The Cross-Country Comparability of IFRS Earnings and Book Values: Evidence From France and Germany

JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH American Accounting Association
Vol. 11, No. 1 DOI: 10.2308/jiar-10215

2012
pp. 155–184
The Cross-Country Comparability of IFRS

Earnings and Book Values: Evidence from
France and Germany
Qing Liao, Thorsten Sellhorn, and Hollis A. Skaife
ABSTRACT: Beginning in 2005, the EU began requiring consolidated financial reports of
publicly traded firms to be prepared in accordance with EU-endorsed International
Financial Reporting Standards (IFRS) in an effort to increase the comparability of
financial information across EU Member States. While some expect IFRS reporting to
increase the comparability of financial information across the EU, others argue that
comparability is unlikely because IFRS implementation will vary conditional on national
institutions and culture. We investigate the cross-country comparability of IFRS earnings
and book values of French and German firms because these two EU states have well-
developed equity markets and use the same currency, while having social-economic and
cultural differences that can affect managers’ IFRS implementation choices. Our results
indicate that French and German IFRS earnings and book values are comparable in the
year subsequent to IFRS adoption, but become less comparable in the years that follow.
We document differences in accounting estimates, recognition of special items, and
other equity reserves between French and German firms that help explain the decrease
in comparability over time. Our study adds to the growing literature on the financial
statement effects of mandatory IFRS reporting, and points to possible reasons for a
sustained lack of cross-country comparability of financial information under a common
accounting regime.
Keywords: international ﬁnancial reporting; IFRS; comparability; valuation usefulness.
JEL Classiﬁcations: G12; G14; G38; K22; M41; M42; M48.
I. INTRODUCTION
I
n an effort to fully integrate the European capital markets, the European Union (EU) issued
EU Regulation No. 1606/2002, which required all publicly traded firms to apply EU-endorsed
International Financial Reporting Standards (IFRS) in their consolidated accounts beginning in
Qing Liao is a Ph.D. student at the University of Wisconsin–Madison, Thorsten Sellhorn is a Professor at
WHU–Otto Beisheim School of Management, and Hollis A. Skaife is a Professor at the University of
Wisconsin–Madison.
We appreciate the comments of Erv Black, editor, Tony Kang, discussant, and participants at the 2011 JIAR Conference,
2009 AAA Annual Meeting, Amsterdam Business School, University of California, Davis, University of Konstanz,
University of Tilburg, and the University of Wisconsin–Madison.
Published Online: January 2012
155
156 Liao, Sellhorn, and Skaife
2005 (European Communities [EC] 2002). One of the primary stated objectives of Regulation No.
1606/2002 is to increase the comparability of firms’ financial information across EU Member
States.
But the comparability of financial information hinges on at least two elements. First,
comparable financial information results when firms account for identical transactions in identical
ways (Schipper 2003). If the set of accounting standards allows managers to choose between
methods in accounting for identical transactions, the discretion management has in implementing a
standard diminishes the comparability of financial information across firms. Second, 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). 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). Therefore, it is an empirical
question whether the adoption of IFRS by EU Member States, as mandated by Regulation No.
1606/2002, increased the comparability of firms’ financial information.
We assess the cross-country comparability of IFRS financial reporting by investigating the
valuation usefulness of earnings and book values in France and Germany post-IFRS adoption. To
assess comparability, we employ accounting-based valuation models, 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, assuming markets are equally efficient. 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, suggesting these two countries have equally efficient
equity markets. Moreover, France and Germany have some similar social-economic institutions,
which prior research indicates affect firms’ accounting measures (Alford et al. 1993; Gernon and
Wallace 1995; Ball et al. 2000; Bushman and Piotroski 2006; Brown and Tarca 2007). At the same
time, there exist institutional differences between France and Germany that can influence managers’
accounting implementation choices (Stulz and Williamson 2003; Nobes and Schwencke 2006;
Enriques and Volpin 2007), thereby affecting the comparability of financial information.
Our primary results are as follows. First, when considering earnings in isolation, the valuation
usefulness of earnings appears to be similar across France and Germany. However, as expected, the
earnings capitalization model is limited in its application when firms report negative earnings. In
fact, German firms more often report losses (23.38 percent of firm-year observations) than French
firms (15.17 percent of firm-year observations) post-IFRS adoption. French firms’ losses per share,
however, are larger (mean ¼1.21, median ¼0.69) than German firms’ losses per share (mean ¼
1.01, median ¼ 0.57). Similarly, profitable French firms report higher earnings per share (mean
¼ 2.77, median ¼ 1.65) than profitable German firms (mean ¼ 1.89, median ¼ 0.75).
Second, we document that French firms report higher book values (mean ¼ 20.28, median ¼
10.69) than German firms (mean ¼ 11.50, median ¼ 5.16) over our analysis period. Our
year-by-year results suggest that in the year after IFRS adoption (2006), German and French firms
report book values more similar to the market’s assessment of net assets, indicating that they have
relatively more comparable book values. However, the results of estimating a book value valuation
model in later years suggest that German firms report more conservative book values than French
firms, showing that book values become less comparable over time.
Third, when we estimate a valuation model that includes both earnings and book values, we
find earnings and book values to be positively related to share price, regardless of whether the
model is estimated using all firm-year observations, only loss firm-year observations, or only profit
firm-year observations. The results indicate no difference in the valuation usefulness of earnings
between French and German firms in the first two years of IFRS use. By 2008, however, earnings
Journal of International Accounting Research

Volume 11, No. 1, 2012
The Cross-Country Comparability of IFRS Earnings and Book Values: France and Germany 157
reported by German firms appear to be less comparable to French firms’ earnings. The results also
indicate that German firms’ book values are more conservative than French firms’ book values, as
the multiple on German firms’ book values is above 1, whereas the multiple on French firms’ book
values is significantly less than one.
Overall, our results suggest that earnings and book values of French and German firms were
more comparable, in terms of valuation usefulness, in 2006, and less comparable in 2007 and 2008.
This finding is consistent with French and German firms restating net assets in a similar fashion at
the time of IFRS adoption, but institutional differences between France and Germany lead
managers in the two countries to implement IFRS differently in subsequent reporting periods.
A maintained assumption of using the valuation usefulness of earnings and book values as a
measure of comparability is that earnings and book values hold the same weighting of importance
in firms’ information set that is impounded into share price. Therefore, to provide greater assurance
that our findings are not driven by differences across French and German firms’ information sets,
we conduct a sensitivity test controlling for valuation-relevant firm characteristics. After controlling
for analyst following, growth, auditor choice, and size, we find similar results. Collectively, our
findings are consistent with the notion that French and German firms restate their net assets in a
similar fashion at the time of IFRS adoption, but the two countries’ institutional features create
incentives for French and German managers to implement IFRS differently over time.
To provide further evidence on this conjecture, we test for differences in accounting choices
and estimates between French and German firms post-IFRS adoption using two different matched
samples: (1) a matched sample based on size (n ¼ 149 pairs), and (2) a matched sample based on the
propensity score estimation within the manufacturing (n ¼ 33 pairs) and service (n ¼ 24 pairs)
industries. We document German firms, on average, report significantly greater depreciation
expense, significantly greater amortization expense, significantly more negative special items, and
significantly less equity reserves than French firms, all of which contribute to reporting more
conservative earnings and, ultimately, book values.
We also graph the distribution of the change in earnings for French and German firms, using
the methodology described in Burgstahler and Dichev (1997a) to assess whether the patterns of
earnings changes are distinctly different between French and German firms. The patterns are
consistent with the notion that German managers use the discretion under IFRS to report smoother
earnings, whereas French managers use the discretion under IFRS to avoid small negative earnings
surprises. Collectively, our additional analyses provide insights into the accounting choices that
diminish the comparability between French and German firms’ IFRS earnings and book values over
time.
Our study makes several contributions. First, our study contributes to the growing literature
investigating the consequences of mandatory IFRS reporting. Prior research examining whether
IFRS use affects the quality of firms’ accounting information generally concludes that firms’
financial reporting improves after adopting IFRS. However, the improvement in financial reporting
quality is not consistent across firms or across countries; see, e.g., Soderstrom and Sun (2007) for a
summary of early work on IFRS adoption, and Brüggemann et al. (2011) for an overview of more
recent research. Our research contributes to this line of research by examining the accounting
methods and estimates choices of French and German managers in the years following mandatory
IFRS adoption. We document that German managers’ implementation of IFRS results in
significantly greater depreciation expense, significantly greater amortization expense, significantly
more negative special items, and significantly less equity reserves relative to the choices of French
managers. This evidence helps explain why the properties of financial reporting under IFRS vary
across countries.
Second, our study contributes to the growing literature investigating the specific financial
information characteristic of comparability. We choose to investigate the comparability of IFRS

