000 0.500
TA_Ratioi 250 0.904 0.943 0.551 1.000 0.102

Panel B: Regression Results

Cross-Country Within-Country Pooled Sample
Analysis Analysis Analysis
Cross- and
Cross-Country Within-
Similar Different Similar Different Similar and Country
Variables Firms Firms Firms Firms Different Firms Similar Firms
Intercept 0.680 0.109 0.446 4.653 0.206 0.192
(1.332) (1.248) (1.027) (1.313) (0.656) (0.278)
IFRSt 0.474*** 0.009 0.655* 0.720 0.009 0.655***
(2.698) (0.969) (1.924) (1.347) (0.117) (3.274)
Similar_Firmi 0.542***
(4.186)
Cross_Countryi 0.269
(0.649)
IFRSt  Similar_Firmi 0.465***
(4.199)
IFRSt  Cross_Countryi 0.181
(0.749)
TA_Ratioi 0.470 0.055 0.132 2.849 0.247 0.280
(1.684) (0.657) (1.318) (1.119) (0.785) (0.599)
Com_Codei 0.143* 0.007 0.033 0.208
(1.703) (0.768) (0.494) (1.116)
(continued on next page)

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1778 Yip and Young

TABLE 2 (continued)
Cross-Country Within-Country Pooled Sample
Analysis Analysis Analysis
Cross- and
Cross-Country Within-
Similar Different Similar Different Similar and Country
Variables Firms Firms Firms Firms Different Firms Similar Firms
Listingi 0.626 0.075*** 0.483** 0.611
(1.396) (18.680) (2.271) (1.575)
IDi Yes No Yes No Yes Yes
Observations 266 296 122 250 562 388
Adj. R2 0.201 0.006 0.341 0.073 0.317 0.275
*, **, *** Indicate significance at the 0.10, 0.05, and 0.01 levels, respectively, two-sided.
This table presents the results of the tests using the similarity of accounting functions measure. Panel A presents the
descriptive statistics for the variables used in the multivariate test. All of the variables are winsorized at the top and
bottom 1 percent. Panel B presents the regression coefficients (t-statistics in parentheses). The base model is as follows:
Compit b0 b1 IFRSt b2 TA Ratioi b3 Com Codei b4 Listingi IDi :
For within-country analyses, Com_Code and Listing are excluded from the model because all of the observations equal 1,
and the standard errors are adjusted by country clusters. For difference facet of comparability analysis, IDi is excluded
because each of the pairs consists of one manufacturing firm and one service firm. For analyses using a pooled sample of
cross-country similar and different firms, the model includes an indicator variable, Similar_Firm, and its interaction with
IFRS. For analyses using a pooled sample of cross- and within-country similar firms, the model includes an indicator
variable, Cross_Country, and its interaction with IFRS.

Variable Definitions:
Compit information comparability between two firms in pair i in period t;
IFRSt an indicator that equals 1 if t is a post-IFRS period, and 0 if t is a pre-IFRS period;
TA_Ratioi ratio of the smaller value of total assets to the larger value of the firms in a pair in 2006;
Com_Codei an indicator that equals 1 when the home countries of the two firms in a pair have different legal system
origins, and 0 otherwise;
Listingi an indicator that equals 1 if the two firms in a pair are listed on at least one of the same stock exchanges, and 0
otherwise;
IDi an industry indicator of a pair;
Similar_Firmi an indicator that equals 1 if Comp is the comparability between two similar firms, and 0 if it is between
two different firms; and
Cross_Countryi an indicator that equals 1 if Comp is the comparability between two similar firms from different
countries, and 0 if it is between two similar firms from the same country.

country different firms (results are not tabulated).16 Panel B reports the regression results. For the
two cross-country analyses, the coefficient of IFRS (b1) is positive and significant for the sample of
similar firms (coefficient of 0.474, p , 0.01), but is close to 0 (0.009) and statistically insignificant
for the sample of different firms.17 We also compare the coefficient of IFRS between the samples of
similar and different firms. We combine these two samples, and include an indicator for the
observations from the sample of similar firms (Similar_Firm) and its interaction with IFRS in

