Effects on comparability and capital market benefits of voluntary IFRS adoption

JOURNAL OF FINANCIAL REPORTING Vol 3, No Fall 2018 pp 1–22 American Accounting Association DOI: 10.2308/jfir-52279 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption Mary E Barth Stanford University Wayne R Landsman Mark H Lang The University of North Carolina at Chapel Hill Christopher D Williams University of Michigan ABSTRACT: This study addresses whether voluntary IFRS adoption is associated with increased comparability of accounting amounts and capital market benefits We find that after firms voluntarily adopt IFRS (‘‘adopting’’ firms), their accounting amounts are more comparable to those of firms that previously adopted IFRS (‘‘adopted’’ firms) and less comparable to those of firms that apply domestic standards (‘‘non-adopting’’ firms) Adopting firms exhibit increased liquidity, share turnover, and firm-specific information relative to adopted and non-adopting firms Neither adopted nor non-adopting firms suffer capital market consequences Adopting firms with higher comparability with adopted firms have greater capital market benefits after adopting IFRS than adopting firms with lower comparability, and capital market benefits for adopting firms in countries with a relatively high percentage of firms that apply IFRS enjoy greater capital market benefits INTRODUCTION T he question this study addresses is whether voluntary adoption of International Financial Reporting Standards (IFRS) is associated with increased comparability of accounting amounts and attendant capital market benefits In particular, we predict that after firms voluntarily adopt IFRS (‘‘adopting’’ firms), their accounting amounts become more comparable to those of firms that adopted IFRS before them (‘‘adopted’’ firms) and less comparable to those of firms that not adopt IFRS (‘‘non-adopting’’ firms) We also predict that capital market benefits increase for the adopting firms relative to non-adopting firms and adopted firms Our findings are largely consistent with these predictions We link capital market benefits with comparability by showing that the higher comparability is associated with greater capital market benefits Many countries have mandated adoption of IFRS by listed firms Extant research provides evidence on the effects of comparability between U.S firms and non-U.S firms in these countries, as well as capital market benefits associated with mandatory adoption We focus on assessing the effects on comparability and capital market benefits associated with voluntary IFRS adoption An advantage of voluntary IFRS adoption is the potential for increased comparability between the accounting amounts of voluntary adopters and those of other firms in the same industry applying IFRS.1 A disadvantage is that voluntary IFRS adoption may reduce comparability between accounting amounts of firms that apply IFRS and those that continue to We thank seminar participants at the University of Graz, The University of Mississippi, the 2013 Workshop on European Financial Reporting, the 2013 American Accounting Association Annual Meeting, and an anonymous reviewer We appreciate funding from the Center for Finance and Accounting Research, The University of North Carolina Kenan-Flagler Business School, Stanford University Graduate School of Business, and the PricewaterhouseCoopers-Norm Auerbach Faculty Fellowship Editor’s note: Accepted by Richard A Lambert Submitted: March 2017 Accepted: February 2018 Published Online: September 2018 Another advantage is that voluntary IFRS adoption affords securities market regulators the opportunity to gain insight into the potential capital market consequences of mandatory IFRS adoption Barth, Landsman, Lang, and Williams apply domestic standards Thus, we expect comparability of accounting amounts between adopting and adopted (non-adopting) firms to increase (decrease) after the adopting firms adopt IFRS because both groups of firms then apply (no longer apply) the same accounting standards, i.e., IFRS (domestic standards) These expectations might not be borne out because it is unclear how the incentives of voluntary adopters, regulation, and other institutional features influence voluntary implementation of IFRS and, therefore, comparability Changes in comparability associated with voluntary adoption of IFRS also depend on the fact that domestic accounting standards are designed for domestic institutions, but IFRS are not, and differences between domestic standards and IFRS Further, even if voluntary IFRS adoption improves comparability, the extent of the improvement is an empirical question Following Barth, Landsman, Lang, and Williams (2012), we define accounting amounts as comparable if firms report similar accounting amounts when they face similar economic outcomes (FASB 2010; IASB 2010) Thus, following Barth et al (2012), to assess comparability of accounting amounts, we use two approaches In both we use various combinations of net income and equity book value as accounting amounts, and stock price, stock return, and cash flow as economic outcomes.2 The first approach, which Barth et al (2012) label accounting system comparability, is based on the extent to which the mapping from accounting amounts, e.g., earnings, to an economic outcome, e.g., stock price, of one firm is the same as that of the other firm The second approach, which Barth et al (2012) label value relevance comparability, reflects the extent to which variation in economic outcomes explained by accounting amounts is the same for two firms We find that accounting system and value relevance comparability between adopting and adopted firms increase significantly after adopting firms adopt IFRS We also find that both types of comparability between adopting and non-adopting firms decrease significantly after adopting firms adopt IFRS Regarding capital market benefits, any increases (decreases) in comparability likely result in capital market benefits (costs) The extent to which changes in comparability result in capital market benefits depends on whether the benefits resulting from increased comparability with other firms applying IFRS dominate the costs resulting from decreased comparability with firms applying domestic standards Thus, we have four capital market benefits predictions First, benefits for adopting firms after they adopt IFRS increase (decrease) if the benefits from increased comparability with other firms applying IFRS, including adopted firms, exceed (are exceeded by) the cost of decreased comparability with firms that continue to apply domestic standards, including non-adopting firms Second, benefits for adopting firms exceed those for non-adopting firms if the non-adopting firms’ benefits decrease because of decreased comparability with adopting firms or remain unchanged Third, adopted firms’ benefits increase because of increased comparability with adopting firms or remain unchanged Fourth, adopting firms’ benefits exceed the adopted firms’ benefits because the adopted firms have already realized any benefits from increased comparability with other firms that adopted IFRS Following prior research, we test for changes in three capital market benefits: greater liquidity, higher share turnover, and more firm-specific information We use two measures of liquidity: the Amihud (2002) illiquidity measure, which captures the extent to which prices change as a result of trading; and the percentage of zero return days, which captures the extent to which a firm’s equity securities not trade We base our measure of share turnover on the ratio of the number of daily shares traded to the number of shares outstanding We measure firm-specific information as stock return synchronicity We find that adopting firms enjoy relative capital market benefits after IFRS adoption in that they exhibit increased liquidity, share turnover, and firm-specific information relative to adopted and non-adopting firms In addition, we find little evidence of capital market consequences for adopted firms and little evidence that non-adopting firms suffer a decrease in capital market benefits Because a firm’s voluntary adoption of IFRS likely is not made in isolation of other complementary decisions, e.g., improvements in financial reporting, governance, and auditing, the capital market benefits of voluntary IFRS adoption could be attributable to the joint effects of IFRS adoption and these other decisions We link comparability with capital market benefits in two ways First, we provide evidence that adopting firms with higher comparability with adopted firms have greater capital market benefits after adopting IFRS than adopting firms with lower comparability Second, we provide evidence that capital market benefits for adopting firms in countries with a relatively high percentage of firms that apply IFRS enjoy greater capital market benefits than firms in countries with a relatively low percentage We conduct all comparability and capital market benefits tests using two matched samples of firms, each of which comprises pairs of firms of similar size matched on country and industry The first comprises adopting firms matched with adopted firms; the second comprises adopting firms matched with non-adopting firms Our sample is drawn from the population of firms domiciled in 27 countries that permitted voluntary IFRS adoption between 1996 and 2008, which includes the vast majority of voluntary IFRS adopting firms Because more than half of the sample comprises German and Swiss firms, we also We use the terms earnings and net income interchangeably Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption test for changes in comparability and capital market benefits separately for German and Swiss firms and other firms Findings from these additional analyses reveal that our inferences generally apply to both groups of firms The remainder of the paper is organized as follows The next section discusses related research and develops our predictions The third section explains the research design The fourth and fifth sections describe the sample and data and present the results The sixth section offers a summary and concluding commentary RELATED RESEARCH AND PREDICTIONS Related Research Although many countries have mandated adoption of IFRS by listed firms, several countries permitted firms to adopt international accounting standards and IFRS voluntarily before adoption of IFRS became mandatory There is a substantial literature examining the effects on the quality of accounting amounts that result from voluntary application of international accounting standards and IFRS (Bartov, Goldberg, and Kim 2005; van Tendeloo and Vanstraelen 2005; Hung and Subramanyam 2007; Barth, Landsman, and Lang 2008; Hail, Leuz, and Wysocki 2010a, 2010b), as well as the capital market effects associated with voluntary adoption (Leuz 2003; Daske 2006; Kim and Shi 2012; Daske, Hail, Leuz, and