Volume 11, No. 1, 2012
reporting by French and German firms because these two EU states have well-developed equity
markets and use the same currency while, at the same time, have cultural differences that can affect
managers’ IFRS implementation choices. We examine the comparability of earnings and book
values, as both of these accounting measures are fundamental to investors’ resource allocation
decisions, and are key elements of the accounting-based valuation models that investors and other
market participants, e.g., analysts, use in assessing relative firm performance in the market.
Unlike Cascino and Gassen (2010) or Lang et al. (2010), we provide evidence suggesting that
earnings and book values are more comparable in the year immediately following IFRS adoption.
We posit that the relative comparability is due to firms structuring their balance sheets in similar
ways upon IFRS adoption (see International Financial Reporting Standards Foundation 2010a).
However, as more years go by after IFRS adoption, more differences in the valuation usefulness of
earnings and book values appear, suggesting comparability diminishes over time. We conjecture the
diminishing comparability of IFRS earnings and book values is due to French and German
managers making different implicit and explicit accounting choices, and we provide evidence
consistent with this conjecture. Taken together, our findings shed light on the cross-country
comparability of IFRS financial information, which is a key objective of having a common set of
internationally accepted financial reporting standards.
The remainder of the paper is organized as follows. Section II reviews some of the key
accounting choices available under IFRS, the social-economic institutions that can influence
managers’ accounting choices in France and Germany, and prior research on financial reporting
comparability. Section III presents our research design, sample, and descriptive statistics. Section
IV reports our findings. Conclusions are drawn in Section V.
II. IFRS IMPLEMENTATION IN FRANCE AND GERMANY
Discretion in IFRS Implementation

The EU’s mandate to report consolidated financial statements in accordance with IFRS is
intended to supplement the EU’s reporting requirements of the Fourth Company Directive, which
specifies that firms follow the true and fair view principle in applying accounting standards. The
true and fair view principle is a concept that is challenged in the capital markets because some
believe the principle allows too much managerial discretion in financial reporting, which attenuates
the comparability of firms’ financial information (Carmona and Trombetta 2008).
Table 1 displays some of the IFRS recognition and measurement standards that have the
potential to significantly impact the cross-country comparability of earnings and book values when
managers implement standards differently (see, also, Nobes 2006). We first consider the explicit
choices (Panel A) available under IFRS: For example, IAS 16 gives firms the option of upward
revaluing their property, plant, and equipment (PP&E) under the so-called revaluation model
(International Financial Reporting Standards Foundation [IFRSF] 2010b). By upward revaluing
PP&E, managers can report more value-relevant book values, as PP&E is reported at fair value
rather than depreciated historical cost. Firms then choose, as is inherent in any set of accounting
standards, depreciation and amortization rates that affect the accretion of costs reported on the
income statement, thereby shaping reported earnings.
As does any accounting system, IFRS also offers implicit choices (Panel B): Consider, for
example, the capitalization of development costs under IAS 38. According to IAS 38, the costs
related to an intangible asset arising from the development phase of an internal R&D project are
capitalized if, and only if, the development process meets six specific criteria (IFRSF 2010c, para.
57). By choosing not to meet one or more of these criteria, management implicitly chooses to
expense all costs related to the development project, which decreases earnings and book values
compared to a situation where these costs are capitalized.

Volume 11, No. 1, 2012
TABLE 1
Examples of Choices under IFRS Having the Potential for IFRS Implementation to Differ
across France and Germany
Panel A: Explicit Choices Relating to Recognition and Measurement

IFRS Alternative 1 IFRS Alternative 2
IAS 16: Property, Upward revalue through other comprehensive Carry at depreciated cost (cost
Plant, and income subsequent to initial recognition model)
Equipment (revaluation model)
IAS 19: Employee Spread actuarial gains/losses over time Charge actuarial gains/losses to
Benefits (corridor approach or faster method) equity when incurred
IAS 38: Intangible Upward revalue through other comprehensive Carry at amortized cost (cost
Assets income subsequent to initial recognition model)
(revaluation model)
IAS 40: Investment Upward revalue through profit or loss Carry at depreciated cost (cost
Property subsequent to initial recognition (fair value model)
model)
IFRS 1: First-Time Capitalize goodwill written off to reserves Leave goodwill written off to
Adoption of IFRS under previous GAAP reserves under previous
GAAP written off
IFRS 1: First-Time Record fixed assets at fair value Record fixed assets at previous
Adoption of IFRS GAAP-depreciated cost
Panel B: Implicit Choices Relating to Recognition and Measurement

‘‘Aggressive’’ Reporting Choice ‘‘Conservative’’ Reporting Choice
IAS 17: Leases Avoid finance lease classification Achieve finance lease classification
IAS 19: Employee Set actuarial assumptions to minimize Set actuarial assumptions to maximize
Benefits pension liability pension liability
IAS 36: Impairment of Delay impairment losses, accelerate Accelerate impairment losses, delay
Assets impairment loss reversals impairment loss reversals
IAS 38: Intangible Capitalize development costs related to Expense development costs related to
Assets internally generated intangible assets internally generated intangible assets
This table shows a list of explicit and implicit accounting choices under IFRS that allow managers discretion in the
implementation of IFRS. For these and other examples, refer to Nobes (2006). We do not consider the choices inherent
in IAS 39, Financial Instruments: Recognition and Measurement, because that standard is mainly relevant for financial
institutions, which we exclude from our analysis.
Institutional Factors Affecting Accounting Choice

Bushman and Piotroski (2006) propose that social-economic factors affect the nature of
financial reporting within countries, and prior research demonstrates that country-specific
institutional factors are associated with the properties of firms’ accounting measures (Ball et al.
2003). For example, Ali and Hwang (2002) build on the work of Alford et al. (1993) and examine
whether country-specific institutional factors affect the value relevance of earnings and book values.
Their results suggest that the value relevance of accounting measures is lower for countries where
the financial systems are predominantly based on private debt rather than public capital markets,
where governments, rather than private-sector bodies, are involved in the accounting standard-

Volume 11, No. 1, 2012
TABLE 2
Factors Affecting Managers’ Accounting Choices
Institutional Attribute France Germany
Legal system French—civil law German—civil law
(La Porta et al. 1998, 1997)
Religious Greater Less
(Dyreng et al. 2010; Swenson 2011)
Ownership concentration Less Greater
(Nobes 2006)
Key blockholder Family member Bank
(Enriques and Volpin 2007; Fohlin 2005)
IFRS-tax linkage Less Greater
(Delvaille et al. 2005)
Enforcement of IFRS implementation Capital-market Two-tier (private-sector body and
(Delvaille et al. 2005) authorities financial industry regulator)
This table displays the institutions of sample countries that can affect managers’ implementation of IFRS. Differences in
the implementation of IFRS ultimately affect the properties of IFRS earnings and book values.
setting process, where the legal regime is based on code law versus common law, and where tax
rules have a greater influence on financial accounting measurements (Ali and Hwang 2002). Ball et
al. (2000) and Leuz et al. (2003) report that firms in code law countries report less timely and
smoother earnings, respectively, relative to firms domiciled in common law countries. The work of
Burgstahler et al. (2006) suggests that capital market reporting incentives explain differences in
earnings smoothing between private and public firms, and that earnings smoothing is more
pronounced in countries with legal systems based on code law.
Table 2 summarizes institutional factors that potentially manifest in different IFRS
measurement and estimate choices between French and German firms. One of the reasons why
we elect to study these two countries is because these countries have distinct social-economic
factors. At the same time, there are also institutional factors that are common to both countries.1
Although both France and Germany are civil law (or code law) countries, their legal systems differ
in that France’s system is of French civil law origin, whereas Germany’s is of German civil law
origin (La Porta et al. 1998). French civil law and German civil law countries in general (and France
and Germany in particular) differ in important respects, which La Porta et al. (1998) link to factors
assumed to influence financial reporting. For example, they argue that differences in investor
protection will result in differences in ownership concentration, thereby affecting the demand for
external financial reporting. The presence of concentrated ownership decreases the demand for
timely and accurate information disclosure. In contrast, when there is more dispersed ownership,
information asymmetries between management and outside investors are resolved through public
disclosure. German firms are thought to have more concentrated ownership than French firms, as
1
It is important to note that the institutional factors referenced in the text are pertinent to ‘‘traditional’’ firms in
France and Germany, firms that have local operations and do not rely as much on foreign capital. In contrast,
multinational, cross-listed, ‘‘global’’ firms are influenced by institutional features of other countries, as well as
their home countries (Lang et al. 2003). Ashbaugh and Olsson (2002) provide evidence of this when examining
IFRS adoption by non-U.S. and non-U.K. firms listed in London and in the U.S.