16
Seven pairs of firms have extremely small comparability values, mainly in the pre-IFRS period. When these pairs
are excluded from the sample of cross-country similar firms, the mean comparability of the sample becomes
similar to those of the other samples. When we estimate Equation (4) using the reduced sample, the coefficient of
IFRS remains positive and significant (coefficient of 0.119, p , 0.000), and significantly greater than that of the
sample of cross-country different firms.
17
We follow Milton (1986) to estimate a minimum sample size necessary to reach a t-value of 2.00 and 1.68 for the
samples used in the tests of the similarity of accounting functions and information transfer measures where the
result for the variable of interest is insignificant. We find that all of our sample sizes are greater than their
corresponding minimum sample sizes based on a t-value of 2.00.

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Does Mandatory IFRS Adoption Improve Information Comparability? 1779

Equation (4). We find that the coefficient on the interaction is positive and significant (coefficient of
0.465, p , 0.01). These results, thus, suggest that there is a significant improvement in the
similarity facet, but not in the difference facet of cross-country comparability in the post-IFRS
period.
For the two within-country analyses, the coefficient on IFRS is 0.655 and marginally
significant for similar firms, and 0.720 but insignificant for different firms. We combine the samples
of cross- and within-country similar firms, and include an indicator for the observations from the
cross-country sample (Cross_Country) and its interaction with IFRS in the model. We find that the
coefficient on the interaction is insignificant, suggesting that the effect of IFRS adoption on the
similarity facet of cross-country comparability is similar to that of within-country comparability.

Results Using the Information Transfer Measure

The regression model using the measure of information transfer is as follows:
jNAF CARit j b0 b1 jAF UEit j b2 IFRSt b3 jAF UEit jIFRSt b4 AF Sizeit
b5 AF Analystit b6 AF Lossit IDi ; 5
where jNAF_CARitj is the average absolute value of the cumulative abnormal returns of all the non-
announcing firms within the three-day earnings release window of an announcing firm, and
jAF_UEitj is the absolute value of the unexpected earnings per share of the announcing firm, scaled
by its stock price at the beginning of the fiscal year.18 We use the absolute value of these two
variables because information transfer can be positive or negative. A positive transfer takes place
when a positive (negative) earnings surprise for an announcing firm indicates an unexpected
improvement (deterioration) in market conditions, which positively (negatively) affects the stock
prices of similar firms. A negative information transfer occurs when a positive (negative) earnings
surprise for an announcing firm represents an increased (decreased) market share for that firm,
which negatively (positively) affects the stock prices of similar firms (Kim et al. 2008). The
indicator IFRSt equals 1 if t is a post-IFRS year, and 0 if it is a pre-IFRS year. We include the
logarithm of total assets in U.S. dollars of the announcing firm (AF_Sizeit) in the model because
previous studies find that the earnings surprises of larger firms affect the stock prices of similar
firms more than those of smaller firms (e.g., Atiase 1985; Firth 1996).19 The variable AF_Analystit
is the number of one-year-ahead earnings forecasts issued and revised for the announcing firm,
controlling for the intensity of analyst activity. In addition, we include AF_Lossit in the model to
indicate whether the announcing firm is reporting a loss, as prior studies find that losses are less
informative than profits (e.g., Hayn 1995). The industry indicator IDi is also included in the cross-
and within-country analysis for similar firms. Further, we adjust standard errors by country clusters
based on the announcing firms country in all of the four analyses.
Our variable of interest is the interaction between the absolute value of the unexpected earnings
of the announcing firm and the indicator for the post-IFRS period (jAF_UEitj  IFRSt). The
coefficient on this interaction (b3) indicates whether information comparability differs across the
pre- and post-IFRS periods. The descriptive statistics for the variables for the four samples are
summarized in Table 3, Panel A. We winsorize all of the variables at the top and bottom 1 percent.
As Panel A shows, the mean absolute values of the cumulative abnormal return of the non-
announcing firms range from 0.023 to 0.028, and are all greater than zero.
Table 3, Panel B, reports the regression results. For cross-country analysis, the coefficient b3 on
the variable of interest (jAF_UEitj  IFRSt) is positive and significant (p , 0.05) for the sample of

18
NAF and AF in the variable names denote Non-Announcing Firms and Announcing Firms, respectively.
19
The Worldscope database provides accounting data in both the local currency and U.S. dollars.