Verdi 2013).3 There also is a substantial literature examining the effects associated with mandatory application of IFRS on accounting quality (Ahmed, Neel, and Wang 2013), capital market benefits (Daske, Hail, Leuz, and Verdi 2008, 2013; Armstrong, Barth, Jagolinzer, and Riedl 2010; DeFond, Hu, Hung, and Li 2011; Brochet, Jagolinzer, and Riedl 2013), and comparability of accounting amounts with those of firms in non-IFRS adopting countries (Cascino and Gassen 2015) and those of firms in IFRS countries before and after IFRS adoption (Yip and Young 2012) Barth et al (2012) find increases in comparability of accounting amounts and of accounting quality between firms adopting IFRS voluntarily and mandatorily and those of U.S firms after the IFRS firms adopt IFRS Although, collectively, these studies find evidence of an increase in quality of accounting amounts and capital market benefits associated with voluntary application of IFRS, the extent of the documented increase depends on the research design and sample firms However, none of these studies address the question of whether voluntary adoption affects comparability of accounting amounts between firms adopting IFRS and those of firms in their own countries that adopted IFRS before them and that not adopt IFRS In addition, it is not possible to infer changes in comparability of accounting amounts based on findings from studies examining changes in accounting quality For example, although it might be possible to infer that an increase in accounting quality for adopting firms leads to a loss in comparability of accounting amounts with non-adopting firms, there is no basis on which to predict how an increase in accounting quality for adopting firms affects comparability of accounting amounts with adopted firms Although some prior studies address capital market consequences associated with voluntary adoption, none attempt to link capital market consequences to comparability changes, or make comparisons of capital market consequences between firms adopting IFRS and those of firms in their own countries that adopted IFRS before them and that not adopt IFRS Predictions Comparability Our first prediction is that comparability of accounting amounts between adopting firms and adopted firms increases after the adopting firms adopt IFRS We predict this because after the adopting firms adopt IFRS, both groups of firms claim to apply the same set of standards, IFRS Our second prediction is that comparability of accounting amounts between adopting and nonadopting firms decreases after the adopting firms adopt IFRS We predict this because after the adopting firms adopt IFRS, the two groups of firms no longer apply the same set of standards Even though we make these comparability predictions, there are at least three reasons why they might not be borne out As a result, whether our predicted changes in comparability obtain depend on whether and the extent to which these countervailing effects offset our predicted effects The first is the incentives of voluntary adopters For example, a primary concern of the U.S Securities and Exchange Commission (SEC 2012) is that firms may elect to apply IFRS for opportunistic reasons Such reasons could lead them to adopt IFRS without making substantive changes in their financial reporting practices (Daske et al 2013); if this is the case, then there will be no change in comparability Alternatively, as noted by the SEC (2012), firms could apply IFRS opportunistically if it improves their reported performance, which could result in an increase or a decrease in comparability of accounting amounts with those of both firms that voluntarily adopted IFRS and firms that continue to apply domestic standards The International Accounting Standards Committee (IASC), the predecessor body to the IASB, issued international accounting standards IFRS include standards issued not only by the IASB, but also by the IASC, some of which have been amended by the IASB Journal of Financial Reporting Volume 3, Number 1, 2018 Barth, Landsman, Lang, and Williams The second is the fact that domestic accounting standards are designed for domestic institutions, but IFRS are not (Ball, Kothari, and Robin 2000) To the extent that IFRS not permit accounting amounts to reflect the economic effects of domestic institutions, there may be a decrease (no change) in comparability of accounting amounts with those of firms that continue to apply domestic standards (already voluntarily adopted IFRS) The third is the extent to which there is a difference between domestic standards and IFRS (Bae, Tan, and Welker 2008; Barth, Landsman, Young, and Zhuang 2014) If the difference is small, then it is likely that there will be little or no change in comparability after firms voluntarily adopt IFRS Capital Market Benefits Our four capital market benefits predictions follow from our comparability predictions First, regarding adopting firms after they adopt IFRS, we predict capital market benefits to increase (decrease) if the benefits from increased comparability with other firms applying IFRS, including adopted firms, exceed (are exceeded by) the cost of decreased comparability with firms that continue to apply domestic standards, including non-adopting firms.4 Second, we predict benefits for adopting firms to exceed those for non-adopting firms if the non-adopting firms’ benefits decrease because of decreased comparability with adopting firms or remain unchanged Third, we predict the adopted firms’ benefits to increase because of increased comparability with adopting firms or to remain unchanged Fourth, we predict the adopting firms’ benefits to exceed the adopted firms’ benefits because the adopted firms have already realized any benefits from increased comparability with other firms that adopted IFRS before they did Underlying each of our capital market benefits predictions is that the comparability predictions in the ‘‘Related Research and Predictions’’ section are descriptively valid To the extent that they are not, the capital market benefits predictions are unlikely to be, as well We focus on three capital market benefits commonly employed in the literature: greater liquidity, higher share turnover, and more firm-specific information (Leuz and Verrecchia 2000; Amihud 2002; Durnev, Morck, and Yeung 2004; Piotroski and Roulstone 2004; Daske et al 2008) A key assumption underlying our capital market benefits predictions is that when investors have more comparable financial statement information, they are better able to compare a firm’s economic condition to that of other firms when making their investment decisions Thus, for example, we expect that when an adopting firm adopts IFRS, investors are better able to compare the economic condition of the adopting firm to that of adopted firms, thereby making them more willing to trade in the adopting firm’s equity This increased willingness to trade should manifest as an increase in the adopting firm’s liquidity and share turnover In addition, we expect the increased comparability to result in more firm-specific information being available to investors, which should manifest in lower stock return synchronicity Research Design We design our research to provide evidence on comparability and capital market benefits for voluntary adopters of IFRS relative to other voluntary IFRS adopters and to firms applying domestic standards Our research setting enables us to provide insights into the effects of voluntary IFRS adoption on comparability of accounting amounts and attendant capital market benefits Matched Sample Design We use a matched sample design to test our predictions developed in the ‘‘Related Research and Predictions’’ section We construct separate matched samples to assess comparability between the adopting firms and adopted firms and between adopting firms and non-adopting firms to maximize the number of observations for each comparability test As a result, the number of observations underlying the two sets of tests differs To construct the two matched samples, for each adopting firm we select an adopted firm and a non-adopting firm, each of which is from the same country and industry as the adopting firm and, relative to other adopted or non-adopting firms, has the closest equity market value (Barth et al 2008; Barth et al 2012).5 Following Barth et al (2012), to identify a firm’s industry we use the I/B/E/S industry classification from Worldscope; to identify the firm with the closest equity market value, we minimize the Home bias and other informational constraints—particularly the use of domestic accounting standards—make it more difficult for investors outside a country to compare investments across countries (Amiram 2012) To the extent that adoption of IFRS by a firm enhances comparability with foreign firms, foreign investors are more likely to include the firm’s stock in their investment portfolios This ability to attract foreign investors should augment any increase in capital market benefits Barth et al (2008) find that application of international accounting standards is associated with higher accounting quality than application of domestic standards However, if accounting amounts based on IFRS are of lower quality than those based on domestic standards, then capital market benefits associated with increased comparability could be offset by capital market costs associated with decreased accounting quality This procedure allows for the possibility that an adopting firm also can be an adopted firm, i.e., be matched with another adopting firm that adopts IFRS after it does Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption sum of the equity market value differences between adopting firms and matched adopted or non-adopting firms at the end of the adopting firm’s adoption year We eliminate any matched pair for which the size difference exceeds 50 percent in absolute value To ensure that we properly identify an adopting firm’s adoption year, we require the firm to have data in the year it adopts IFRS and the year before Our analyses include all firm-years for which both firms in a matched pair have data For example, if an adopting firm has data from 1994 through 2000, and its matched adopted firm has data for 1995 through 2002, then our analysis includes data from 1995 through 2000 for the adopting firm and its matched adopted firm Also, to ensure that our tests are unaffected by mandatory adoption, we eliminate all matched pairs after IFRS became mandatory in their country Assessing Comparability Following Barth et al (2012), we assess accounting system comparability and value relevance comparability based on metrics using stock price, stock return, and cash flow as economic outcomes, and various combinations of net income and equity book value as accounting amounts The relations used to construct the comparability metrics associate earnings and equity book value with stock price, earnings and