Volume 11, No. 1, 2012
half of publicly traded German firms have a blockholder with an ownership stake of at least 57
percent (Enriques and Volpin 2007).
When considering French and German companies’ ownership structure, another potential
factor that affects managers’ accounting implementation choices is the direct involvement of banks
in monitoring German firms. Bank representation on German boards and bank direct ownership of
German firms’ shares suggest that managers will be more conservative in their accounting method
choices in order to produce more prudent earnings numbers. In contrast, family ownership in
French firms is more substantial, and banks play a more indirect role in the monitoring and
oversight of French managers.
Religion influences individuals’ beliefs and values. These beliefs and values affect individuals’
decision making and actions, which, in turn, impacts corporate and investment decisions (Hilary
and Hui 2009; Dyreng et al. 2010) and accounting choices (Swenson 2011). While both France and
Germany are countries whose predominant religion is Christianity, France has a much higher
percentage of Christian adherents (87 percent) than Germany (68 percent) (Central Intelligence
Agency [CIA] 2008). Differences in the religious social norm between France and Germany can
potentially result in French and German managers implementing IFRS differently.
Also, the extent to which tax reporting and financial reporting are aligned is traditionally
argued to influence financial reporting properties in predictable ways (Joos and Lang 1994). Nobes
(2006) notes that other factors, e.g., mandatory dividend payouts based on legal-entity accounts,
can also result in tax-driven legal-entity financial statements influencing consolidated IFRS reports.
French accounting is generally viewed to be more strongly tax-driven than German accounting,
which is primarily influenced by commercial law (Delvaille et al. 2005).
A final institutional difference between France and Germany relates to the enforcement of
accounting standards. An established body of literature espouses the importance of enforcement in
the context of IFRS implementation (e.g., Li 2010; Daske et al. 2008). The French and German
enforcement settings differ in that Germany has elected to implement a two-tier structure in which
the private-sector Financial Reporting Enforcement Panel (FREP) handles much of the enforcement
process, while in France, the capital market authority (Autorité des Marchés Financiers [AMF])
deals with enforcement. Extant literature does not allow us to form any expectations about
differential effectiveness of these enforcement models.
Prior literature shows that French and German domestic standards are differentially distant
from international standards (Ashbaugh 2001; Bae et al. 2008), and that the opacity of French and
German firms’ earnings differs prior to the mandatory adoption of IFRS (Osma and Pope 2011).
The variation in social-economic factors between France and Germany can continue to influence
managers’ IFRS choices, resulting in differences in the valuation usefulness of earnings and book
values across the two countries. At the same time, capital market pressure potentially influences
French and German managers to use the discretion under IFRS to report earnings and book values
that result in similar valuation usefulness. Thus, we make no prediction on whether the valuation
usefulness of earnings and book values will differ between French and German firms after the
mandatory use of IFRS.
Related Literature
Financial reporting comparability is desired by investors and regulators, and is a stated
objective of financial accounting standards. However, comparability has proven somewhat elusive
and difficult to grasp empirically. Earlier comparability papers examine the extent to which firms
use identical sets of accounting standards (i.e., de jure comparability) (e.g., Garrido et al. 2002)
and, for those firms that use identical sets of accounting standards, to what extent the same
accounting methods are applied (i.e., de facto comparability) (e.g., van der Tas 1988; Gray 1980).

Volume 11, No. 1, 2012
Because these studies focus on the accounting regimes applied and methods chosen, actual
accounting outcomes are neglected. Recent research in financial reporting comparability, however,
focuses on how comparability of financial reporting culminates in comparable financial reporting
outcomes (e.g., De Franco et al. 2011). The reason behind this shift in attention is that a comparison
of outcomes is a more direct approach to comparing financial statements than a comparison of the
accounting methods applied.
We assess the cross-country comparability of IFRS financial reporting by investigating the
valuation usefulness of earnings and book values in France and Germany post-IFRS adoption. We
employ accounting-based valuation models to assess comparability, 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, as long as other valuation-relevant firm characteristics are
similar. A maintained assumption for our definition of comparability is that markets are equally
efficient across countries. While this assumption might not be true across all countries, our selection
to study the equity markets of France and Germany is intended to enhance the validity of the
efficient market assumption.
Using pricing multiples of accounting variables as a measure of cross-country financial
reporting comparability is consistent with a growing body of international accounting literature that
examines the relation between an accounting measure and a market statistic. For example, De
Franco et al. (2011) develop a measure of accounting comparability based on the relation between
earnings and returns. Other papers, however, measure the comparability of financial reporting
outcomes somewhat differently. For example, Cascino and Gassen (2010) use the variance of
earnings and balance sheet items to draw inferences on financial reporting comparability. We
investigate financial reporting comparability under IFRS by comparing two countries with similar
capital market structure, but having differences in social-economic dimensions shown to affect
financial reporting properties. Our measure of comparability incorporates both earnings and book
values, which allows us to provide new insights into the drivers of financial reporting comparability
or lack thereof.
III. RESEARCH DESIGN AND DESCRIPTIVE ANALYSIS

Methodology
Following the work of Collins et al. (1999) and Ashbaugh and Olsson (2002), we assess the
valuation usefulness of German and French firms’ IFRS earnings and book values using the
following accounting-based valuation models:
Pt ¼ b0 þ b1 EPSt þ b2 GER þ b3 GEREPSt þ e ð1Þ
Pt ¼ c0 þ c1 BVPSt1 þ c2 GER þ c3 GERBVPSt1 þ e ð2Þ
Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 GER þ d4 GEREPSt þ d5 GERBVPSt1 þ e ð3Þ

where:
P ¼ price per share three months after fiscal year-end adjusted for stock splits and dividends;
EPS ¼ earnings per share;
BVPS ¼ book value of common equity per share at the beginning of the fiscal year; and
GER ¼ a binary variable coded 1 for German firm-year observations, and 0 otherwise.
All variables are measured in Euros.
We use the estimated parameters and explanatory power of the models as indications of the
valuation usefulness of earnings and book values. The earnings capitalization model (EC model,

Volume 11, No. 1, 2012
Equation (1)) is well specified if the intercept is not statistically different from zero. The book value
model (BV model, Equation (2)) is well specified if the estimated coefficient on book value is not
different from one. The coefficient on book value being greater (less than) one indicates that the
firm’s accounting measure of net assets is significantly lower (higher) than the market value of net
assets. Likewise, a non-zero intercept in the BV model indicates that there are assets or liabilities
valued by the market that are not reported on a firm’s balance sheet.
Collins et al. (1999) demonstrate that the earnings capitalization model results in biased
earnings coefficients for both loss and profit firms. They suggest using a valuation model that
includes both earnings and book values, specified as in Equation (3).2 Prior international research
uses Equation (3) to assess the valuation usefulness of earnings and book values reported by U.S.
cross-listed and voluntary IFRS reporting firms (e.g., Lang et al. 2006; Barth et al. 2008).
Our motivation for using these three accounting-based valuation models is straightforward. If
managers implement IFRS consistently in terms of accounting for similar economic events in
similar ways and for distinct economic events in ways which allow investors to price the
distinction, then investors applying simple, accounting-based valuation models should, on
average, price earnings in a similar fashion across markets. Furthermore, if managers implement
IFRS standards on a consistent basis, the magnitude of recognized versus unrecognized net assets
should result in similar book value measures, which will be valued similarly for firms with
equivalent risk.
Sample
Panel A of Table 3 summarizes the sample selection process. There are 1,674 French and 2,035
German firm-year observations that have the necessary accounting and market data on Compustat
Global over 2006–2008 to conduct our empirical tests. We eliminate one French firm-year
observation and 72 German firm-year observations from the sample because they relate to firms that
use preferred shares rather than common shares as the primary shares listed on their domestic
exchanges. We eliminate these observations because our accounting-based valuation models are
only appropriate for pricing common shares that represent the residual owners’ claims to firm
assets. We also eliminate 209 French and 335 German firm-year observations relating to firms that
are not required to report under IFRS because they do not prepare consolidated reports or do not
trade shares in a regulated market (EC 2002, Article 4).
We eliminate 248 French and 348 German firm-year observations operating in the finance,
insurance, and real estate industries (SIC codes 6000–6999) because these firms are subject to
additional regulatory reporting requirements and have different levels of unrecorded intangible
assets (Kohlbeck and Warfield 2007), which potentially result in dissimilar pricing of earnings and
book values relative to firms operating in other industries. Finally, we eliminate 63 French and 44
German firms whose stock price, earnings per share, or book value per share fall in the 1st or 99th
percentiles of the respective distributions, as these extreme values are likely to influence the OLS
regression estimates.3 The final sample consists of 1,153 French and 1,236 German firm-year
observations.
Panel B of Table 3 displays the firm-year observations by industry. In general, sample firms’
industry representation is similar across France and Germany. Regardless of country of domicile,
the majority of sample firms (43.97 percent of French and 50.40 percent of German firms) operate
2
We elect not to use the residual income model because the performance of the residual income model requires a
reliable estimate of the cost of equity. Cost of equity estimates typically are a function of variables including
earnings properties, which are at the heart of our investigation.
3
These outliers are identified by the DIFFITS statistic from the regression models.

Volume 11, No. 1, 2012
TABLE 3
Sample
Panel A: Sample Construction

France Germany
Year No. of Obs. Year No. of Obs.
Publicly traded firms on 2006 624 2006 712
Compustat Global with 2007 624 2007 723
necessary data for the 2008 426 2008 590
valuable model
1,674 2,035
Less: Firms with share type of 2006 1 2006 17

primary shares other than 2007 0 2007 28
common stock 2008 0 1 2008 17 72
Less: Firms not using IFRS 2006 85 2006 139
2007 86 2007 126
2008 38 209 2008 70 335
Less: Firms from the finance, 2006 86 2006 118
insurance, and real estate 2007 92 2007 123
industries (SIC 6000–6999) 2008 70 248 2008 107 348
Less: Firms out of 1st and 99th 2006 25 2006 11
percentiles of price and EPS 2007 22 2007 17
2008 16 63 2008 16 44
Final Sample Total 1,153 Total 1,236

2006 427 2006 427
2007 424 2007 429

2008 302 2008 380
Panel B: Industry Composition

France Germany
Industry (Four-Digit SIC) n Percent n Percent
Agriculture, Forestry, and Fishing (1–999) 11 0.95% 5 0.40%
Mining (1000–1499) 11 0.95% 6 0.49%
Construction (1500–1999) 47 4.08% 17 1.38%
Manufacturing (2000–3999) 507 43.97% 623 50.40%
Transportation, Communications, Electric, Gas, and 109 9.45% 108 8.74%
Sanitary Services (4000–4999)
Wholesale Trade (5000–5199) 30 2.60% 55 4.45%
Retail Trade (5200–5999) 86 7.46% 37 2.99%
Services (7000–8999) 350 30.36% 378 30.58%
Non-Classifiable Establishments (9900–9999) 2 0.17% 7 0.57%
Total Number of Firm-Years 1,153 1,236