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1780 Yip and Young

TABLE 3
Results of the Tests Using the Information Transfer Measure

Panel A: Descriptive Statistics for the Variables in the Various Samples

n Mean Median Minimum Maximum Std. Dev.
Sample of Similar Firms from Different Countries
jNAF_CARitj 744 0.025 0.018 0.000 0.170 0.027
jAF_UEitj 744 0.237 0.016 0.000 2.420 0.996
IFRSt 744 0.472 0.000 0.000 1.000 0.500
AF_Sizeit 744 2.726 2.692 1.199 5.033 0.740
AF_Analystit 744 6.742 5.000 1.000 30.000 6.439
AF_Lossit 744 0.181 0.000 0.000 1.000 0.386
Sample of Different Firms from Different Countries
jNAF_CARitj 910 0.023 0.021 0.005 0.065 0.011
jAF_UEitj 910 0.201 0.016 0.000 2.232 0.505
IFRSt 910 0.488 0.000 0.000 1.000 0.500
AF_Sizeit 910 2.782 2.759 1.160 4.372 0.717
AF_Analystit 910 7.158 5.000 1.000 32.000 6.717
AF_Lossit 910 0.188 0.000 0.000 1.000 0.391
Sample of Similar Firms from the Same Country
jNAF_CARitj 195 0.028 0.019 0.000 0.128 0.029
jAF_UEitj 195 0.363 0.029 0.000 2.225 0.700
IFRSt 195 0.485 0.000 0.000 1.000 0.501
AF_Sizeit 195 2.696 2.629 0.890 4.512 0.825
AF_Analystit 195 7.441 5.000 1.000 39.000 7.561
AF_Lossit 195 0.170 0.000 0.000 1.000 0.377
Sample of Different Firms from the Same Country
jNAF_CARitj 630 0.025 0.020 0.001 0.106 0.019
jAF_UEitj 630 0.239 0.020 0.001 2.227 0.552
IFRSt 630 0.508 1.000 0.000 1.000 0.500
AF_Sizeit 630 2.681 2.684 1.085 4.194 0.702
AF_Analystit 630 6.897 5.000 1.000 28.000 6.289
AF_Lossit 630 0.205 0.000 0.000 1.000 0.404

Panel B: Regression Results

Cross-Country Within-Country Pooled Sample
Analysis Analysis Analysis
Cross-Country Cross- and
Similar and Within-
Similar Different Similar Different Different Country
Variables Firms Firms Firms Firms Firms Similar Firms
Intercept 0.010 0.038*** 0.039 0.019* 0.036*** 0.025***
(0.272) (11.200) (1.027) (1.668) (19.560) (3.697)
jAF_UEitj 0.000 0.000 0.000 0.000 0.000 0.000
(0.069) (0.354) (0.144) (0.478) (1.020) (0.289)
IFRSt 0.002 0.004 0.008 0.000 0.001 0.004
(1.468) (1.385) (1.413) (0.252) (1.036) (0.759)
Similar_Firmi 0.001
(1.089)
(continued on next page)

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Does Mandatory IFRS Adoption Improve Information Comparability? 1781