change in earnings with stock return, and earnings with cash flow We first test whether comparability of accounting amounts between adopting and adopted firms increases after the adopting firms adopt IFRS, and whether comparability of accounting amounts between adopting and non-adopting firms decreases after the adopting firms adopt IFRS We also test whether the matched adopting and adopted firms’ accounting amounts, and the matched adopting and non-adopting firms’ accounting amounts, have comparable value relevance before and after the adopting firms adopt IFRS.6 Accounting System Comparability Following De Franco, Kothari, and Verdi (2011) and Barth et al (2012), we define accounting systems as comparable if an estimated economic outcome, such as stock price, based on the mapping from accounting amounts, such as earnings, to economic outcomes from one system is the same as the estimated economic outcome based on the mapping of the other system Following Barth et al (2012), we construct accounting system comparability metrics separately for the adopting/adopted and adopting/non-adopting firms matched samples.7 Construction of the metrics requires six steps In the first step, we estimate the relations between each economic outcome and its associated accounting amounts For stock price, the accounting amounts are earnings and equity book value; for stock return, the accounting amounts are earnings and change in earnings; for subsequent year’s cash flow, the accounting amount is earnings In the second step, for each group of firms we calculate within-sample fitted economic outcomes We conduct steps three through six separately for adopting firms and their matched adopted firms, and for adopting firms and their matched non-adopting firms In the third step, we use the multiples from the other group of firms to calculate fitted economic outcomes For example, when constructing the comparability metric that relates to adopting firms and their matched adopted firms, we calculate fitted stock price for each adopting firm based on the adopted firms’ multiples and vice versa In the fourth step, we calculate the absolute value of the difference between the fitted economic outcomes that were calculated in the second and third steps For example, when constructing the comparability metric that relates to adopting firms and their matched adopted firms, for each adopting and adopted firm we calculate the absolute value of the difference between the fitted economic outcomes based on adopting firm and adopted firm multiples In the fifth step, for each of the four groups of firms, i.e., the matched adopting and adopted firms, and the matched adopting and non-adopting firms, we average the differences in fitted economic outcomes calculated in the fourth step This results in two sets of average differences for each economic outcome, i.e., one for the matched adopting and adopted firms and one for the matched adopting and non-adopting firms In the sixth step, we calculate the comparability metric for each economic outcome as the mean, median, and standard deviation of the average differences calculated in the fifth step To assess significance of mean (median) differences, we use a t-test (Wilcoxon Rank Sum Test).8 To assess significance of standard deviation differences, we generate a distribution of the differences using a bootstrapping procedure.9 To test for Following Barth et al (2012), we not conduct analogous tests for accounting system comparability because there are not separate metrics for each group of firms Rather, the metrics are based on a comparison of fitted stock prices, stock returns, or cash flow See Barth et al (2012, Appendix) for computational details Following Barth et al (2012), we also test whether the mean and median comparability metrics are significantly different from zero Throughout, we apply a (10) percent significance level under a one-sided alternative when we have a signed prediction, and under a two-sided alternative otherwise For example, to test whether standard deviation differences between adopting and adopted firms are significant, we randomly assign observations to each group For each assigned adopting firm, we randomly assign an adopted firm as its match We calculate the difference in standard deviations for the two randomly assigned groups of firms To generate the empirical distribution of this difference, we repeat this procedure 1,000 times, with replacement We deem as significant a standard deviation difference that exceeds 950 of the differences we generate Sampling without replacement has no effect on our inferences Journal of Financial Reporting Volume 3, Number 1, 2018 Barth, Landsman, Lang, and Williams differences in accounting system comparability after the adopting firms adopt IFRS, we use observations when the adopting firms applied domestic standards, i.e., before they adopted IFRS, and observations when they applied IFRS, i.e., after they adopted IFRS Value Relevance Comparability Following Barth et al (2012), we define value relevance of accounting amounts as comparable if they explain the same variation in economic outcomes; when testing for differences in value relevance comparability, we use differences in the absolute values of comparability metrics Because comparability relates to how close the metrics are to each other—not whether one metric is larger than another—we not use differences in signed values PRICE, the first value relevance metric, is constructed using the adjusted R2 from a regression of stock price, P, on net income before extraordinary items per share, NI, and book value of equity per share, BVE: X X b C ỵ b I ỵ eit : 1ị Pit ẳ b0 þ b1 BVEit þ b2 NIit þ j 3j j k 4k k Following Barth et al (2012), P is stock price six months after fiscal year-end, Cj and Ik are indicator variables that equal for firms domiciled in country j and industry k, and otherwise; i and t refer to firm and year, respectively RETURN, the second metric, is constructed using the adjusted R2 from a regression of annual stock return, RETURN, on net income and change in net income, deflated by beginning-of-year price, NIt/PtÀ1 and DNIt/PtÀ1:10 RETURNit ẳ b0 X ỵ b1 NIit =Pit1 Xỵ b2 DNIit =Pit1 ỵ b3 LOSSit ỵ b4 LOSSit NIit =Pit1 ỵ b5 LOSSit DNIit =Pit1 ỵ b C þ b I þ eit : j 6j j k 7k k ð2Þ RETURN is the cumulative percentage change in stock price beginning nine months before and ending three months after fiscal year-end, adjusted for dividends and stock splits LOSS is an indicator variable that equals if NIt /PtÀ1 is negative, and otherwise CASH FLOW, the third metric, is constructed using the adjusted R2 from the following regression of cash flow on lagged net income: X X b C ỵ b I ỵ eitỵ1 ; 3ị CFitỵ1 ẳ b0 ỵ b1 NIit =TAit1 ỵ j 2j j k 3k k where CF is net cash flow from operations scaled by lagged total assets, TA We include the country and industry fixed effects in each equation to mitigate effects on our inferences of differences across countries and industries in mean stock price, stock return, and future cash flow from operations To ensure each comparability metric reflects only the explanatory power of the accounting amounts, we calculate each metric as the difference in explanatory power of Equations (1), (2), and (3), and each equation’s nested equation that includes only the fixed effects We estimate each full and attendant nested equation using those observations relevant to each comparison we make For example, when we compare value relevance of adopting and adopted firms after the adopting firms adopt IFRS, we estimate the equations using the combined sample of adopting firms and their matched adopted firms for years after the adopting firms adopt IFRS We test for differences in each value relevance metric using a bootstrapping procedure similar to the one we use for tests of differences in accounting system comparability standard deviation Capital Market Benefits We test for capital market benefits—liquidity, share turnover, and firm-specific information—associated with adopting firms adopting IFRS by using a change-in-difference research design, using metrics adapted from prior research For each comparison we make, we test whether the change in a particular capital market benefit metric differs for the two groups of firms being compared, i.e., adopting and adopted firms, and adopting and non-adopting firms The structure of the tests also permits us to test for differences in capital market benefits for each group of firms and between two groups of firms before and after the adopting firms adopt IFRS We use two metrics for liquidity The first is the Amihud (2002) illiquidity measure, which we denote as AMIHUD AMIHUD is based on the ratio of the absolute value of the firm’s daily return (multiplied by one million) to its dollar volume, averaged over the fiscal year For each firm, we calculate AMIHUD for the periods before and after the adopting firm adopts IFRS as the average of these yearly average ratios over the fiscal years in each period The second metric, 10 For ease of exposition, we use the same notation for coefficients and error terms in each equation Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption ZeroRet, is based on the percentage of trading days for which a firm’s stock return is zero in each fiscal year (Daske et al 2008) For each firm, we calculate ZeroRet for the periods before and after the adopting firm adopts IFRS as the average of these yearly average percentages over the fiscal years in each period An increase in liquidity is reflected by a decrease in AMIHUD or ZeroRet We base our measure of share turnover, TURN, on the ratio of the number of daily shares traded to the number of shares outstanding, averaged over the fiscal year (Leuz and Verrecchia 2000) For each firm, we calculate TURN for the periods before and after the adopting firm adopts IFRS as the average of these yearly average ratios over the fiscal years in each period As in prior research, we interpret stock return synchronicity as measuring the extent to which a firm’s stock return reflects firmspecific information, and measure stock return synchronicity, SYNC, as the adjusted R2 from a regression of a firm’s daily stock return on the daily market return (Durnev et al 2004; Piotroski and Roulstone 2004) The lower is SYNC, the greater is the extent of firm-specific information, which we view as a capital market benefit Specifically, when comparing the adopting and adopted firms (adopting and non-adopting firms), we estimate the following regression separately for each group of firms before and after the adopting firms adopt IFRS: Rit ẳ a0 ỵ b1 RMrkt ỵ eit : t ð4Þ Mrkt is the daily market return for the country in which the firm’s stock is traded We require a R is the firm’s daily return; and R minimum of 250 daily observations for each firm when estimating Equation (4) We test for differences in synchronicity between groups of firms, e.g., between adopting