Volume 11, No. 1, 2012
in the manufacturing industry (SIC codes 2000–3999), whereas relatively more French firms
operate in the construction industry (4.08 percent) and in the retail trade industry (7.46 percent) than
German firms (1.38 percent and 2.99 percent, respectively).
Descriptive Statistics
Table 4 displays descriptive statistics. In Panel A of Table 4, we report the descriptive statistics
for all firm-year observations partitioned by year and by country. The three-year average share price
for French and German firms measured three months after fiscal year-end is €33.23 and €21.83,
respectively, indicating share prices vary across countries. In both countries, the average share price
declined over the three-year analysis period. When considering all firm-year observations, the
descriptive statistics indicate that French firms report higher book values per share (mean ¼ €20.28,
median ¼ €10.69) than German firms (mean ¼ €11.50, median ¼ €5.16), on average, over the three
years. Likewise, French firms report higher earnings (mean ¼ €2.17, median ¼ €1.17) than German
firms (mean ¼ €1.22, median ¼ €0.43) over the three-year period.
Turning to the descriptive statistics for loss firms (Panel B of Table 4), share price is relatively
constant for German firms reporting losses (mean ¼ €7.62). In contrast, the mean share price of
French loss firms falls from €13.65 to €7.99 over 2006–2008. French firms consistently report
larger losses per share than German firms; €1.21 as opposed to €1.01, respectively, yet average
larger book values per share than German firms (€12.35 versus €5.54, respectively).
For the reader’s benefit, we report in Panel D of Table 4 the descriptive statistics for the 107
firms that were eliminated from the analysis because their share price, BVPS, or EPS were less than
(more than) or equal to the 1st (99th) percentile. The mean share price is €132.49 and €428.22 for
German and French firms, respectively, eliminated from the analysis, share prices significantly
higher than the market averages. The book value per share of the firms deleted from the sample is
also quite high relative to the rest of the French and German markets.
To gain additional insight into the distributional properties of French and German firms’
earnings and book values, we identify the proportion of firms reporting losses and negative book
values each year. Figure 1 displays the percentage of sample firms reporting losses in 2006, 2007,
and 2008. Regardless of year, substantially more German firms report losses (21.55 percent to
26.58 percent each year) than French firms (13.35 percent to 19.54 percent each year). Figure 2
illustrates the proportion of firms with negative book values in 2006, 2007, and 2008. While both
countries have some firms reporting negative book values, the proportions are relatively small (the
largest being 1.87 percent for France in 2006, and 1.32 percent for Germany in 2008).
To reduce the concern that the differences in summary statistics are driven by differences in
macro-economic conditions in France and Germany, we gather economic statistics from the World
Bank database. Germany reported, on average, only slightly larger gross national per capita income
($35,340) and higher gross domestic product growth (1.7 percent) than France ($34,125 and 1.3
percent, respectively) during our analysis period (World Bank 2009). Given no large difference in
macro-economic conditions between France and Germany during our period of analysis, the
descriptive statistics suggest that German firms, on average, report more conservative IFRS
earnings and book values than French firms.
IV. FINDINGS
Earnings Capitalization Model
For completeness, we begin our empirical analysis by estimating the earnings capitalization
model (Equation (1)). Results are reported in Panel A of Appendix A. The explanatory power of the
model is 62 percent and, as expected, we find a significant positive coefficient on EPS, indicating
that earnings are an important valuation attribute. We find a significant negative coefficient on GER,
corroborating the descriptive statistics that indicate German share prices are lower, on average, than

Volume 11, No. 1, 2012
TABLE 4
Descriptive Statistics
Panel A: Descriptive Statistics for All Observations

Pt BVPSt1 EPSt
Year Country n Mean Std. Dev. Median Mean Std. Dev. Median Mean Std. Dev. Median
2006 France 427 39.68 45.12 24.26 18.43 28.28 9.70 2.17 3.62 1.02
Germany 427 24.70 42.86 11.16 10.84 24.88 4.47 1.12 3.11 0.42
2007 France 424 33.53 39.55 19.68 20.01 29.35 10.30 2.32 3.67 1.25
Germany 429 22.74 40.07 9.54 10.87 21.41 5.01 1.28 3.22 0.45
2008 France 302 23.69 28.28 13.77 23.29 33.27 13.67 1.96 3.50 1.30
Germany 380 17.58 42.06 5.96 12.96 25.39 6.12 1.25 3.49 0.42
Pooled France 1,153 33.23 39.69 19.65 20.28 30.08 10.69 2.17 3.61 1.17
Germany 1,236 21.83 41.73 8.39 11.50 23.90 5.16 1.22 3.27 0.43
Panel B: Descriptive Statistics for Loss Firms

Pt BVPSt1 EPSt
2006 France 57 13.65 15.44 8.00 9.58 15.02 3.12 0.94 1.14 0.41
Germany 92 7.44 10.71 3.77 5.13 8.54 2.59 0.92 1.06 0.60
2007 France 59 12.46 20.86 6.00 12.58 23.11 6.54 1.20 1.29 0.69
Germany 96 7.87 15.32 3.16 5.19 8.58 2.84 0.97 1.13 0.53
2008 France 59 7.99 12.42 4.80 14.79 21.09 7.14 1.48 1.36 1.30
Germany 101 7.54 26.52 2.45 6.25 9.04 3.61 1.13 1.32 0.65
Pooled France 175 11.34 16.70 5.95 12.35 20.09 6.15 1.21 1.28 0.69
Germany 289 7.62 18.92 3.07 5.54 8.72 3.04 1.01 1.18 0.57
Panel C: Descriptive Statistics for Profit Firms

Pt BVPSt1 EPSt
2006 France 370 43.69 46.83 26.47 19.79 29.59 10.92 2.65 3.64 1.40
Germany 335 29.44 46.98 14.44 12.41 27.54 5.22 1.68 3.25 0.66
2007 France 365 36.94 40.80 24.00 21.21 30.09 11.61 2.88 3.62 1.71
Germany 333 27.03 43.82 13.08 12.51 23.62 5.78 1.92 3.34 0.76
2008 France 243 27.5 29.72 17.99 25.35 35.34 14.94 2.80 3.35 1.84
Germany 279 21.22 45.93 8.30 15.39 28.76 7.15 2.11 3.63 0.83
Pooled France 978 37.15 41.31 24.16 22.11 21.70 13.34 2.77 3.56 1.65
Germany 947 26.17 45.65 12.12 13.32 26.62 6.01 1.89 3.40 0.75
(continued on next page)

Volume 11, No. 1, 2012
TABLE 4 (continued)
Panel D: Descriptive Statistics for Truncated Firms

Pt BVPSt1 EPSt
Pooled Country n Mean Std. Dev. Median Mean Std. Dev. Median Mean Std. Dev. Median
All firms France 63 428.22 1082.56 33.00 312.3 526.63 47.23 47.9 269.73 0.53
Germany 44 132.49 204.09 13.24 74.64 191.85 4.64 8.26 27.56 0.16
Loss firms France 26 108.44 256.28 5.00 166.51 506.51 5.77 9.55 14.65 2.81
Germany 23 10.81 15.69 3.10 42.17 220.72 1.08 9.06 11.97 6.83
Profit firms France 37 652.92 1359.04 315.8 414.76 522.82 341.42 88.26 347.99 19.67
Germany 21 265.75 231.54 307.00 110.2 151.67 94.32 27.24 27.42 29.82
Loss firms are observations of firms that report EPSt , 0, and profit firms are observations of firms that report EPSt 0.
Truncated observations represent firms that report P and EPS less than (more than) or equal to the 1st (99th) percentile.
Variable Definitions:
Pt ¼ stock price three months after fiscal year t end plus dividends per share in year t, adjusted for stock splits and
dividends;
BVPSt1 ¼ book value of equity at the end of fiscal year t1, adjusted for stock splits and dividends; and
EPSt ¼ earnings per share excluding discontinued operations, adjusted for stock splits and dividends.
French share prices. The coefficient on the interaction term GER EPS is not statistically
significant in any of the yearly regressions or in the pooled analysis, implying that earnings are not
priced significantly differently in Germany and France over our analysis period.4
Book Value Model

To assess the comparability of IFRS book values reported by French and German firms, we
estimate yearly and pooled cross-sectional regressions where price per share is regressed on book
value per share (Equation (2)). Panel B of Appendix A displays the results. We find, on average, the
explanatory power of book value for price (55 percent) to be less than that of earnings (62 percent).
However, book value is a significantly positive determinant of share price regardless of year or
profitability. More importantly, it appears that German firms’ book values are priced differently
than French firms’ book values: we find a positive and significant coefficient on GER BVPS in
two of the three years, as well as in the pooled analysis.
The year-by-year results suggest that in the year following mandatory IFRS adoption (2006),
German and French firms reported comparable book values, which were close to the market’s
assessment of net assets (coefficient on BVPS close to 1 and on GER BVPS close to zero).
However, over time, French firms report more aggressive book values (coefficients on BVPS below
4
Given the differences in the proportion of firms reporting losses in France versus Germany, we reestimate the
earnings capitalization model using only loss firms and then only profit firms (not tabled). The explanatory power
of the earnings capitalization model averages 5 percent when estimated using loss firms, whereas it is 66 percent
for profit firms. When focused on only loss firms, the coefficient on EPS is negative in all three years, albeit
significant only in 2006. Coefficients on both GER and GER EPS are not statistically significant in any of the
yearly regressions. Turning to the only-profit firms, the coefficient on EPS is positive and significant each year,
and we find in two of the three years a negative coefficient on GER, indicating that share prices of profitable
German firms are lower than those of profitable French firms. We also find a significantly positive coefficient on
GER EPS in 2008, indicating that profitable German firms have a higher earnings multiple than profitable French
firms in 2008.