TABLE 3 (continued)
Cross-Country Within-Country Pooled Sample
Analysis Analysis Analysis
Cross-Country Cross- and
Similar and Within-
Similar Different Similar Different Different Country
Variables Firms Firms Firms Firms Firms Similar Firms
Cross_Countryi 0.003
(0.588)
jAF_UEitj  IFRSt 0.001** 0.001 0.007 0.000 0.001*** 0.003*
(2.430) (0.484) (1.554) (0.091) (3.566) (2.041)
jAF_UEitj  Similar_Firmi 0.001
(0.431)
jAF_UEitj  Cross_Countryi 0.002
(1.334)
IFRSt  Similar_Firmi 0.002
(1.439)
IFRSt  Cross_Countryi 0.002
(0.389)
IFRSt  jAF_UEitj 0.003**
 Similar_Firmi (2.306)
IFRSt  jAF_UEitj 0.001
 Cross_Countryi (1.261)
AF_Sizeit 0.001 0.005*** 0.009 0.003 0.004*** 0.002
(0.210) (8.658) (1.156) (1.497) (4.723) (0.644)
AF_Analystit 0.000 0.000 0.001 0.000 0.000 0.000
(0.492) (0.681) (0.954) (1.712) (0.018) (0.189)
AF_Lossit 0.000 0.002* 0.003 0.002 0.001 0.002
(0.070) (2.197) (0.369) (0.865) (0.941) (1.651)
IDi Yes No Yes No Yes Yes
Observations 744 910 195 630 1,654 939
Adj. R2 0.046 0.154 0.029 0.075 0.124 0.030
*, **, *** Indicate significance at the 0.10, 0.05, and 0.01 levels, respectively, two-sided.
This table presents the results for the tests using the information transfer measure. Panel A presents the descriptive statistics for
the variables in the multivariate test. All of the variables are winsorized at the top and bottom 1 percent. Panel B presents the
regression coefficients (t-statistics in parentheses). The standard errors are clustered at the announcing firms country level.
The base model is as follows:
jNAF CARit j b0 b1 jAF UEit j b2 IFRSt b3 jAF UEit jIFRSt b4 AF Sizeit b5 AF Analystit b6 AF Lossit IDi :
For analysis using a combined sample of similar and different cross-country firms, the model includes an indicator,
Similar_Firm, and its two- and three-way interactions with IFRS and jAF_UEj. For analysis using a pooled sample of
cross- and within-country similar firms, the model includes an indicator, Cross_Country, and its two- and three-way
interactions with IFRS and jAF_UEj.
Variable Definitions:
jNAF_CARitj average absolute value of the cumulative abnormal return of all of non-announcing firms within the three-
day earnings release window of the announcing firm;
jAF_UEitj absolute value of the unexpected earnings per share of the announcing firm, scaled by its stock price at the
beginning of the fiscal year;
IFRSt an indicator that equals 1 if t is a post-IFRS year, and 0 if t is a pre-IFRS year;
AF_Sizeit size of the announcing firm, measured by the logarithm of total assets in U.S. dollars;
AF_Analystit number of one-year-ahead earnings forecasts issued and revised for the announcing firm;
AF_Lossit an indicator of whether the announcing firm is reporting a loss;
IDi an industry indicator of a pair;
Similar_Firmi an indicator that equals 1 if the announcing and the non-announcing firms are similar firms, and 0 if they
are different firms; and
Cross_Countryi an indicator that equals 1 if the announcing and the non-announcing firms are from different countries,
and 0 if they are from the same country.

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1782 Yip and Young

similar firms with a coefficient of 0.001, but insignificant for the sample of different firms. Similar
to the measure of accounting functions similarity, we pool the two samples and include an indicator
for the observations from the sample of similar firms (Similar_Firm) and its interaction with
jAF_UEitj  IFRSt in the model to test the equality of b3 across the similar and different firms. We
find that the coefficient on IFRSt jAF_UEitj  Similar_Firmi has a value of 0.003 and is significant
(p , 0.05), which suggests that IFRS adoption increases cross-country information transfer more
for similar firms than for different firms.
For within-country analysis, the coefficient b3 on jAF_UEitj  IFRSt is insignificant for both the
sample of similar firms and the sample of different firms. However, the result from the test that
examines the equality of b3 between the cross-country and within-country similar firms shows that
the coefficient on the variable of interest (IFRSt  jAF_UEitj  Cross_Countryi ) is insignificant,
suggesting that change in information transfer does not statistically differ between these two
samples. Thus, the results using the information transfer measure are generally consistent with those
using the similarity of accounting functions measure.