and adopted firms, based on a distribution of differences in adjusted R2 obtained from a bootstrapping procedure that is similar to the one used for tests of significance of differences in value relevance comparability metrics SAMPLE AND DATA Our tests are based on a sample of firms that adopted IFRS between 1996 and 2008 The vast majority of voluntary IFRS adoptions occurred between 1999 and 2004 We extend the sample of adoption years to include the small number of voluntary adopters in the immediately preceding and subsequent years Our tests require pre- and post-adoption sample years The preadoption sample years potentially range from 1992 through 2005, and post-adoption sample years potentially range from 1996 through 2009, which provides at least four pre- and post-adoption years for most sample firms We obtain our sample of IFRS firms from Worldscope, which identifies the set of accounting standards a firm uses to prepare its financial statements and its industry (similar to Barth et al 2012) Following prior research (Daske et al 2008; Barth et al 2012), the Worldscope standards categories that we code as IFRS based on the Worldscope Accounting Standards Applied data field are ‘‘international standards’’ and IASC or IFRS We limit IFRS firms to those that not cross-list in the U.S to eliminate effects on the IFRS accounting amounts associated with the reconciliation requirement (Harris and Muller 1999; Lang, Raedy, and Wilson 2006; Barth et al 2012) We obtain data used to estimate our equations from Datastream Using the full sample, we winsorize at the percent and 99 percent levels all variables used to construct our metrics to mitigate the effects of outliers on our inferences The resulting samples of adopting and adopted firms used in the comparability analyses comprise 106 matched pairs with 426 firm-year observations, of which 161 are before the adopting firm adopts IFRS and 265 are after; the resulting samples of adopting and non-adopting firms comprise 204 matched pairs with 1,095 firm-year observations, of which 626 are before the adopting firm adopts IFRS and 469 are after That the number of matched pairs is larger for the adopting/non-adopting comparison reflects the fact that there were relatively fewer voluntary adopters of IFRS than non-adopters Capital market benefits tests are based on somewhat smaller samples that reflect additional data requirements In particular, to construct ZeroRet, we require each firm to have 100 non-missing returns; to construct AMIHUD and TURN, we require trading volume, which is not available for all firms Table 1, Panel A provides a breakdown of sample firms by country Sample firms are from 27 countries, with the greatest proportion from Germany and Switzerland Panel B of Table provides an industry breakdown Sample firms are from 34 industries and, with the exception of Industrial Engineering comprising 14.29 percent of the adopting/non-adopting firm-years, there is no apparent industry concentration Panel C of Table provides a breakdown by adoption year of the adopting firms Table reports descriptive statistics separately for the adopting/adopted matched pairs sample and the adopting/nonadopting matched pairs sample before and after adopting firms adopt IFRS Although we not conduct significance tests for differences in means between the adopting and adopted firms and between the adopting and non-adopting firms, Table suggests that differences exist for several of our variables Because it is likely that such mean differences are, at least in part, attributable to country and industry differences, as described in the ‘‘Research Design’’ section, our value relevance comparability metrics are constructed to exclude the explanatory power of country and industry indicator variables Journal of Financial Reporting Volume 3, Number 1, 2018 Barth, Landsman, Lang, and Williams TABLE Sample Composition by Country, Industry, and Year of Adoption Panel A: Composition by Country Adopting/Adopted Sample Firm-Year Observations Australia Austria Belgium Brazil Canada Czech Republic Denmark Finland France Germany Greece Hungary Hong Kong Israel Japan Malaysia The Netherlands New Zealand Norway Peru Portugal Singapore South Africa Sweden Switzerland Turkey United Kingdom Totals (%) Firm-Year Observations Adopting/Non-Adopting Sample # of Firms % of Firms 19 4.46 1.88 4.72 2.83 15 15 12 3.52 3.52 2.82 4 3.77 3.77 1.89 178 41.78 46 43.40 0.70 0.94 4 0.94 0.94 1.41 1.89 0.94 2.83 16 3.76 1.64 2.83 1.89 111 28 26.06 6.57 21 19.81 8.49 426 100.0 106 100.0 Firm-Year Observations (%) Firm-Year Observations # of Firms % of Firms 14 42 13 99 37 16 449 0.82 1.28 3.84 1.19 0.82 0.64 9.04 3.38 1.46 41.00 0.18 1 14 91 0.49 1.47 4.41 0.98 0.49 0.49 6.86 2.94 2.45 44.61 0.49 33 43 4 68 16 34 37 109 25 3.01 3.93 0.37 0.37 0.46 6.21 0.55 0.82 1.46 3.11 3.38 0.18 9.95 2.28 0.27 1 14 1 5 17 1.96 3.43 0.49 0.49 0.49 6.86 0.49 0.49 1.47 2.45 2.45 0.49 8.33 3.92 0.49 1,095 100.0 204 100.0 (continued on next page) RESULTS Comparability Table presents mean, median, and standard deviation accounting system comparability metrics; Panel A (B) presents findings for the full sample relating to comparability of accounting amounts of adopting and adopted (non-adopting) firms As predicted, findings in Table 3, Panel A reveal that comparability between the adopting and adopted firms is greater when the adopting firms apply IFRS than when they applied domestic standards, in that six of the nine accounting system comparability metrics for adopting and adopted firms decrease significantly after the adopting firms adopt IFRS The change in differences in mean (median; standard deviation) PRICE, RETURN, and CASH FLOW are À8.52 (À1.46; À16.01), À0.13 (À0.21; 0.13), and À0.001 (0.000; À0.002) Neither of the two positive changes in differences, RETURN standard deviation and CASH FLOW median, is significant As predicted, findings in Table 3, Panel B reveal that comparability between the adopting and non-adopting firms is lower when the adopting firms apply IFRS than when they applied domestic standards, in that eight of the nine accounting system comparability metrics for adopting and non-adopting firms increase significantly after adopting firms adopt IFRS The change in differences in mean (median; standard deviation) PRICE, RETURN, and CASH FLOW are 6.38 (2.07; 10.71), 0.06 (0.09; À0.04), and 0.002 (0.001; 0.002) The negative change in the RETURN standard deviation difference is insignificant Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption TABLE (continued) Panel B: Composition by Industry Adopting/Adopted Sample Firm-Year Observations Automobiles Banks Beverages Chemicals Construction Electricity Electronic Equip Financial Services Fixed Line Telecom Food Retailers Food Producers Forestry Gas and Water Utilities General Industrials General Retailers Healthcare Home Construction Ind Engineering Industrial Metals Ind Transportation Leisure Goods Media Mining Mobile Telecom Insurance (non-life) Oil and Gas Producers Oil Equip and Serv Personal Goods Pharmaceuticals Real Estate Software and Comp Support Services Tech Hardware Travel and Leisure Totals (%) Firm-Year Observations # of Firms Adopting/Non-Adopting Sample % of Firms 11 24 2.58 5.63 2.83 5.66 33 42 31 1.64 7.75 9.86 7.28 1.64 10 1.89 7.55 9.43 6.60 1.89 37 0.70 8.69 1.64 0.94 7.55 0.94 16 15 15 24 14 1.41 3.76 3.52 3.52 5.63 3.29 1.17 4 2.83 3.77 3.77 3.77 7.55 2.83 0.94 1.41 1.64 2 1.89 1.89 10 22 2.35 5.16 1.89 4.72 19 10 27 28 4.46 2.35 6.34 6.57 4.72 1.89 5.66 6.60 426 100.0 106 100.0 Firm-Year Observations 38 24 17 41 57 28 29 30 19 89 14 24 69 40 76 137 24 30 13 21 47 23 21 14 50 14 27 49 1,095 (%) Firm-Year Observations # of Firms % of Firms 3.41 1.07 1.71 4.69 5.33 2.56 2.99 1.92 0.21 1.28 8.96 0.64 0.64 1.49 5.54 2.77 5.54 14.29 1.07 3.20 0.43 2.35 3.84 1.07 3.62 0.21 0.21 2.99 1.07 0.21 5.33 0.85 3.84 4.69 4 10 16 12 13 28 6 1 12 10 3.43 1.96 1.96 3.92 4.90 1.96 2.94 3.92 0.49 1.47 7.89 0.98 0.49 1.96 5.88 2.94 6.37 13.73 1.47 1.96 0.98 2.94 2.94 0.49 1.47 0.49 0.49 2.45 1.47 0.49 5.88 1.96 2.45 4.90 100.0 204 100.0 (continued on next page) Table presents value relevance comparability metrics; Panel A (B) presents findings relating to comparability of accounting amounts of adopting and adopted (non-adopting) firms As predicted, and consistent with the accounting system comparability findings in Table 3, Panel A, the findings in Table 4, Panel A reveal that comparability between adopting and adopted firms is greater when the adopting firms apply IFRS than when they applied domestic standards, in that the difference in value relevance metrics for adopting and adopted firms decreases significantly after adopting firms adopt IFRS In particular, the difference in PRICE, RETURN, and CASH FLOW decreased by 0.06, 0.11, and 0.02 Panel A also reveals that before the adopting firms adopt IFRS, their value relevance measured by PRICE and RETURN is significantly lower than that of the adopted firms However, after adopting firms adopt IFRS, their value relevance is higher than before they adopt IFRS and there is no significant difference in value relevance between the two groups of firms Also as predicted, and consistent with the accounting system comparability findings in Table 3, Panel B, the findings in Table 4, Panel B reveal that comparability between adopting and non-adopting firms is lower when the adopting firms apply IFRS than when they applied domestic standards, in that the differences in value relevance metrics for adopting and nonJournal of Financial Reporting Volume 3, Number 1, 2018 Barth, Landsman, Lang, and Williams 10 TABLE (continued) Panel C: Composition by Year of IFRS Adoption by Adopting Firms Adopting/ Adopted Sample Adopting/ Non-Adopting Sample # of Firms % of Firms # of Firms % of Firms 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 14 14 18 14 28 1.89 0.00 3.77 4.72 13.21 13.21 16.98 13.21 26.42 0.00 1.89 0.94 3.77 3 14 16 26 31 27 50 18 1.47 1.47 3.43 6.86 7.84 12.75 15.20 13.24 24.51 1.47 8.82 2.45 0.49 Totals 106 100.0 204 100.0 The Adopting/Adopted (Adopting/Non-Adopting) sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 matched with firms of similar size in their country and industry that adopted IFRS before them (do not adopt IFRS) adopting firms increase after adopting firms adopt IFRS, significantly so for RETURN and CASH FLOW In particular, the difference in PRICE, RETURN, and CASH FLOW increase by 0.02, 0.05, and 0.02 Taken together, the findings in Tables and are consistent with the prediction that voluntary adoption of IFRS increases comparability between firms that adopt IFRS and those that adopted IFRS before them, but decreases comparability between firms that adopt IFRS and those that not adopt IFRS Capital Market Benefits Liquidity Table presents findings relating to tests of changes in differences in capital market benefits as reflected by liquidity; Panel A (B) presents