Volume 11, No. 1, 2012
FIGURE 1
Percentage of Loss Firms
FIGURE 2
Percentage of Negative Book Value Firms
Loss firms are firms that report EPSt , 0 and negative book value firms are firms that report BVPSt1 , 0.

Volume 11, No. 1, 2012
1), whereas German firms report more conservative book values (sum of coefficients on BVPS and
GER BVPS above 1).5
Earnings and Book Value Model

As noted above, the work of Collins et al. (1999) demonstrates that a valuation model
including both earnings and book values is superior to valuation models based solely on earnings or
book values. Moreover, given our interest is in assessing the cross-country comparability of
financial information, it seems more meaningful to focus on an accounting-based valuation model
that takes into account both earnings and book values.
Table 5 reports the results of estimating the ‘‘combined’’ valuation model that includes both
earnings and book values for all firm-year observations (Panel A), loss firms (Panel B), and profit
firms (Panel C). The results indicate that the combined valuation model performs better than the
earnings capitalization model or the book value model, as the adjusted R2 of 71 percent is higher
than the explanatory power of 55 percent or 62 percent, respectively. Both earnings and book
values are positively related to share price regardless of whether the model is estimated using all
firm-year observations or only profit firms.
Considering all firms (Panel A of Table 5), there seems to be no difference in the valuation
usefulness of earnings between French and German firms in the early years of IFRS use, as the
coefficient on GER EPS, in general, is insignificant in 2006 and 2007. By 2008, however,
earnings reported by German firms appear to be less comparable to French firms’ earnings, as we
find a significantly negative coefficient on GER EPS in 2008 when using all firm-year
observations or profit firms. Recall that German firms’ average positive earnings per share rose
from €1.68 in 2006 to €2.11 in 2008. In contrast, the average positive earnings per share of a French
firm stayed relatively stable at around €2.80. Finding a significantly negative coefficient on GER
EPS in 2008 suggests that the higher earnings reported by German firms in 2008 are discounted by
the market relative to French firms’ earnings.
Turning to the coefficients on book value and the interaction of GER BVPS, we find that
regardless of year or profitability, the coefficient on BVPS is positive and significant, and well
below the value of 1. This suggests that the accounting value of French firms’ net assets is higher
than the market’s assessment of value. When considering German firms’ book values, the
significantly positive coefficients on GER BVPS in 2007 and 2008 and the pooled analysis
indicate that German firms’ accounting value of net assets is less than the market’s assessment, and
less than that reported by French firms. The significant coefficients on GER BVPS also suggest
that French firms’ book values are not comparable to German firms’ book values in 2007 and 2008.
In addition, the significant and generally higher coefficients on loss firms’ BVPS (Panel B of Table
5) is consistent with prior research that suggests that the valuation usefulness of summary
accounting variables shifts from earnings to book values when earnings are negative (Burgstahler
and Dichev 1997b).
Robustness Tests
Cross-Sectional Tests
Our initial analysis examines the pricing of firms’ book values and earnings without controlling
for other factors that prior research documents are related to firms’ share prices. We present these
5
We estimate the book value model separately for loss versus profit firms (not tabled). Regardless of profit or loss
firms, the results indicate that by 2008, the book values of German firms become significantly more conservative
than French firms’ book values.

Volume 11, No. 1, 2012
TABLE 5
Earnings and Book Value Model
Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 GER þ d4 GEREPSt þ d5 GERBVPSt1 þ e ð3Þ
Panel A: All Firms
Year n Intercept EPSt BVPSt1 GER GER EPSt GER BVPSt1 Adj. R2
2006 854
13.80 7.82 0.48 5.19 0.71 0.12 0.72
(11.58)*** (7.33)*** (5.32)*** (2.42)** (0.33) (0.36)
2007 853 10.83 6.44 0.39 5.91 2.16 0.75 0.74
(7.38)*** (5.95)*** (3.24)*** (3.37)*** (1.42) (3.95)***
2008 682 7.68 5.05 0.26 9.30 3.25 1.05 0.78
(6.58)*** (9.60)*** (4.32)*** (5.34)*** (2.74)*** (6.07)***
Pooled 2,389 6.74 0.37 5.92 1.23 0.53 0.71
(9.85)*** (4.97)*** (3.61)*** (0.81) (2.15)**
Panel B: Loss Firms

2006 149
3.91 5.61 0.46 0.72 6.26 0.48 0.52
(2.97)*** (3.03)*** (2.66)*** (0.47) (2.54)** (1.41)
2007 155 4.93 1.87 0.78 0.03 1.10 0.06 0.43
(2.90)*** (1.17) (3.83)*** (0.01) (0.61) (0.19)
2008 160 3.59 1.82 0.48 7.03 2.25 2.01 0.57
(2.32)** (2.55)*** (7.16)*** (1.91)* (1.16) (2.74)***
Pooled 464 0.25 0.60 3.18 0.75 0.78 0.42
(0.27) (5.98)*** (1.84)* (0.56) (4.42)***
Panel C: Profit Firms

2006 705 12.93 8.37 0.43 5.85 0.99 0.10 0.73
(8.63)*** (6.82)*** (4.67)*** (2.40)*** (0.40) (0.30)
2007 698 9.63 7.65 0.25 5.41 3.14 0.88 0.75
(4.96)*** (5.37)*** (1.95)** (2.40)** (1.55) (3.98)***
2008 522 5.83 5.93 0.20 8.96 2.77 0.95 0.81
(3.97)*** (9.07)*** (3.93)*** (3.93)*** (2.15)** (6.61)***
Pooled 1,925 7.65 0.28 6.13 0.96 0.50 0.73
(9.39)*** (4.25)*** (3.65)*** (0.52) (1.90)*
*, **, *** Indicate significance at the 0.10, 0.05, and 0.01 levels, respectively.
Loss firms are firm-year observations of firms that report EPSt , 0, and profit firms are firm-year observations of firms
that report EPSt 0. Cross-sectional significance levels are based on White’s heteroscedasticity-corrected standard errors
for annual regressions (two-tailed). Pooled regression significant levels are based on Rogers standard errors clustered by
firms (two-tailed). Year dummies in the pooled analysis are significant with the exception of the coefficient on 2008 that
is only significant in the ‘‘All Firms’’ analysis.
dividends;
EPSt ¼ earnings per share excluding discontinued operations, adjusted for stock splits and dividends;
GER ¼ 1 for German firm-year observations, and 0 otherwise.

Volume 11, No. 1, 2012
findings so as to document the relation between share price and summary accounting variables in
the French and German markets in the simplest form. Prior research indicates that the performance
of accounting-based valuation models is conditional on firm-specific characteristics (e.g., Collins et
al. 1999). In other words, using accounting-based valuation models to draw conclusions regarding
the cross-country comparability (or lack thereof ) of accounting information rests on the assumption
that the French and German firms that we study are comparable on all valuation-relevant
dimensions.
For example, consider two firms that implement IFRS identically (our understanding of
comparability), but have different growth prospects. Economic theory suggests that the market will
price these firms’ earnings and book values differently. This would result in different valuation
coefficients on earnings and book values and, consequently, in significant coefficients on our
interactions of the German country dummy (GER) with earnings and book values, our measure of
cross-country comparability (or lack thereof ). To test whether our results are robust to controlling
for valuation-relevant firm characteristics, we supplement the combined valuation model with
variables that proxy for firms’ operating characteristics and information environments to estimate
the following OLS regression:
Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 GER þ d4 GEREPSt þ d5 GERBVPSt1 þ Controls
þ GERControls þ GERControlsEPSt þ GERControlsBVPSt1 þ e:
ð4Þ
Based on the theoretical work of Fishman and Hagerty (1989), Ashbaugh (2001) and Bradshaw
et al. (2004) suggest that some firms voluntarily report financial information prepared under IFRS
and U.S. GAAP, respectively, in order to reduce investors’ information processing costs. Financial
information reported in a familiar form will reduce investors’ efforts to understand the economic
meaning of the financial data. Extending this line of reasoning to our study, we posit that some
managers have incentives to make IFRS implementation choices that will result in more comparable
financial information because they face relatively greater capital market pressures to provide
financial information that can easily be compared to that of other firms. We use analyst following as
a proxy for such reporting incentives. We define analyst following (Analysts) as the logarithm of the
sum of 1 and the number of analysts following the firm at the fiscal year-end.
As mentioned above, differences in growth options potentially affect the extent to which firms’
accounting variables are priced comparably. In order to control for this effect, we report an
additional analysis controlling for growth options, using past sales growth (Growth) as a proxy,
when estimating our combined earnings and book value model for 2008.
In its International Accounting Standards Concept Release, the U.S. Securities and Exchange
Commission (SEC) acknowledged the importance of the audit function in firms’ reporting of
comparable financial information in the global capital market (SEC 2000). Audit firms with the
resources to train staff in the relatively new set of standards comprising IFRS are expected to have
more expertise in attesting to the implementation of IFRS. Following prior research, we assess
whether the valuation usefulness of IFRS earnings and book values is conditional on firms’ auditor
choices. For this purpose, we augment our combined earnings and book value model for 2008 with
a dummy variable assuming the value of 1 when a Big 4 auditor audits the financial statements
underlying the respective firm-year observation (Big4), and 0 otherwise.
To control for the nature of firms’ operations that can affect operating risk, we supplement
Equation (3) with industry dummies. We also include a control for firm size in Equation (3), defined
as the firm’s market value of equity (MV), since firm size is related to financing and information
risk.