Results Using the Similarity of ICE and ICBV Measure

For the ICE and ICBV measures, we conduct tests for similar firms across countries and for
different firms within the country. The descriptive statistics for the variables used in Equation (3)
for these two samples are summarized in Table 4, Panel A. We winsorize all of the variables at the
top and bottom 1 percent. Table 4, Panel B, presents the aggregate results from estimating Equation
(3).
We perform a t-test to compare the mean comparability scores for ICE and ICBV across the
pre- and post-IFRS periods. Table 4, Panel C, reports the results. For the sample of cross-country
similar firms, the mean comparability scores for ICE and ICBV in the post-IFRS period are 0.890
and 0.862, respectively, indicating that among the 210 regressions of Equation (3), about 89.0
(86.2) percent show that the information content of earnings (book value of equity) does not
statistically differ between the two sets of similar firms from two different countries. The 0.890
score for ICE is marginally greater than the corresponding pre-IFRS period score 0.829 (p 0.06),
and the 0.862 score for ICBV is significantly greater than the pre-IFRS period score of 0.748 (p ,
0.01). This again suggests that IFRS adoption increases the similarity facet of cross-country
information comparability. However, for the sample of different firms from the same country, the
mean comparability scores for ICE and ICBV in the post-IFRS period (0.688 and 0.688) are not
significantly different from the corresponding scores in the pre-IFRS period (0.594 and 0.625).

Summary of Results
Our comparability measures consistently indicate a significant improvement in the similarity
facet, but an indiscernible change in the difference facet of cross-country information comparability
after mandatory IFRS adoption. Further, the comparability improvement in the similarity facet is
consistently greater than that in the difference facet. Together, these results suggest that IFRS
adoption is, on the whole, beneficial, because it makes similar things look more alike without
making different things look discernibly less different.
We also find some evidence of improvement in the similarity facet of within-country
comparability. Importantly, our results show that there is no statistical difference between the
similarity facet of comparability improvement in the cross-country sample and that in the within-
country sample. Together, these results suggest that IFRS adoption improves information
comparability among similar firms from different countries, as well as similar firms within the same
country. As IFRS adoption generally reduces accounting choices for European firms (Hoogendoorn

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Does Mandatory IFRS Adoption Improve Information Comparability? 1783

TABLE 4
Results of the Tests Using the ICE and ICBV Measures
Panel A: Descriptive Statistics for the Variables in the Estimation of Equation (3)
Variable n Mean Median Minimum Maximum Std. Dev.
Sample of Similar Firms from Different Countries
MVit 1,798 28.849 6.939 0.070 531.913 73.171
NIit 1,798 1.513 0.283 12.690 39.300 5.719
BVit 1,798 25.459 3.252 4.699 802.606 94.491
Sample of Different Firms from the Same Country
MVit 1,259 30.123 6.853 0.071 625.803 82.706
NIit 1,259 1.459 0.249 15.144 45.312 6.370
BVit 1,259 26.988 3.216 5.475 851.320 103.926

Panel B: Aggregate Summary Table of Estimates

Full Sample Pre-IFRS Sample Post-IFRS Sample
Estimates Mean p-value Mean p-value Mean p-value
Estimates for the Sample of Similar Firms from Different Countries (n 420)
Intercept 10.327*** 0.000 10.187*** 0.000 10.467*** 0.000
NIit 3.313*** 0.000 1.917*** 0.000 4.709*** 0.000
BVit 0.690*** 0.000 0.623*** 0.000 0.757*** 0.000
D1 6.657*** 0.000 6.445*** 0.002 6.868*** 0.000
D1  NIit 0.000 0.970 0.000 0.366 0.000** 0.016
D1  BVit 0.000 0.496 0.000 0.196 0.000* 0.072
Estimates for the Sample of Different Firms from the Same Country (n 128)
Intercept 5.642** 0.035 4.289* 0.074 6.996 0.145
NIit 2.384*** 0.002 0.761 0.483 2.076*** 0.000
BVit 0.924*** 0.002 0.897*** 0.000 0.172* 0.096
D2 7.638*** 0.004 7.686** 0.031 0.338* 0.060
D2  NIit 1.345* 0.077 2.664** 0.014 2.100 0.981
D2  BVit 0.332 0.270 0.460** 0.032 1.332 0.718