findings for adopting and adopted (non-adopting) firms The first (second) set of findings in each panel is based on the Amihud (2002) illiquidity (zero returns) metrics, AMIHUD (ZeroRet) Regarding AMIHUD, the findings in Panel A reveal that when the adopting firms apply domestic standards, their shares are significantly less liquid than those of firms that apply IFRS AMIHUD means for adopted and adopting firms are 6.10 and 23.29; the difference of À17.19 is significant The difference evaporates after the adopting firms adopt IFRS, with corresponding mean AMIHUD amounts of 4.66 and 4.50 for adopted and adopting firms In addition, consistent with the prediction that the increase in capital market benefits for adopting firms exceeds that for adopted firms, the change in the difference in mean AMIHUD, 17.35, is significantly positive, which indicates that the increase in liquidity after adopting firms adopt IFRS is significantly greater for adopting firms than for adopted firms Regarding ZeroRet, the findings in Table 5, Panel A also reveal that when the adopting firms apply domestic standards, their shares are significantly less liquid than those of firms that apply IFRS ZeroRet means for adopted and adopting firms are 0.24 and 0.27; the difference of À0.03 is significant The À0.02 difference after the adopting firms adopt IFRS is not significant In addition, the change in the difference in mean ZeroRet, 0.01, is significantly positive, which, as with the AMIHUD findings, indicates that the increase in liquidity after adopting firms adopt IFRS is significantly greater for adopting firms than for adopted firms The comparison of adopting and non-adopting firms in Table 5, Panel B reveals that, as in Panel A, the adopting firms’ shares increase in liquidity after they adopt IFRS—the mean decrease in illiquidity is significant for both AMIHUD and ZeroRet, À8.28 and À0.03 The non-adopting firms’ shares not evidence a significant change in liquidity before and after the adopting firms adopt IFRS—the mean differences in AMIHUD and ZeroRet, À5.85 and 0.00, are insignificant The changes in the differences in mean AMIHUD and ZeroRet, 2.43 and 0.03, are significant, which is consistent with our prediction that the increase in liquidity after adopting firms adopt IFRS is greater for adopting firms than for non-adopting firms Taken together, Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption 11 TABLE Descriptive Statistics Panel A: Adopting/Adopted Sample Before IFRS Adoption Adopting Firms Mean P BVE P/BVE NI RETURN NI/P DNI/P LOSS CF NI/TA Std Dev 34.75 42.65 40.56 55.17 1.22 0.96 4.16 7.35 0.11 0.40 0.17 0.32 0.00 0.34 0.19 0.40 0.07 0.10 0.02 0.10 n ¼ 161 After IFRS Adoption Adopted Firms Mean Std Dev 29.02 37.82 1.40 2.83 0.12 0.18 0.02 0.19 0.08 0.03 40.57 65.62 1.19 4.81 0.51 0.37 0.26 0.39 0.08 0.06 Adopting Firms Mean Adopted Firms Std Dev 42.78 53.76 50.86 57.66 1.41 1.11 3.56 6.05 0.16 0.48 0.10 0.24 0.01 0.25 0.23 0.42 0.08 0.07 0.02 0.07 n ¼ 265 Mean Std Dev 31.80 30.08 1.43 3.04 0.21 0.09 0.02 0.24 0.08 0.02 43.56 42.93 1.16 5.57 0.48 0.24 0.28 0.43 0.06 0.05 Panel B: Adopting/Non-Adopting Sample Before IFRS Adoption After IFRS Adoption Adopting Firms Non-Adopting Firms Adopting Firms Non-Adopting Firms Mean Mean Std Dev Mean Mean Std Dev 20.73 32.51 1.46 2.86 0.04 0.15 À0.02 0.23 0.08 0.03 29.50 52.48 1.41 5.04 0.34 0.27 0.23 0.42 0.07 0.04 29.11 29.23 1.64 2.09 0.11 0.04 0.01 0.29 0.06 0.00 48.72 53.88 1.41 4.56 0.39 0.19 0.21 0.45 0.07 0.09 Std Dev P 23.89 29.06 BVE 30.24 50.58 P/BVE 1.47 1.30 NI 3.04 5.16 RETURN 0.05 0.33 NI/P 0.13 0.23 DNI/P À0.03 0.19 LOSS 0.18 0.39 CF 0.08 0.07 NI/TA 0.04 0.05 n ¼ 626 Std Dev 34.23 47.58 29.78 49.42 1.60 1.21 2.22 4.67 0.15 0.41 0.04 0.19 0.00 0.21 0.24 0.43 0.08 0.07 0.02 0.06 n ¼ 469 The Adopting/Adopted (Adopting/Non-Adopting) sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 matched with firms of similar size in their country and industry that adopted IFRS before them (do not adopt IFRS) Variable Definitions: P ¼ stock price six months after fiscal year-end; BVE ¼ book value of equity per share at end of fiscal year; P/BVE ¼ P divided by BVE; NI ¼ net income before extraordinary items per share; RETURN ¼ annual stock return beginning nine months before and ending three months after fiscal year-end; NI/P ¼ net income per share scaled by beginning-of-year stock price; LOSS ¼ an indicator variable equal to if NI/P is negative, and otherwise; CF ¼ net cash flow from operations scaled by lagged total assets; NI/TA ¼ net income scaled by lagged total assets; and D ¼ annual change Journal of Financial Reporting Volume 3, Number 1, 2018 Barth, Landsman, Lang, and Williams 12 TABLE Accounting System Comparability Before and After Adopting Firms Adopt IFRS Panel A: Adopting and Adopted Firms PRICE Before (n ¼ 161) After (n ¼ 265) After À Before RETURN CASH FLOW Pred Mean Median Std Dev Mean Median Std Dev Mean Median Std Dev À 15.72 7.20 À8.52** 6.49 5.03 À1.46 23.94 7.93 À16.01** 0.46 0.33 À0.13** 0.40 0.19 À0.21** 0.21 0.34 0.13 0.005 0.004 À0.001* 0.002 0.002 0.000 0.007 0.005 À0.002* Panel B: Adopting and Non-Adopting Firms PRICE Before (n ¼ 626) After (n ¼ 469) After À Before RETURN CASH FLOW Pred Mean Median Std Dev Mean Median Std Dev Mean Median Std Dev ỵ 4.71 11.09 6.38** 1.29 3.36 2.07** 8.44 19.15 10.71** 0.22 0.28 0.06** 0.01 0.10 0.09** 0.39 0.35 À0.04 0.001 0.003 0.002** 0.001 0.002 0.001** 0.001 0.003 0.002** **, * Denote that the difference between metrics is significant at the 0.05 and 0.10 levels, respectively, under a one-tailed alternative The means and medians for all metrics are significantly different from zero The Adopting/Adopted (Adopting/Non-Adopting) sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 matched with firms of similar size in their country and industry that adopted IFRS before them (do not adopt IFRS) In Panel A (B), the accounting system comparability metrics are the averages of the differences between fitted stock price and stock return for adopting firms resulting from applying adopting and adopted (non-adopting) firms’ pricing multiples, and for adopted (non-adopting) firms resulting from applying adopting and adopted (non-adopting) firms’ pricing multiples We construct our accounting system comparability metrics in six steps First, we estimate the relations between stock price (stock return, subsequent year’s cash flow) and earnings and equity book value (earnings and change in earnings, earnings) separately for adopting and adopted (non-adopting) firms Second, for each group of firms, we calculate within-sample fitted values for stock price (stock return, cash flow) Third, for each group of firms, we calculate fitted values for stock price (stock return, cash flow) using the multiples from the other group of firms Fourth, for each group of firms, we calculate the absolute value of the difference between the fitted stock price (stock return, cash flow) obtained in the second and third steps Fifth, for each matched pair, we average the differences in fitted stock price (stock return, cash flow) obtained in the fourth step Sixth, we calculate our price, return, and cash flow comparability metrics as the mean, median, and standard deviation (Std Dev.) of the average differences obtained in the fifth step appropriate for each comparability analysis we conduct the findings in Table are consistent with adopting firms exhibiting an increase in capital market benefits relative to both adopted and non-adopting firms Share Turnover Table presents findings relating to tests of changes in differences in capital market benefits as reflected by share turnover; Panel A (B) presents findings for adopting and adopted (non-adopting) firms The findings in Panel A reveal that when the adopting firms apply domestic standards, turnover is significantly lower than that for firms that apply IFRS Mean TURN for adopting and adopted firms is 0.0038 and 0.0123; the difference of 0.0085 is significant Adopting firms also have significantly lower mean TURN after they adopt IFRS; the difference of 0.0032 is significant However, the change in difference of means, À0.0053, is significant, which indicates that the adopted firms experience a decrease in turnover relative to the adopting firms This finding also is consistent with the prediction that the increase in capital market benefits for adopting firms exceeds that for adopted firms The comparison of adopting and non-adopting firms in Table 6, Panel B reveals that the adopting firms experience a relatively smaller decrease in turnover after they adopt IFRS In particular, the change in the mean difference for TURN, À0.0008, is significant This difference arises from there being an insignificant difference in mean TURN between the adopting and non-adopting firms before the adopting firms adopt IFRS of À0.0001, and a significant decrease in mean TURN for the nonadopting firms of À0.0009 afterward Thus, the findings in Panel B are consistent with an increase in capital market benefits for adopting firms relative to non-adopting firms Taken together, the findings in Table also are consistent with adopting firms exhibiting an increase in capital market benefits relative to both adopted and non-adopting firms Firm-Specific Information Table presents findings relating to tests of changes in differences in capital market benefits as reflected by stock price synchronicity; Panel A (B) presents findings for adopting and adopted (non-adopting) firms The findings in Panel A reveal that Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption 13 TABLE Value Relevance Comparability Before and After Adopting Firms Adopt IFRS Panel A: Adopting and Adopted Firms PRICE RETURN CASH FLOW Before IFRS Adoption (n ¼ 161) Adopting Firms Adopted Firms Adopting À Adopted 0.01 0.13 À0.12** 0.01 0.12 À0.11** 0.07 0.02 0.05 After IFRS Adoption (n ¼ 265) Adopting Firms Adopted Firms Adopting À Adopted 0.08 0.14 À0.06 Pred 0.05 0.05 0.00 0.03 0.06 À0.03 À0.06** À0.11** À0.02* PRICE RETURN CASH FLOW Before IFRS Adoption (n ¼ 626) Adopting Firms Non-Adopting Firms Adopting À Non-Adopting 0.00 0.05 À0.05 0.02 0.03 À0.01 0.08 0.09 À0.01* After IFRS Adoption (n ¼ 469) Adopting Firms Non-Adopting Firms Adopting À Non-Adopting 0.03 0.10 À0.07 0.04 0.10 À0.06** 0.02 0.05 À0.03** 0.02 0.05** 0.02** After À Before IFRS Adoption Change in jDifferencej À Panel B: Adopting and Non-Adopting Firms Pred After ÀBefore IFRS Adoption Change in jDifferencej ỵ **, * Indicate significance at the 0.05 and 0.10 levels, respectively, under a one-tailed alternative when we have a signed prediction, and under a two-tailed alternative otherwise The Adopting/Adopted (Adopting/Non-Adopting) sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 matched with firms of similar size in their country and industry that adopted IFRS before them (do not adopt IFRS) PRICE is based on the explanatory power from a regression of stock