The Effect of IFRS Adoption on Analysts’ Earnings Forecasts: Evidence from Korea

Abstract

We examine the effect of the adoption of International Financial Reporting Standards (IFRS) on the financial analysts’ information environment in Korea. One of the significant changes with IFRS adoption is that the primary financial statements have changed from non-consolidated to consolidated financial statements. We investigate the transition effect on the analyst forecast errors using three approaches. First, we analyze the effect of IFRS adoption on the forecast errors for the primary financial statements: that is, non-consolidated financial statements in the pre-IFRS period and consolidated financial statements in the post-IFRS period. Second, we perform a similar analysis for non-consolidated financial statements. Finally, we repeat our analysis for a sample of firms in which analysts have issued forecasts for both consolidated and non-consolidated financial statements in the pre- and post-IFRS periods. We find that IFRS adoption reduces the analysts’ absolute forecast errors of earnings per share. Moreover, the beneficial effect of IFRS adoption on analysts’ forecasting performance is more pronounced for firms in which analysts provided forecasts of consolidated financial statements in the pre-IFRS period.