Panel C: t-test Results

Similar Firms from Different Firms from
Different Countries the Same Country
Mean Comparability Score for ICE
Pre-IFRS 0.829 0.594
Post-IFRS 0.890 0.688
Difference 0.061* 0.094
t-statistic (two-tailed p-value) in a paired t-test 1.868 1.515
(0.063) (0.135)
Observations 210 64
Mean Comparability Score for ICBV
Pre-IFRS 0.748 0.625
Post-IFRS 0.862 0.688
Difference 0.114*** 0.063
t-statistic (two-tailed p-value) in a paired t-test 3.412 0.942
(0.001) (0.350)
Observations 210 64
(continued on next page)
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1784 Yip and Young

TABLE 4 (continued)

*, **, *** Indicate significance at the 0.10, 0.05, and 0.01 levels, respectively.
This table presents the results of the tests using the ICE and ICBV measure. Panel A presents the descriptive statistics for
the variables in the estimation of the following equation:

MVit b0 b1 NIit b2 BVit b3 Dx b4 Dx NIit b5 Dx BVit :

All of the variables are winsorized at the top and bottom 1 percent. The sample of cross-country similar firms comprises
1,798 firms, and the sample of within-country different firms comprises 1,259 firms. Panel B presents the aggregate
summary table for the estimates, which includes the means and two-tailed p-values showing whether the means are
significantly different from 0. Panel C presents the results for the t-test of the difference in ICE and ICBV across the pre-
and post-IFRS period for the sample of cross-country similar firms (n 210) and the sample of within-country different
firms (n 64), respectively. An ICE (ICBV) comparability score of 1 is assigned if b4 (b5 ) is insignificant (defined as a
p-value of more than 5 percent), and 0 otherwise.

Variable Definitions:
MVit total market value of equity at the end of the fiscal year, scaled by the number of outstanding common shares;
BVit book value of equity, scaled by the number of outstanding common shares;
NIit net income, defined as earnings (revenues less operating costs, depreciation, interest, taxes, and other expenses)
less preferred dividends, scaled by the number of outstanding common shares; and
Dx a country indicator when x equals 1, and an industry sector indicator when x equals 2.

2006), our results are consistent with the view that IFRS adoption improves information
comparability via both accounting convergence and higher quality information.

V. SUPPLEMENTAL AND SENSITIVITY TESTS

Supplemental Tests for the Impact of Institutional Environment on Information

Comparability
These supplemental tests examine whether the impact of IFRS adoption on the similarity facet
of cross-country information comparability is influenced by a firms institutional environment. On
one hand, the importance of institutional factors to a firms reporting incentives suggests that the
comparability improvement resulting from IFRS adoption will be greater among firms from
countries with similar institutional environments than among firms from countries with different
institutional environments (e.g., Ball et al. 2003; Ball and Shivakumar 2005; Burgstahler et al.
2006). On the other hand, because countries with similar institutional environments usually had
similar local accounting standards in the pre-IFRS period, the comparability improvement may be
smaller among firms from these countries. We, thus, view this as an empirical question.
We classify a firms institutional environment according to the origins of the legal system in its
home country. For the tests using the accounting function measure, we form two samples. The first
(second) sample includes all pairs of two similar firms from countries with the same (different) legal
origin(s). We drop the variable Com_Codei from Equation (4), and estimate the modified model for
the two samples. Our results, presented in Table 5, Panel A, show that cross-country information
comparability increases after IFRS adoption for both samples. We also test the equality of
comparability improvement across the two samples by pooling the two samples and including an
indicator for the observations from the first sample and its interaction with IFRS. We find that the
comparability improvement does not statistically differ between the two samples.20

20
Our results could be affected by the enforcement changes accompanied with IFRS adoption. For example, the EU
passed the Transparency Directive in 2004 to establish disclosure requirements and facilitate IFRS compliance.