price, P, on net income per share, NI, and book value of equity per share, BVE In particular, PRICE is the difference between the adjusted R2 from Equation (1) and the adjusted R2 from the nested version of Equation (1) that includes only C and I: Pit ẳ b0 ỵ b1 BVEit ỵ b2 NIit ỵ b3 Cj ỵ b4 Ik þ eit : ð1Þ Return is based on the adjusted R from a regression of annual stock return, RETURN, on net income and change in earnings, deflated by beginning-ofyear price, NIt/Pt-1 and DNIt/Pt-1 In particular, RETURN is the difference between the adjusted R2 from Equation (2) and the adjusted R2 from the nested version of Equation (2) that includes only C and I: RETURNit ẳ b0 ỵ b1 NIit =Pit1 ỵ b2 DNIit =Pit1 ỵ b3 LOSSit ỵ b4 LOSSit NIit =Pit1 ỵ b5 LOSSit DNIit =Pit1 þ b6 Cj þ b7 Ik þ eit : ð2Þ We measure RETURN as the cumulative percentage change in stock price beginning nine months before fiscal year-end and ending three months after fiscal year-end, adjusted for dividends and stock splits NI/P is net income per share scaled by beginning-of-year stock price; LOSS is an indicator variable that equals if NI/P is negative, and otherwise; and D denotes annual change CASH FLOW is based on the R2 from the regression of cash flow on lagged net income In particular, CASH FLOW is the difference between the adjusted R2 from Equation (3) and the adjusted R2 from the nested version of Equation (3) that includes only C and I: CFitỵ1 ẳ b0 ỵ b1 NIit =TAit1 ỵ b2 Cj ỵ b3 Ik ỵ eitỵ1 ; ị where NI is net income; TA is total assets; and CF is net cash flow from operations scaled by lagged total assets To test for differences in R2, we estimate the equation 1,000 times, randomly assigning firms to the relevant partitions, and base significance tests on the frequency of observing an R2 difference greater than or equal to the tabulated difference Journal of Financial Reporting Volume 3, Number 1, 2018 Barth, Landsman, Lang, and Williams 14 TABLE Liquidity Capital Market Benefits Before and After Adopting Firms Adopt IFRS Panel A: Adopting and Adopted Firms Mean AMIHUD Before (n ¼ 161) After (n ¼ 223) After À Before Mean ZeroRet Before (n ¼ 161) After (n ¼ 265) After À Before Adopting Adopted Adopted À Adopting Pred 23.29 4.50 À18.79*** 6.10 4.66 À1.44 17.19*** 0.16 17.35*** ỵ 0.24 0.23 0.01 0.03* 0.02 0.01* þ 0.27 0.25 À0.02 Panel B: Adopting and Non-Adopting Firms Adopting Non-Adopting Non-Adopting À Adopting Pred Mean AMIHUD Before (n ¼ 544) After (n ¼ 454) After À Before 14.51 6.23 8.28*** 21.79 15.94 5.85 7.28 9.71*** 2.43* ỵ Mean ZeroRet Before (n ¼ 570) After (n ¼ 454) After À Before 0.28 0.25 À0.03*** 0.40 0.40 0.00 0.12*** 0.15*** 0.03*** ỵ ***, **, * Indicate significance at the 0.01, 0.05, and 0.10 levels, respectively, under a one-tailed alternative when we have a signed prediction, and under a two-tailed alternative otherwise The Adopting/Adopted (Adopting/Non-Adopting) sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 matched with firms of similar size in their country and industry that adopted IFRS before them (do not adopt IFRS) AMIHUD is the Amihud (2002) illiquidity measure, which we compute as fiscal year average of the daily ratio of absolute daily return divided by the daily dollar volume traded (in millions); and ZeroRet is fiscal year percentage of zero return trading days TABLE Share Turnover Capital Market Benefits Before and After Adopting Firms Adopt IFRS Panel A: Adopting and Adopted Firms Mean TURN Before (n ¼ 161) After (n ¼ 223) After À Before Adopting Adopted Adopted À Adopting Pred 0.0038 0.0041 0.0003 0.0123 0.0073 À0.0050 0.0085** 0.0032** À0.0053** À Panel B: Adopting and Non-Adopting Firms Mean TURN Before (n ¼ 491) After (n ¼ 418) After–Before Adopting Non-Adopting Non-Adopting À Adopting Pred 0.0023 0.0026 0.0003 0.0023 0.0017 À0.0006** –0.0001 À0.0009*** À0.0008*** À ***, **, * Indicate significance at the 0.01, 0.05, and 0.10 levels, respectively, under a one-tailed alternative when we have a signed prediction, and under a two-tailed alternative otherwise The Adopting/Adopted (Adopting/Non-Adopting) sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 matched with firms of similar size in their country and industry that adopted IFRS before them (do not adopt IFRS) TURN is the fiscal year average of the ratio of the number of daily shares traded to the number of shares outstanding Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption 15 TABLE Firm-Specific Information Capital Market Benefits Before and After Adopting Firms Adopt IFRS Panel A: Adopting and Adopted Firms Before (n ¼ 193,239) After (n ¼ 74,453) After À Before Adopting Adopted Adopted À Adopting Pred 0.1043 0.0621 À0.0422** 0.1307 0.1110 À0.0197** 0.0264** 0.0489** 0.0225** ỵ Panel B: Adopting and Non-Adopting Firms Before (n ¼ 413,866) After (n ¼ 150,960) After À Before Adopting Non-Adopting Non-Adopting À Adopting Pred 0.0628 0.0418 À0.0210** 0.0201 0.0076 0.0125** 0.0427** 0.0342** 0.0085** ỵ ***, **, * Indicate significance at the 0.01, 0.05, and 0.10 levels, respectively, under a one-tailed alternative when we have a signed prediction, and under a two-tailed alternative otherwise The Adopting/Adopted (Adopting/Non-Adopting) sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 matched with firms of similar size in their country and industry that adopted IFRS before them (do not adopt IFRS) To compute our synchronicity metrics, we adopt a methodology similar to that of Piotroski and Roulstone (2004) by first estimating the following regression for each group of firms: Rit ẳ a0 ỵ b1 RMrkt ỵ eit ; t where R is the firm’s daily return; and RMrkt is the daily country market return in which the firm’s stock is traded The adjusted R2 from each equation is our measure of synchronicity when the adopting firms apply domestic standards, their stock returns exhibit less synchronicity than those of firms that apply IFRS SYNC for adopted and adopting firms is 0.1307 and 0.1043; the difference of 0.0264 is significant Although SYNC is lower for both groups of firms after the adopting firms adopt IFRS, the difference between the two groups of firms increases to 0.0489, with corresponding SYNC of 0.1110 and 0.0621 for adopted and adopting firms Consistent with the prediction that the increase in capital market benefits for adopting firms exceeds that for adopted firms, the change in the difference in SYNC, 0.0225, is significantly positive This finding indicates that the decrease in synchronicity after adopting firms adopt IFRS is significantly greater for adopting firms than adopted firms The findings in Table 7, Panel B reveal that when the adopting firms apply domestic standards, their stock returns exhibit more synchronicity than those of firms that not apply IFRS SYNC for non-adopting and adopting firms is 0.0201 and 0.0628; the difference of À0.0427 is significant Although, as in Panel A, SYNC is lower for both groups of firms after the adopting firms adopt IFRS, the difference between the two groups of firms decreases to À0.0342, with corresponding SYNC of 0.0418 and 0.0076 for adopting and non-adopting firms More importantly, consistent with our prediction that the increase in capital market benefits for adopting firms exceeds that for non-adopting firms, the change in the difference in SYNC, 0.0085, is significantly positive This finding indicates that the decrease in synchronicity after adopting firms adopt IFRS is significantly greater for adopting firms than non-adopting firms Taken together, as in Tables and 6, the findings in Table are consistent with the prediction that adopting firms exhibit an increase in capital market benefits relative to both adopted and non-adopting firms There is little evidence of capital market consequences for adopted firms or of a decrease in capital market benefits for non-adopting firms Subsample Analyses: German-Swiss and Other Firms The sample composition statistics in Table 1, Panel A reveal that more than half of the sample comprises German and Swiss firms To provide evidence on the extent to which the inferences we draw are attributable to firms in these countries, we conduct our comparability and capital market benefits tests separately for German and Swiss firms and firms in other countries, Other firms The findings in Table reveal that the subsample findings generally yield the same inferences as those based on the full sample Journal of Financial Reporting Volume 3, Number 1, 2018 Barth, Landsman, Lang, and Williams 16 TABLE German-Swiss and Other Firms: Accounting System Comparability, Value Relevance Comparability, and Capital Market Benefits Panel A: Accounting System Comparability PRICE Pred Mean Adopting and Adopted Firms German-Swiss À À10.62** Other À À6.38* Adopting and Non-Adopting Firms German-Swiss ỵ 8.11** Other ỵ 2.97* RETURN Median Std Dev Mean Median À0.61* À2.63* À20.28** À8.62** À0.08** À0.25** À0.20* À0.25* 7.71** 6.40** 0.01 0.11** 3.85** 0.68 0.07** 0.08** CASH FLOW Std Dev 0.16 0.01 À0.08 À0.01 Mean Median Std Dev À0.007* À0.007* À0.003* À0.004 À0.011* À0.007* 0.001** 0.002** 0.001** 0.001** 0.001** 0.002** Panel B: Value Relevance Comparability Pred Adopting and Adopted Firms German-Swiss À Other À Adopting and Non-Adopting Firms German-Swiss ỵ Other ỵ PRICE RETURN CASH FLOW À0.03* À0.06** À0.09** 0.02 À0.07** 0.00 À0.05* 0.14** 0.07** 0.04* 0.02** À0.01 (continued on next page) Table 8, Panel A presents the After À Before accounting system comparability statistics corresponding to those in Table Panel A reveals that whereas the median PRICE (median CASH FLOW) statistic for adopting and adopted firms is insignificant in Table 3, it is significantly negative for German-Swiss and Other firms (German-Swiss firms), as predicted In addition, the significantly positive median PRICE (mean RETURN) statistic for adopting and non-adopting firms in Table is attributable to German-Swiss (Other) firms Table 8, Panel B presents the After À Before value relevance comparability statistics corresponding to those in Table Regarding adopting and adopted firms, the significantly negative statistic for PRICE (RETURN; CASH FLOW) is attributable to both subsamples (German-Swiss firms) Regarding adopting and non-adopting firms, the insignificantly positive statistic for PRICE in Table 4, Panel B is attributable to aggregation of a significantly negative statistic for German-Swiss firms and a significantly positive statistic for Other firms The significantly positive statistic for RETURN (CASH FLOW) in Table 4, Panel B is attributable to both subsamples (German-Swiss firms) Table 8, Panel C presents the After À Before capital market benefits statistics corresponding to those in Tables 5, 6, and The findings in Panel C reveal that all statistics are significant, with the same signs as those in Tables 5, 6, and 7, except for the insignificant ZeroRet means for Other firms for both comparisons, and the insignificant SYNC statistic for German-Swiss firms in the adopting