The Effect of Mandatory Adoption of IFRS on Value Relevance of Future Earnings

Purpose - This study analyzes whether International Financial Reporting Standards (IFRS) mandatory adoption reduces the stock returns relevance of future earnings for Korean firms. Design/Methodology/Approach - The empirical analysis model used the future earnings response coefficient (FERC) model presented by Tucker and Zarowin (2006). The hypothesis of this study is based on the expectation that changes in accounting standards would not be an incentive to improve the quality of earnings because the strength of legal enforcement of accounting rules in Korea is low. Findings - As a result of an empirical analysis of 3,248 companies listed on the securities market during 2007-2014 (firm-year), the value relevance of future earnings decreased in post-IFRS mandatory adoption periods rather than in pre-IFRS mandatory adoption periods. This is consistent with additional analysis including control variables. In particular, this study additionally tests the effect of adoption of IFRS on value relevance of future earnings according to discretion, shareholders’ share, and legal outside directors. Based on additional tests, companies with high discretionary accruals are expected to decrease the value relevance of future earnings when adopting IFRS. If the block-holders ownership is low, the ownership wedge is high, so if a company with a low shareholding ratio adopts IFRS, the value relevance of future earnings seems to decrease. Research Implications - This study has a contribution in that it suggests that the introduction of K-IFRS does not improve the quality of accounting information among conflicting studies related to K-IFRS adoption. This study has contributed to the analysis of how investors recognize changes in accounting standards in Korean firms.