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Does Mandatory IFRS Adoption Improve Information Comparability? 1785

TABLE 5
Impact of Institutions on Information Comparability

Panel A: Accounting Function Measure by Legal System Origin

Same Origin of Legal System Different Origins of Legal System
Variable Compit Compit
Intercept 1.846 1.642***
(1.441) (8.498)
IFRSt 0.446*** 0.507**
(4.603) (2.689)
TA_Ratioi 1.245 0.269**
(1.143) (2.578)
Listingi 1.123
(1.391)
IDi Yes Yes
Observations 144 122
Adj. R2 0.116 0.274

Panel B: Information Transfer Measure by Legal System Origin

Same Origin of Legal System Different Origins of Legal System
Variable jNAF_CARitj jNAF_CARitj
Intercept 0.027*** 0.019*
(5.637) (1.673)
jAF_UEitj 0.104 0.002
(1.620) (0.894)
IFRSt 0.003 0.000
(1.466) (0.092)
jAF_UEitj  IFRSt 0.024** 0.001
(2.157) (0.449)
AF_Sizeit 0.002 0.003
(1.449) (1.510)
AF_Analystit 0.000 0.000
(0.363) (1.644)
AF_Lossit 0.001 0.002
(0.258) (0.834)
IDi Yes Yes
Observations 514 285
Adj. R2 0.016 0.075

Panel C: ICE and ICBV Measure by Legal System Origin

Pre-IFRS Post-IFRS
Legal Origins n Mean Mean Difference t-statistics p-value
t-test Results for the Difference in ICE Comparability Scores
Same 155 0.794 0.858 0.064a 1.550 0.123
Different 55 0.709 0.782 0.073a 0.893 0.376
0.009b 0.097 0.923
(continued on next page)

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1786 Yip and Young

TABLE 5 (continued)
Pre-IFRS Post-IFRS
Legal Origins n Mean Mean Difference t-statistics p-value
t-test Results for the Difference in ICBV Comparability Scores
Same 155 0.645 0.755 0.110**a 2.580 0.011
Different 55 0.745 0.818 0.073a 1.071 0.289
0.037b 0.450 0.653

*, **, *** Indicate significance at the 0.10, 0.05, and 0.01 levels, respectively.
a
Represents a test of mean difference across the pre- and post-IFRS periods.
b
Represents a test of mean difference between the first and second samples.
This table presents the results for the additional tests of the impact of firms institutions on their information
comparability. Panel A presents the coefficients (t-statistics in parentheses) for the tests using the accounting function
measure, in which the first (second) sample includes all of the pairs of two similar firms from countries with the same
(different) legal origin(s). The variables are defined in Table 2. Panel B presents the coefficients (t-statistics in
parentheses) for the tests using the information transfer measure. In the first (second) sample, the announcing firms
earnings surprise is paired with the average cumulative abnormal return of similar firms from countries with the same
(different) legal origin(s) to the home country of the announcing firm. The variables are defined in Table 3. Panel C
presents the results of tests using the ICE and ICBV measure, in which the first (second) sample includes all of the
comparability scores estimated using two sets of firms from countries with the same (different) legal origin(s). The
variables are defined in Table 4.

For the information transfer measure, we pair an announcing firms earnings surprise with the
average cumulative abnormal return of similar firms from countries with the same (different) legal
origin(s) to the home country of the announcing firm in the first (second) sample. We find that the
cross-country information transfer increases significantly in the post-IFRS period for the first
sample, but not for the second sample. These results are reported in Table 5, Panel B.
For the ICE and ICBV measure, the first (second) sample includes all of the comparability
scores estimated using the two sets of firms from countries with the same (different) legal origin(s).
We compare the mean comparability scores across the pre- and post-IFRS periods in the two
samples. We find that for ICE, there is no significant change in the mean comparability score across
the two periods. For ICBV, however, the mean comparability score is significantly higher in the
post-IFRS period than in the pre-IFRS period for the first sample with the same legal system origin,
but not for the second sample. Table 5, Panel C, reports these results.
Overall, we find consistent evidence for enhanced cross-country information comparability
among firms from countries with similar institutional environments. However, the results for firms
from different institutional environments are mixed. Although the results using the measure of
accounting function similarity suggest an improved comparability, the results using the other two
measures suggest the opposite. This provides some evidence that the institutional environment in
the home countries of firms is an important determinant of their information comparability.