Volume 11, No. 1, 2012
Panel A of Table 6 displays the descriptive statistics on the firm-specific characteristics

partitioned by French and German firms. The statistics indicate that, on average, French firms have
significantly greater analyst following than German firms. In addition, the statistics indicate that
French firms are also larger than German firms in terms of market capitalization.
Panel B of Table 6 reports the results of the multivariate analysis controlling for firm-specific
characteristics. We limit the analysis to using firm-year observations from 2008, as the results
discussed above consistently indicated that French earnings and book values are priced differently
than German firms’ in 2008. In the first column in Table 8, we report the results of estimating the
combined earnings and book value model controlling for Analysts. The coefficient on Analysts is
insignificant. Regarding cross-country comparability, however, we continue to find significant
coefficients on GER EPS and GER BVPS, suggesting that German firms’ earnings and book
values are not comparable to French firms’ earnings and book values, even after controlling for
analyst following. The second column in Table 6 reports the results of the analysis including
Growth in the price model. While the coefficient on Growth itself is insignificant, we continue to
find significant coefficients on the interaction terms, which is consistent with the notion that after
controlling for growth options, French and German IFRS accounting variables are not comparable
in 2008.
The third column in Table 6 reports the results controlling for Big4. The coefficient on Big4 is
insignificant; however, as in the previous analysis, we find significant coefficients on the interaction
terms, indicating that after controlling for auditor choice, there is little cross-country comparability
of French and German IFRS accounting variables in 2008. In our last analysis, we control for all of
the above-mentioned factors (firm size, industry, Analysts, Growth, Big4, and MV). The results are
reported in column four of Table 8. Consistent with our above findings, the firm-specific control
variables remain insignificant, while the significant coefficients on GER EPS and GER BVPS
indicate that the earnings and net assets of French and German firms are priced differently by the
market.
Inter-Temporal Tests
To further test how the mandatory adoption of IFRS affects the valuation usefulness of
earnings and book values of French and German firms, we estimate the combined model using
panel data within each country. The within-country analysis takes each subsequent year of adoption
(2006, 2007, and 2008), and benchmarks it to the valuation usefulness of earnings and book values
in the year immediately preceding the mandatory adoption of IFRS, e.g., 2004. Specifically, the
model estimated by country for each subsequent year of adoption is:
Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 Post2005 þ d4 Post2005EPSt þ d5 Post2005BVPSt1
þe
ð5Þ
where Post2005 equals 1 in the post-IFRS adoption year, and 0 otherwise. All other variables are as
previously defined.
d4 and d5 are expected to be significant in 2006 and lose significance over time, as French
(German) firms make accounting choices similar to pre-mandatory periods due to social-economic
influences.
The results reported in Table 7 are somewhat mixed. We find French firms’ earnings have
different valuation usefulness in 2006 relative to earnings reported in 2004, and, as expected,
earnings reported in 2007 and 2008 are not valued differently than 2004 earnings. When
considering book values, we find 2006 and 2007 book values have similar valuation usefulness to
2004 book values, but 2008 book values do not. Turning to the German market, we find, as

Volume 11, No. 1, 2012
TABLE 6
Robustness Tests Controlling for Firm-Specific Characteristics
Panel A: Descriptive Statistics on Firm Characteristics

Mean Median Std. Dev.
Analysts
French (n ¼ 302) 1.7338 1.7917 1.1804
German (n ¼ 380) 1.3983*** 1.3863*** 1.1788
Growth
French (n ¼ 302) 0.0952 0.0555 0.3016
German (n ¼ 380) 0.1134 0.0583 0.3052
Big4
French (n ¼ 302) 0.4735 0.0000 0.5001
German (n ¼ 380) 0.5079 1.0000 0.5006
MV
French (n ¼ 302) 2.4902 0.1404 8.5625
German (n ¼ 380) 1.4176* 0.0619** 6.8402
*, **, *** Indicate significance at p-value , 0.10, 0.05, and 0.01 levels, respectively.
The samples represent the 2008 firm-year observations that have the necessary data to estimate the regression model. For
continuous variables, significant differences in means (medians) are based on two-tailed t-test (Wilcoxon-Mann-Whitney
test). For indicator variables, significant differences are based on a Chi-square frequency test.
Analysts ¼ log (1 þ number of analysts following at the beginning of the year). Analyst following is from I/B/E/S, and
missing values are set to 0;
Growth ¼ sales in fiscal year t less sales in fiscal year t1, divided by sales in fiscal year t1. If a firm’s sales data of year
t1 are missing, the firm’s sales growth is set to the median;
Big4 ¼ 1 if the auditor is a Big 4 firm, 0 if non-Big 4. We set missing values of Big4 to 0; and
MV ¼ the log of market value of equity.
Panel B: Regression Model Controlling for Firm Characteristics
Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 GER þ d4 GEREPSt þ d5 GERBVPSt1 þ Controls

þ GERControls þ GERControlsEPSt þ GERControlsBVPSt1 þ e ð4Þ
(1) (2) (3) (4)

Analysts Growth Big4 All
Intercept 22.82* 19.17 21.53 23.42
EPSt 5.57*** 4.84*** 4.90*** 5.39***
BVPSt1 0.25*** 0.25*** 0.28*** 0.23***
GER 9.67*** 9.32*** 12.04*** 13.17***
GER EPSt 4.56** 2.89*** 4.36*** 5.37***
GER BVPSt1 1.21*** 1.11*** 1.72*** 1.88***
Analysts 0.64 0.19
GER Analysts 2.35 1.28
Analysts EPSt 0.58 0.60*
Analysts BVPSt1 0.03 0.03
GER EPSt Analysts 1.27* 1.84***
GER BVPSt1 Analysts 0.28*** 0.31***

Volume 11, No. 1, 2012
TABLE 6 (continued)
(1) (2) (3) (4)
Analysts Growth Big4 All
Growth 4.08 3.08
GER Growth 13.16 9.97
Growth EPSt 1.15 0.55
Growth BVPSt1 0.45 0.39
GER EPSt Growth 4.38 4.01
GER BVPSt1 Growth 2.38** 1.90**
Big4 1.34 1.60
GER Big4 5.63* 6.15*
Big4 EPSt 0.02 0.33
Big4 BVPSt1 0.00 0.01
GER EPSt Big4 1.49 0.19
GER BVPSt1 Big4 0.88** 0.63***
MV 0.62*** 0.40*** 0.46*** 0.61***
Industry Yes Yes Yes Yes
n 682 682 682 682
Adj. R2 0.78 0.78 0.78 0.78
Cross-sectional significance levels are based on White’s heteroscedasticity-corrected standard errors for annual
regressions (two-tailed). Industry dummies are not significant. The samples represent the 2008 firm-year observations
that have the necessary data to estimate the model.
dividends;
BVPSt1 ¼ book value of equity at the end of fiscal year t1, adjusted for stock splits and dividends;
GER ¼ 1 for German firm-year observations, and 0 otherwise; the models are estimated using 2008 firm-year
observations;
Analysts ¼ log (1 þ number of analysts following at the beginning of the year). Analyst following is from I/B/E/S, and
missing values are set to 0;
Growth ¼ sales in fiscal year t less sales in fiscal year t1, divided by sales in fiscal year t1. If a firm’s sales data of year
t1 are missing, the firm’s sales growth is set to the median;
Big4 ¼ 1 if the auditor is a Big 4 firm, 0 if non-Big 4. We set missing values of Big4 to 0; and
MV ¼ the log of market value of equity.
expected, German firms’ book values to have significantly different valuation usefulness in the year
subsequent to IFRS adoption, while 2007 and 2008 book values revert to similar valuation
usefulness relative to 2004. The results indicate that German firms’ earnings have similar valuation
usefulness over time.
These findings provide some evidence that the discretion inherent in different sets of
accounting standards (e.g., estimated useful life of fixed assets) allows managers to make
accounting choices (e.g., assume short asset lives) that have similar impacts on the valuation
usefulness of earnings and book values over time. That is, even if the accounting standards change
(e.g., from domestic GAAP to IFRS), managers apparently continue to make accounting choices
conditional on the social-economic factors. These choices culminate in earnings and book values
having similar attributes across accounting standard regimes within one country, while having
different attributes within one accounting standard regime (IFRS) across countries. Our next

Volume 11, No. 1, 2012
TABLE 7
Within-Country Regressions Comparing Years before and after 2005
Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 Post2005 þ d4 Post2005EPSt þ d5 Post2005BVPSt1