and non-adopting firms comparison Linking Comparability and Capital Market Benefits Establishing a link between comparability and capital market benefits helps mitigate the concern that other changes in institutions or other aspects of the financial reporting system associated with IFRS adoption, not comparability, are the source of the increased capital market benefits for adopting firms If increases in comparability for adopting firms result in capital market benefits, then we expect there to be cross-sectional variation in comparability that is related to cross-sectional variation in capital market benefits This should manifest as a positive association between comparability and capital market benefits for adopting firms after they adopt IFRS To examine the link between comparability and capital market benefits, using the sample for the adopting and adopted firms comparisons, we partition adopting firms after they adopt IFRS into a high comparability subsample, i.e., the top tercile, and a low comparability subsample, i.e., the remaining firms for each of our firm-level comparability measures—PRICE, Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption 17 TABLE (continued) Panel C: Capital Market Benefits Mean AMIHUD Pred ỵ Adopting and Adopted Firms German-Swiss 6.95** Other 33.28** Adopting and Non-Adopting Firms German-Swiss 2.69* Other 12.53** Mean ZeroRet Pred ỵ Mean TURN Pred SYNC Pred ỵ 0.07** 0.10 0.0105** À0.0031** 0.0020** 0.0649** 0.07** –0.05 À0.0001* À0.0011** À0.0058 0.0099** ***, **, * Indicate significance at the 0.01, 0.05, and 0.10 levels, respectively (one-tailed) In Panel A, the means and medians for all metrics are significantly different from zero In Panels B and C, the Adopting/Adopted (Adopting/NonAdopting) sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 matched with firms of similar size in their country and industry that adopted IFRS before them (do not adopt IFRS) German-Swiss firms are from Germany and Switzerland, and Other firms are from other sample countries In Panel A, the accounting system comparability metrics are the averages of the differences between fitted stock price and stock return for adopting firms resulting from applying adopting and adopted (non-adopting) firms’ pricing multiples, and for adopted (non-adopting) firms resulting from applying adopting and adopted (non-adopting) firms’ pricing multiples We construct our accounting system comparability metrics in six steps First, we estimate the relations between stock price (stock return, subsequent year’s cash flow) and earnings and equity book value (earnings and change in earnings, earnings) separately for adopting and adopted (non-adopting) firms Second, for each group of firms, we calculate within-sample fitted values for stock price (stock return, cash flow) Third, for each group of firms, we calculate fitted values for stock price (stock return, cash flow) using the multiples from the other group of firms Fourth, for each group of firms, we calculate the absolute value of the difference between the fitted stock price (stock return, cash flow) obtained in the second and third steps Fifth, for each matched pair, we average the differences in fitted stock price (stock return, cash flow) obtained in the fourth step Sixth, we calculate our price, return, and cash flow comparability metrics as the mean, median, and standard deviation (Std Dev.) of the average differences obtained in the fifth step appropriate for each comparability analysis we conduct German-Swiss [Other] sample comprises 99 (190) [62 (75)] observations before (after) adopting firms adopt IFRS in the adopting and adopted firms comparisons, and 294 (264) [332 (205)] observations before (after) adopting firms adopt IFRS in the adopting and non-adopting firms comparisons In Panel B, PRICE is based on the explanatory power from a regression of stock price, P, on net income per share, NI, and book value of equity per share, BVE In particular, PRICE is the difference between the adjusted R2 from Equation (1) and the adjusted R2 from the nested version of Equation (1) that includes only C and I: Pit ẳ b0 ỵ b1 BVEit ỵ b2 NIit ỵ b3 Cj ỵ b4 Ik ỵ eit : 1ị Return is based on the adjusted R2 from a regression of annual stock return, RETURN, on net income and change in earnings, deflated by beginning-ofyear price, NIt/Pt-1 and DNIt/Pt-1 In particular, RETURN is the difference between the adjusted R2 from Equation (2) and the adjusted R2 from the nested version of Equation (2) that includes only C and I: RETURNit ¼ b0 þ b1 NIit =PitÀ1 þ b2 DNIit =PitÀ1 þ b3 LOSSit ỵ b4 LOSSit NIit =Pit1 ỵ b5 LOSSit DNIit =Pit1 ỵ b6 Cj ỵ b7 Ik ỵ eit : ð2 Þ We measure RETURN as the cumulative percentage change in stock price beginning nine months before fiscal year-end and ending three months after fiscal year-end, adjusted for dividends and stock splits NI/P is net income per share scaled by beginning of year stock price; LOSS is an indicator variable that equals if NI/P is negative, and otherwise; and D denotes annual change CASH FLOW is based on the R2 from the regression of cash flow on lagged net income In particular, CASH FLOW is the difference between the adjusted R2 from Equation (3) and the adjusted R2 from the nested version of Equation (3) that includes only C and I: CFitỵ1 ẳ b0 ỵ b1 NIit =TAit1 ỵ b2 Cj ỵ b3 Ik ỵ eitỵ1 ; ð3 Þ where NI is net income; TA is total assets; and CF is net cash flow from operations scaled by lagged total assets To test for differences in R2, we estimate the equation 1,000 times, randomly assigning firms to the relevant partitions, and base significance tests on the frequency of observing an R2 difference greater than or equal to the tabulated difference German-Swiss [Other] sample comprises 99 (190) [62 (75)] observations before (after) adopting firms adopt IFRS in the Adopting and Adopted Firms comparisons, and 294 (264) [332 (205)] observations before (after) adopting firms adopt IFRS in the adopting and non-adopting firms comparisons Panel C presents the means of the Amihud (2002) illiquidity measure, AMIHUD, which we compute as fiscal year average of the daily ratio of absolute daily return divided by the daily dollar volume traded (in millions); and fiscal year percentage of zero return trading days, ZeroRet; and the fiscal year average of the ratio of the number of daily shares traded to the number of shares outstanding, TURN; and SYNC, which we compute using a methodology similar to that of Piotroski and Roulstone (2004) by first estimating the following regression for each group of firms: Rit ẳ a0 ỵ b1 RMrkt ỵ eit ; t where R is the firm’s daily return; and RMrkt is the daily country market return in which the firm’s stock is traded The adjusted R2 from each equation is our measure of synchronicity For AMIHUD and ZeroRet, for adopting and adopted firms [adopting and non-adopting firms] comparisons, there are 99 and 190 (62 and 75) [294 and 264 (332 and 205)] German-Swiss (Other) firms before and after adopting firms adopted IFRS For TURN, for adopting and adopted firms [adopting and non-adopting firms] comparisons, there are 99 and 190 (62 and 75) [295 and 251 (196 and 167)] German-Swiss (Other) firms before and after adopting firms adopted IFRS For Synchronicity, for adopting and adopted firms [adopting and non-adopting firms] comparisons, there are 129,304 and 53,817 (63,935 and 20,636) [231,503 and 89,602 (182,363 and 61,358)] German-Swiss (Other) firms before and after adopting firms adopted IFRS Journal of Financial Reporting Volume 3, Number 1, 2018 18 Barth, Landsman, Lang, and Williams RETURN, and CASH FLOW—and compare mean AMIHUD, ZeroRet, and TURN for the subsamples.11 These analyses also provide evidence of whether the association between greater comparability and greater capital market benefits implied by our primary analyses exists Table 9, Panel A presents findings indicating that mean capital market benefits are higher for high comparability firms for seven of the nine comparisons, five of which are significant In particular, for high comparability adopting firms, mean AMIHUD is smaller than for low comparability adopting firms based on PRICE, RETURN, and CASH FLOW The differences are À1.816, À3.239, and À4.205, with only the PRICE difference being insignificant Mean ZeroRet also is significantly smaller based on PRICE and CASH FLOW, À0.051 and À0.105, but marginally significantly larger based on RETURN In addition, mean TURN is significantly larger based on PRICE, 0.0008, but is insignificantly different based on RETURN and CASH FLOW, À0.002 and 0.002 Taken together, these findings suggest that there is a link between comparability and capital market benefits related to IFRS adoption in that, after they adopt IFRS, adopting firms with greater comparability have greater capital market benefits The relation between comparability and capital market benefits after adopting firms adopt IFRS could reflect their relation when adopting firms applied domestic standards In addition, the differences in means tests in Table 9, Panel A not include controls for intertemporal changes in capital market benefits or other firm characteristics known to be associated with capital market benefits Thus, we estimate the following equation for the adopting firms, again using the sample for the adopting and adopted firms comparisons and, for the sake of parsimony and power, aggregating the comparability metrics and capital market benefits metrics each into composite measures: X X CAPBENit ẳ c0 ỵ c1 COMPit ỵ c2 POSTit ỵ c3 COMPit POSTit ỵ c4 BTMit ỵ c5 SIZEit ỵ c C ỵ c I ỵ eit : j 6j j k 7k k ð5Þ CAPBEN is a categorical variable that equals (0) if an adopting firm has high (low) capital market benefits relative to other adopting firms in a given calendar year To construct CAPBEN, we partition firm-year observations into high/low subsamples of AMIHUD, ZeroRet, and TURN based on their yearly sample medians We classify a firm-year observation as having CAPBEN equal to if it is in two of the three high capital market benefits subsamples, i.e., AMIHUD or ZeroRet is below the sample median or TURN is above the sample median, and otherwise.12 Regarding the explanatory variables, COMP is a categorical variable that equals (0) if an adopting firm has high (low) comparability relative to other adopting firms in a given year Based on the yearly distributions of each of our three firm-level comparability measures—PRICE, RETURN, and CASH FLOW—we construct COMP by first partitioning firm-year observations into tercile subsamples of each measure We classify a firm-year observation as having COMP equal to if it is in at least two of the three high-tercile subsamples and, at most, one of the middle-tercile subsamples, and otherwise.13 POST is an indicator variable that equals (0) if the adopting firm’s fiscal year is after (before) the year it adopted IFRS BTM is the equity book-to-market ratio; and SIZE is the natural