Sensitivity Tests
We perform several sensitivity tests to assess the robustness of our results. First, because
unusual accounting choices could be reflected in financial statements due to the anticipation of, and
the transition to, IFRS during 2004 and 2005, we exclude these two years by defining the pre-IFRS
period as 20022003 and the postIFRS period as 20062007. The untabulated results based on the
new sample periods are similar to those of the main tests.
Second, our results on the comparability improvement may be driven by increased similarity of
firms responses to economic shocks. To address this possibility, we examine whether there is a
significant increase in firms responses to economic shocks. Specifically, we compute the stock

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Does Mandatory IFRS Adoption Improve Information Comparability? 1787

return correlation between two sets of similar firms from different countries for the pre- and post-
IFRS periods separately. Because firms in the same industry face similar economic shocks, their
stock returns should be correlated if they react to economic shocks in similar ways. A significantly
higher mean correlation of stock return in the post-IFRS period than in the pre-IFRS period would
suggest that there is an increase in the similarity of firms responses to economic shock after
mandatory IFRS adoption. We find that the mean correlation is significantly lower in the post-IFRS
period (0.134) than in the pre-IFRS period (0.314), suggesting that firms responses to economic
shocks become less similar in the post-IFRS period. This, in turn, suggests that the similarity of
firms responses to economic shocks is unlikely to be the driver of improved information
comparability in the post-IFRS period.
Third, because level regressions can be subject to econometric problems, we use a returns
model to compare ICE across the pre- and post-IFRS periods. In our return model, annual stock
returns are regressed on earnings scaled by price, a loss indicator, a country indicator, and the
interaction between earnings and the country indicator. We run the regression for every possible
combination of two countries in an industry in the pre- and post-IFRS periods separately, and assign
a comparability score of 1 if the coefficient on the interaction term is insignificant, and 0 otherwise.
We find that the mean comparability score in the post-IFRS period (0.990) is significantly higher
than that in the pre-IFRS period (0.945), which is consistent with the finding from the level model
that IFRS adoption improves the similarity facet of cross-country information comparability.
Fourth, because all of our comparability measures are based on equity price, we use a non-
price-based comparability measure to examine the similarity facet of cross-country information
comparability. Following Beuselinck et al. (2007), we assume that earnings comparability is
affected by the timely recognition of losses by a firms accounting system. We use the following
modified model from Ball and Shivakumar (2005) to determine the comparability scores for every
possible combination of two countries in an industry in the pre- and post-IFRS periods separately:
ACCjt b0 b1 CFjt b2 NegCFjt b3 CFjt NegCFjt b4 D b5 DCFjt
b6 DNegCFjt b7 DCFjt NegCFjt ejt ; 6
where ACCt is accruals, defined as net income minus operating cash flow, and CFt is operating cash
flow. Both are scaled by the average total assets. NegCFt is an indicator of a negative CF, and D is a
country indicator. The coefficient on the last item (b7 ) indicates whether the accounting systems in
the two countries recognize losses in accounting accruals in a similar fashion. We assign a
comparability score of 1 if b7 is insignificant, and 0 otherwise. We find that the mean comparability
score in the post-IFRS period (0.861) is significantly higher than that in the pre-IFRS period
(0.764). This result is consistent with the findings from those equity price-based comparability
measures that cross-country information comparability improves for similar firms after mandatory
IFRS adoption.

VI. CONCLUSION
One of the most commonly mentioned benefits of IFRS adoption is the improvement in
cross-country information comparability. This study provides empirical evidence for this posited
benefit using data from 17 European countries that adopted IFRS in 2005. We use three proxies for
information comparability. The first is the similarity with which two firms translate economic
events into their financial statements. The second is the degree of information transfer, and the third
is the similarity of the information content of earnings and of the book value of equity.
Overall, our results are consistent with the view that mandatory IFRS adoption improves
information comparability across countries. In particular, our results indicate a significant increase
in the similarity facet of cross-country comparability in the post-IFRS period. However, we do not

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1788 Yip and Young

find such improvement in the difference facet of cross-country comparability, which implies that the
mandatory IFRS adoption is not sufficient to achieve a full enhancement in comparability in the
EU. Our results also suggest that both accounting convergence and higher quality accounting
information are likely to be the mechanisms underlying the observed comparability improvement in
the similarity facet. Further, our results suggest that comparability improvement is more likely to
occur among firms from similar institutional environments than among firms from different
institutional environments.

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