þ e ð5Þ
Panel A: France
Post2005 Post2005
n Intercept EPSt BVPSt-1 Post2005 EPSt BVPSt-1 Adj. R2
2004 versus 783 10.60 3.61 0.73 3.83 4.83 0.46 0.70
2006 (9.04)*** (3.33)*** (10.40)*** (1.42) (2.07)** (1.52)
2004 versus 780 10.60 3.61 0.73 1.98 1.36 0.27 0.68
2007 (9.04)*** (3.33)*** (10.40)*** (0.94) (1.23) (1.24)
2004 versus 658 10.60 3.61 0.73 1.96 0.93 0.42 0.72
2008 (9.04)*** (3.33)*** (10.40)*** (1.37) (0.44) (4.80)***
Panel B: Germany
Post2005 Post2005
n Intercept EPSt BVPSt-1 Post2005 EPSt BVPSt-1 Adj. R2
2004 versus 739 6.02 4.68 0.93 2.71 0.44 0.66 0.68
2006 (2.62)*** (2.43)** (3.54)*** (1.84)* (0.16) (2.04)**
2004 versus 741 6.02 4.68 0.93 3.38 1.11 0.14 0.70
2007 (2.62)*** (2.43)** (3.54)*** (1.20) (0.50) (0.26)
2004 versus 692 6.02 4.68 0.93 4.86 2.10 0.05 0.59
2008 (2.62)*** (2.43)** (3.54)*** (1.10) (0.93) (0.08)
regressions (two-tailed). Pooled regression significance levels are based on Rogers standard errors clustered by firms
(two-tailed).
dividends;
Post2005 ¼ 0 for year 2004, and 1 for 2006, 2007, or 2008, respectively, in each regression model.
analysis explores French and German managers’ accounting implementation choices post-IFRS
adoption.
Evidence on Implementation Differences
To provide some evidence on whether French and German managers implement IFRS
differently after mandatory adoption, we conduct two additional analyses. The first analysis uses

Volume 11, No. 1, 2012
TABLE 8
Differences in Accounting Choices and Estimates
Panel A: Matched-Pair Samples Matched by Size

Matched by Size (149 Pairs of Samples)
Mean
t-test of Differences
Accounts Year France Germany (One-Sided p-value)
Depreciation 2006 0.0114 0.0507 (0.000)
2007 0.0203 0.0379 (0.005)
2008 0.0327 0.0818 (0.016)
Amortization 2006 0.0072 0.0117 (0.054)
2007 0.0052 0.0099 (0.012)
2008 0.0060 0.0526 (0.057)
Special Items 2006 0.0110 0.0040 (0.233)
2007 0.0120 0.0002 (0.011)
2008 0.0040 0.0690 (0.019)
Other Equity Reserves 2006 0.0860 0.0322 (0.233)
2007 0.0440 0.0189 (0.325)
2008 0.4166 0.1038 (0.032)
p-values are one-sided based on a t-test for differences.

We match a French firm to a German firm based on the log of market value of equity at the end of 2005, where we
require the log of market values to be within 0.01 range of each other. This matching process results in 149 pairs of
French and German firms.
Depreciation ¼ annual depreciation expense (DFXA) divided by market value of equity;
Amortization ¼ annual amortization expense (AM) divided by market value of equity;
Special Items ¼ magnitude of special items (SPI) divided by market value of equity; and
Other Equity Reserves ¼ magnitude of other equity reserves (ERO) divided by the market value of equity.
Panel B: Matched-Pair Samples using Propensity Score Matching

Manufacturing (33 Paired Samples) Services (24 Paired Samples)
Mean Mean
Accounts Year France Germany p-value Year France Germany p-value
Depreciation 2006 0.0180 0.0344 (0.039) 2006 0.0031 0.0229 (0.019)
2007 0.0284 0.0218 (0.045) 2007 0.0077 0.0177 (0.100)
2008 0.0680 0.0745 (0.041) 2008 0.0159 0.0557 (0.041)
Amortization 2006 0.0044 0.0190 (0.179) 2006 0.0038 0.0151 (0.053)
2007 0.0037 0.0085 (0.046) 2007 0.0022 0.0084 (0.022)
2008 0.0164 0.0065 (0.047) 2008 0.0036 0.0103 (0.028)
Special Items 2006 0.0070 0.0074 (0.055) 2006 0.008 0.007 (0.450)
2007 0.0500 0.0110 (0.271) 2007 0.009 0.0014 (0.012)
2008 0.0770 0.0340 (0.020) 2008 0.031 0.019 (0.076)
Other Equity 2006 0.1674 0.1276 (0.066) 2006 0.0696 0.0413 (0.216)
Reserves 2007 0.2869 0.0588 (,0.0001) 2007 0.0822 0.017 (0.041)
2008 0.0770 0.0340 (0.044) 2008 0.2183 0.0235 (0.021)

Volume 11, No. 1, 2012
TABLE 8 (continued)
All variables are as defined previously.

We calculate the propensity score for each firm and match a French firm to a German firm when their propensity scores
are within 0.01 of each other. When there is more than one German firm within the 0.01 range of the French firm, we
choose the German firm with the closest propensity score. This approach generates 33 pairs of matched firms in the
manufacturing industry and 24 pairs of matched firms in the service industry. p-values are one-sided based on a t-test for
differences.
We match a French firm to a German firm in the manufacturing (service) industry based on the propensity scores
calculated from the analyst following model estimated as follows:
ProbðHIGH FOLLOWINGi Þ ¼ Logitða þ d1 MVi þ d2 STDRETi þ d3 RELATIVESIZEi þ d4 GROWTHi þ ei Þ ð6Þ

where:
HIGH_FOLLOWING ¼ an indicator variable taking a value of 1 if the number of analysts following the firm is greater
than its country’s industry median at the end of 2005, and 0 otherwise noting that the median is 8 (7) for French
(German) manufacturing firms and 3 (3) for French (German) service firms;
MV ¼ the log of market value at the beginning of 2005;
STDRET ¼ the standard deviation of returns on the firm’s share calculated over the prior five years;
RELATIVESIZE ¼ a firm’s market value divided by the average market value of the firms listed on the country’s primary
stock exchange at the beginning of 2005; and
GROWTH ¼ the change in sales scaled by the sales of the previous year, calculated at the beginning of 2005.
matched pairs of French and German firms to investigate accounting estimates and choices that
affect earnings and/or book values. Specifically, we test for differences in reported depreciation
expense, amortization expense, special items, and other equity reserves (all scaled by market
value).6 We construct two different samples of matched-pair firms. The first sample is matched
based on firm size. We match a French firm to a German firm based on the log of market value of
equity at the end of 2005, where we require the log of market value to be within a 0.01 range of
each other. This matching process results in 149 pairs of French and German firms.
The second matched-pair sample is based on the propensity score matching technique, where
French firms are matched to German firms based on the determinants of analyst following. We use a
model of analyst following because analysts tend to follow large, more economically important
firms, as well as firms that have enhanced information environments. Financial information reported
in a familiar form will reduce analysts’ efforts to understand the financial data. Extending this line
of reasoning to our study, we posit that managers will make IFRS implementation choices that will
result in more comparable financial information when they face relatively greater capital market
pressures to provide financial information that can easily be compared to that of other firms.
To calculate propensity scores, we estimate the following logistic regression by country and
within the manufacturing and service industries (not tabled):
ProbðHIGH FOLLOWINGi Þ ¼ Logitða þ d1 MVi þ d2 STDRETi þ d3 RELATIVESIZEi
þ d4 GROWTHi þ ei Þ ð6Þ
where:
HIGH_FOLLOWING ¼ an indicator variable taking a value of 1 if the number of analysts
following the firm is greater than its country’s industry median at the end of 2005, and 0
6
According to Compustat Global, ‘‘other equity reserves’’ represent the total amount of miscellaneous reserves
reported in the Stockholders’ Equity section and not classified elsewhere; i.e., not classified in (1) Revaluation
Reserve, (2) Retained Earnings, and (3) Unappropriated Net Profits.

Volume 11, No. 1, 2012
otherwise noting that the median is 8 (7) for French (German) manufacturing firms and 3
(3) for French (German) service firms;
MV ¼ the log of market value at the beginning of 2005;
STDRET ¼ standard deviation of returns on the firm’s share calculated over the prior five years;
RELATIVESIZE ¼ the firm’s market value divided by the average market value of the country’s
primary stock exchange at the beginning of 2005; and
GROWTH ¼ the change in sales scaled by the sales of the previous year, calculated at the
beginning of 2005.
We match a French firm to a German firm in the manufacturing (service) industry based on the
propensity scores calculated from the HIGH_FOLLOWING model above, where we require
propensity scores to be within 0.01 of each other. When there is more than one German firm within
the 0.01 range of the French firm, we choose the German firm with the closest propensity score.
This approach generates 33 pairs of matched firms in the manufacturing industry and 24 pairs of
matched firms in the service industry.
The results of testing for differences in accounting choices and estimates for the two matched-
pair samples are reported in Table 8. Panel A displays depreciation expense, amortization expense,
special items, and other equity reserves (all scaled by market value of equity) of French and German
firms that make up the matched-pair sample matched on size. Regardless of year, depreciation
expense is significantly greater for German firms relative to French firms. We see a similar pattern
for amortization expense. When considering special items, we see no difference in the magnitude of
special items in 2006, French firms report more negative special items in 2007, and German firms
report more negative special items in 2008. In contrast, there is no difference in other equity
reserves between French and German firms in 2006 and 2007, but German firms report significantly
less equity reserves in 2008 relative to French firms.
Panel B of Table 8 reports the same four line items for the propensity score matched sample.
We see similar patterns in depreciation expense, amortization expense, special items, and other
equity reserves as what is found in the size-matched analysis. Specifically, regardless of industry,
German firms report greater depreciation expense, greater amortization expense, and less other
equity reserves than French firms. There does appear to be less consistent treatment of special items
in the matched-pair sample, as French firms in the manufacturing and service industries report, in
general, more negative special items than German firms. Overall, the statistics reported in Table 8
suggest that French firms make less conservative accounting choices than German firms during our
period of analysis.
Our second implementation analysis investigates whether the cross-sectional distribution of
earnings changes is different between French and German firms. If managers implement IFRS
differently across France and Germany, we expect to see different distributional patterns of earnings
changes between French and German firms.
Figure 3 presents the mapping of earnings changes for Germany and France over 2006–2008
following the method of Burgstahler and Dichev (1997a). The figure depicts the distribution of the
change in earnings before discontinued operations scaled by the market value of equity, showing
percentages of firms reporting the specific earnings change interval to facilitate comparison between
the two countries. The horizontal axis represents the earnings changes, where the distribution
intervals are 0.0025 and the data are truncated to the firm-year observations falling in the range of
[0.15, 0.15]. For example, the first interval to the right of zero contains all scaled changes in
earnings in the interval [0.0000, 0.0025), the second interval contains [0.0025, 0.0050), and so on.
The vertical axis labeled ‘‘percent’’ represents the percentage of observations in each earnings
change interval. The location of zero on the horizontal axis is marked by the dashed line.