logarithm of equity market value, both measured at the end of the fiscal year Equation (5) includes both COMP and COMP POST to permit the relation between comparability and capital market benefits to differ before and after adopting firms adopt IFRS The equation includes POST as a control for intertemporal changes in capital market benefits, and includes BTM and SIZE because these firm characteristics are known to be associated with capital market benefits Estimating Equation (5) using only adopting firms permits each firm to act as its own control for other firm characteristics associated with capital market benefits Table 9, Panel B presents the regression summary statistics from Equation (5), which we estimate using probit regression, and construct t-statistics based on standard errors clustered by firm and year Our primary interest is in c3, the coefficient on COMP POST, and Panel B reveals that it is significantly positive (coefficient ¼ 1.71; t-statistic ¼ 3.35).14 This significantly positive coefficient indicates that after adopting firms adopt IFRS, higher comparability is associated with greater capital market 11 12 13 14 We also conduct comparisons of capital market benefits partitioning the sample based on the median of each comparability metric Untabulated findings generally reveal the same inferences as those based on the tercile partitions in Table 9, Panel A, although significance levels are higher This is consistent with comparability not being symmetric around the median, and with a relatively high comparability threshold being necessary for a firm to enjoy capital market benefits (Ramanna and Sletten 2014) In addition, untabulated findings from analyses based on terciles, but excluding the middle tercile, reveal inferences identical to those based on the tabulated findings We construct CAPBEN based on the sample medians of AMIHUD, ZeroRet, and TURN because the distributions of these metrics are approximately symmetric around their medians This classification scheme is equivalent to summing the tercile rankings—1, 2, or 3—of PRICE, RETURN, and CASH FLOW, and setting COMP equal to if the firm-year observation has a sum of or 9, and otherwise This results in setting COMP equal to for approximately one-third of the sample Ai and Norton (2003) show that the magnitude of the interaction effect in probit models does not equal the marginal effect of the interaction term We implement the Ai and Norton (2003) correction procedure to assess the marginal effect of, and the significance of coefficient on, the interaction term, COMP POST, in Equation (5) Untabulated findings reveal that for every data point, the marginal effect is positive It is significantly positive for 183 of the 265 observations at the 0.10 level and 174 at the 0.05 level Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption 19 TABLE Capital Market Benefits of Accounting System Comparability for IFRS Adopting Firms Panel A: Differences in Capital Market Benefits Means after Adopting Firms Adopt IFRS AMIHUD ZeroRet PRICE Low Comparability High Comparability High À Low Pred 4.940 3.124 À1.816 À RETURN Low Comparability High Comparability High À Low Pred 5.221 1.982 À3.239*** – 0.200 0.261 0.061* – CASH FLOW Low Comparability High Comparability High À Low Pred 5.574 1.369 À4.205*** À 0.306 0.201 À0.105*** À 0.247 0.196 À0.051** À TURN 0.003 0.011 0.008*** þ 0.004 0.002 À0.002 þ 0.005 0.007 0.002 þ (continued on next page) benefits Panel B also reveals that the total coefficient on COMP in the period after adopting firms adopt IFRS, c1 ỵ c3, is significantly positive (coefficient ẳ 1.00; p-value , 0.01) This finding supports the inference from the unconditional means tests in Panel A Panel B also reveals that there is no significant incremental difference in mean capital market benefits after adopting firms adopt IFRS (POST coefficient ¼ À0.07; t-statistic ¼ À0.13) In addition, BTM is not significantly related to capital market benefits (coefficient ¼ 0.00; t-statistic ¼ 0.03), but SIZE is (coefficient ¼ 0.27; t-statistic ¼ 3.87) We next test whether capital market benefits for adopting firms after they adopt IFRS are positively associated with the percentage of firms that apply IFRS in a given adopting firm’s country The notion underlying this approach is that the informational benefits of IFRS are likely to be most pronounced when more firms apply IFRS To conduct these tests, we compute, by year, the percentage of firms that apply IFRS in a given adopting firm’s country, based on the sample for the adopting and non-adopting comparisons We then compare our capital market benefit measures—AMIHUD, ZeroRet, and TURN—for adopting firms between countries in which the percentage of firms that apply IFRS is relatively high, i.e., in the top tercile, and countries in which the percentage of firms that apply IFRS is relatively low, i.e., in the bottom two terciles.15 Untabulated findings from these tests indicate that, for all measures, adopting firms in countries with a relatively high percentage of firms that apply IFRS enjoy greater capital market benefits than firms in countries with a relatively low percentage In particular, mean AMIHUD, ZeroRet, and TURN are significantly higher for firms in higher percentage countries, although the mean AMIHUD difference is marginally so Untabulated findings also indicate that adopting firms enjoy significantly greater capital market benefits than non-adopting firms in both high and low percentage countries, but significantly more so in high percentage countries In other words, although capital market benefits are more pronounced in countries with a higher percentage of firms applying IFRS, such benefits exist even in low percentage countries SUMMARY AND CONCLUDING COMMENTARY This study determines whether voluntary adoption of IFRS is associated with an increase in comparability of accounting amounts and capital market benefits after the firms adopt IFRS Our evidence is based on samples of non-U.S firms that voluntarily adopt IFRS matched with firms of similar size in their country and industry that either adopted IFRS before them or not adopt IFRS We find that after firms voluntarily adopt IFRS, their accounting amounts become more comparable to those of firms that adopted IFRS before them and less comparable to those of firms that not adopt IFRS We also find that adopting 15 We partition the sample into terciles because the cutoff percentage of firms applying IFRS in the top tercile is 45 percent, which means that almost half the firms in the country apply IFRS, and there is a reasonable sample size in both partitions Inferences from analyses based on the median or the top and bottom terciles are similar Journal of Financial Reporting Volume 3, Number 1, 2018 Barth, Landsman, Lang, and Williams 20 TABLE (continued) Panel B: Regression Linking Capital Market Benefits and Comparability CAPBENit ẳ c0 ỵ c1 COMPit ỵ c2 POSTit þ c3 COMPit POSTit þ c4 BTMit þ c5 SIZEit ỵ Pred COMP POST COMP POST BTM SIZE Test: COMP ỵ (COMP POST) Fixed Effects n Pseudo R2 ỵ X c C j 6j j ỵ X c I k 7k k ỵ eit : Coefficient (t-statistic) À0.71** (À1.97) À0.07 (À0.13) 1.71*** (3.35) 0.00 (0.03) 0.27*** (3.87) 1.00*** Industry, Country 265 0.4035 ***, **, * Indicate significance at the 0.01, 0.05, and 0.10 levels, respectively, under a one-tailed alternative when we have a signed prediction, and under a two-tailed alternative otherwise In Panel A, we partition firm-year observations into tercile subsamples based on the yearly distributions of each of our three firm-level comparability measures—PRICE, RETURN, and CASH FLOW We classify a firm-year observation as High Comparability if it is in at least two of the three high-tercile subsamples and, at most, one of the middle-tercile subsamples, and as Low Comparability otherwise We estimate the equation in Panel B using Probit regression, and construct t-statistics based on standard errors clustered by firm and year CAPBEN is a categorical variable that equals (0) if an adopting firm has a high (low) level of capital market benefits relative to other adopting firms in a given calendar year To construct CAPBEN, we partition firm-year observations into high/low subsamples of AMIHUD, ZeroRet, and TURN based on their yearly sample medians We classify a firm-year observation as having CAPBEN equal to if is in two of the three high capital market benefits subsamples, i.e., AMIHUD or ZeroRet is below the sample median or TURN is above the sample median, and otherwise We classify a firm-year observation as having COMP equal to if is in at least two of the three high-tercile subsamples of our three firm-level comparability measures—PRICE, RETURN, and CASH FLOW—and, at most, one of the middle-tercile subsamples, and otherwise POST is an indicator variable that equals (0) if the adopting firm’s fiscal year is after (before) the year it adopted IFRS BTM is defined as the book value of equity divided by the market value of equity; and SIZE is calculated as the natural logarithm of the market value of equity, both of which are measured at fiscal year-end AMIHUD is the Amihud (2002) illiquidity measure, which we compute as fiscal year average of the daily ratio of absolute daily return divided by the daily dollar volume traded (in millions); and ZeroRet is fiscal year percentage of zero return trading days TURN is the fiscal year average of the ratio of the number of daily shares traded to the number of shares outstanding PRICE, RETURN, and CASH FLOW are as defined in the notes to Table The sample comprises non-U.S firms that voluntarily adopt IFRS between 1996 and 2008 firms generally exhibit an increase in capital market benefits—liquidity, share turnover, and firm-specific information—relative to both adopted and non-adopting firms Because a firm’s voluntary adoption of IFRS likely is not made in isolation of other complementary decisions, e.g., improvements in financial reporting, governance, and auditing, the capital 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The Accounting Review 87 (5): 1767–1789 https://doi.org/10.2308/accr-50192 Journal of Financial Reporting Volume 3, Number 1, 2018 Copyright of Journal of Financial Reporting is the property of American Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission However, users may print, download, or email articles for individual use  ... 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption test for changes in comparability and capital market benefits separately for German and Swiss firms and other... address capital market consequences associated with voluntary adoption, none attempt to link capital market consequences to comparability changes, or make comparisons of capital market consequences... that adopts IFRS after it does Journal of Financial Reporting Volume 3, Number 1, 2018 Effects on Comparability and Capital Market Benefits of Voluntary IFRS Adoption sum of the equity market value