Volume 11, No. 1, 2012
FIGURE 3
Change in Earnings
The figures depict the distribution of the change in earnings before discontinued operations scaled by the
market value of equity: (Earningst Earningst1)/Market Valuet2. The figures show percentages of firms
reporting the specific earnings change interval to facilitate comparison between the two countries. The
horizontal axis represents the earnings changes, where the distribution intervals are 0.0025 and the data are
truncated to the firm-years whose NI/MV fall in the range of [0.15, 0.15]. The location of zero on the
horizontal axis is marked by the dashed line. For example, the first interval to the right of zero contains all
scaled changes in earnings in the interval [0.0000, 0.0025), the second interval contains [0.0025, 0.0050), and
so on. The vertical axis labeled percentage represents the percentage of observations in each earnings change
interval.
Reviewing the two histograms, it is clear that the patterns of earnings changes are distinctly
different between German and French firms. The histogram of German firms’ earnings changes is
relatively flat and peaks to the far right of zero. In contrast, the pattern of French firms’ earnings
changes is closer to a normal distribution, but demonstrates the phenomenon found in Burgstahler
and Dichev (1997a) of earnings changes slightly less than zero occurring less often than expected.
The differences in the earnings changes are consistent with German managers using the discretion

Volume 11, No. 1, 2012
under IFRS to report smoother earnings, whereas French managers use the discretion under IFRS to
avoid small negative earnings surprises.
Limitations
As in all empirical archival research, our study is subject to several limitations. First, as our
study employs only one measure of financial reporting comparability, that being the valuation
usefulness of summary accounting variables, it cannot speak to the behavior of other comparability
measures that might be relevant to our setting. At present, most studies addressing comparability
focus on earnings, whereas we incorporate both earnings and book values into our comparability
study, thereby limiting our ability to compare the importance of our measure to other measures of
comparability. Second, our paper does not address the broader issue of how cross-country
comparability of financial reporting can be achieved in the future. Since this would likely involve
far-reaching harmonization of social-institutional factors that have evolved over time, the
fundamental (normative) question arises whether comparability can ever be achieved for
heterogeneous firms, even if they are using a common set of accounting standards, e.g., U.S.
generally accepted accounting principles or IFRS.
V. CONCLUSION
The objective of our study is to provide evidence on whether mandated reporting under a
common set of financial reporting standards results in more comparable earnings and book values
across countries. We use the valuation usefulness of earnings and book values to assess the
comparability of IFRS financial reporting between French and German firms in the years
subsequent to mandatory IFRS adoption. We present evidence that French and German firms’ book
values and earnings are priced similarly in the year following mandatory IFRS adoption, suggesting
French and German firms’ book values and earnings were comparable in the year after the
mandatory adoption of IFRS in EU states. We also provide evidence indicating that French firms’
earnings and book values are priced differently than German firms’ earnings and book values in the
years subsequent to mandatory IFRS reporting, suggesting these summary accounting variables are
not directly comparable. These findings are robust to controlling for important valuation-relevant
characteristics including firm size, industry, analyst following, growth options, and audit quality.
To provide some insights into whether our findings can be explained by managers
implementing IFRS differently, we examine specific line items that are a function of managers’
accounting estimates, as well as the distribution of earnings changes after IFRS adoption. The
differences in depreciation expense, amortization expense, special items, and other equity reserves,
along with the patterns of earnings changes, suggest that the accounting choices of French firms are
different from the accounting choices of German firms. Our paper adds to the literature on
mandatory IFRS use and sheds light on financial reporting comparability between two large
continental European countries.
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APPENDIX A
Panel A: Earnings Capitalization Mode
Pt ¼ b0 þ b1 EPSt þ b2 GER þ b3 GEREPSt þ e ð1Þ
Year n Intercept EPSt GER GER EPSt Adj. R2

2006 854 17.91 10.04 5.55 0.98 0.65
(11.98)*** (11.32)*** (2.77)*** (0.56)
2007 853 13.90 8.48 3.97 1.57 0.64
(8.45)*** (10.49)*** (1.95)* (1.06)
2008 682 11.46 6.23 4.80 2.49 0.54
(9.63)*** (12.80)*** (2.29)** (1.50)
Pooled 2,389 8.51 4.56 1.38 0.62
(15.89)*** (2.97)*** (1.09)
Panel B: Book Value Model
Pt ¼ c0 þ c1 BVPSt1 þ c2 GER þ c3 GERBVPSt1 þ e ð2Þ
Year n Intercept BVPSt1 GER GER BVPSt1 Adj. R2

2006 854 19.92 1.07 7.71 0.08 0.46
(7.00)*** (5.97)*** (1.68)* (0.18)
2007 853 15.16 0.92 10.12 0.71 0.62
(6.15)*** (6.37)*** (3.75)*** (3.97)***
2008 682 11.73 0.51 13.41 0.97 0.69
(5.42)*** (5.12)*** (5.21)** (5.66)***
Pooled 2,389 0.83 10.04 0.57 0.55
(6.07)*** (3.27)*** (2.40)**
regressions (two-tailed). Pooled regression significance levels are based on Rogers standard errors clustered by firms
(two-tailed). Year dummies in the pooled analysis are significance with the exception of the coefficient on 2008 in the
‘‘Profit Firms’’ analysis.
dividends;
GER ¼ 1 for German firm-year observations, and 0 otherwise.

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JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH American Accounting Association

Vol. 11, No. 1 DOI: 10.2308/jiar-10215

The Cross-Country Comparability of IFRS

JEL Classiﬁcations: G12; G14; G38; K22; M41; M42; M48.

Published Online: January 2012

Journal of International Accounting Research

Journal of International Accounting Research

II. IFRS IMPLEMENTATION IN FRANCE AND GERMANY

Discretion in IFRS Implementation

Journal of International Accounting Research

Panel A: Explicit Choices Relating to Recognition and Measurement

Panel B: Implicit Choices Relating to Recognition and Measurement

Institutional Factors Affecting Accounting Choice

Journal of International Accounting Research

Journal of International Accounting Research

Journal of International Accounting Research

III. RESEARCH DESIGN AND DESCRIPTIVE ANALYSIS

Pt ¼ c0 þ c1 BVPSt1 þ c2 GER þ c3 GERBVPSt1 þ e ð2Þ

Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 GER þ d4 GEREPSt þ d5 GERBVPSt1 þ e ð3Þ

Journal of International Accounting Research

Journal of International Accounting Research

Panel A: Sample Construction

Less: Firms with share type of 2006 1 2006 17

Final Sample Total 1,153 Total 1,236

2007 424 2007 429

Panel B: Industry Composition

Journal of International Accounting Research

Journal of International Accounting Research

Panel A: Descriptive Statistics for All Observations

Panel B: Descriptive Statistics for Loss Firms

Panel C: Descriptive Statistics for Profit Firms

(continued on next page)

Journal of International Accounting Research

Panel D: Descriptive Statistics for Truncated Firms

Book Value Model

Journal of International Accounting Research

Journal of International Accounting Research

Earnings and Book Value Model

Journal of International Accounting Research

Panel B: Loss Firms

Panel C: Profit Firms

Journal of International Accounting Research

Journal of International Accounting Research

Panel A of Table 6 displays the descriptive statistics on the firm-specific characteristics

Journal of International Accounting Research

Panel A: Descriptive Statistics on Firm Characteristics

Panel B: Regression Model Controlling for Firm Characteristics

Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 GER þ d4 GEREPSt þ d5 GERBVPSt1 þ Controls

(1) (2) (3) (4)

Journal of International Accounting Research

Journal of International Accounting Research

Pt ¼ d0 þ d1 EPSt þ d2 BVPSt1 þ d3 Post2005 þ d4 Post2005EPSt þ d5 Post2005BVPSt1

Journal of International Accounting Research

Panel A: Matched-Pair Samples Matched by Size

p-values are one-sided based on a t-test for differences.

Panel B: Matched-Pair Samples using Propensity Score Matching

Journal of International Accounting Research

All variables are as defined previously.

ProbðHIGH FOLLOWINGi Þ ¼ Logitða þ d1 MVi þ d2 STDRETi þ d3 RELATIVESIZEi þ d4 GROWTHi þ ei Þ ð6Þ

Journal of International Accounting Research

Journal of International Accounting Research

Journal of International Accounting Research

Journal of International Accounting Research