J. Account.

Public Policy 30 (2011) 103121

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J. Account. Public Policy

journal homepage: www.elsevier.com/locate/jaccpubpol

Do earnings reported under IFRS tell us more about

future earnings and cash ows?
T.J. Atwood a, Michael S. Drake b, James N. Myers c, Linda A. Myers c,
a
b
c

Accounting Department, College of Business, Florida State University, United States

Department of Accounting and MIS, Fisher College of Business, The Ohio State University, United States
Department of Accounting, Sam M. Walton College of Business, University of Arkansas, United States

a r t i c l e
Article history:

i n f o

a b s t r a c t
We contribute to the debate about the relative benets and costs of
International Financial Reporting Standards (IFRS) adoption by
examining whether earnings persistence and the association
between current accounting earnings and future cash ows differ
for rms reporting under IFRS versus rms reporting under United
States Generally Accepted Accounting Principles (U.S. GAAP) and
rms reporting under non-U.S. domestic accounting standards
(DAS). Using samples comprised of 58,832 rm-year observations
drawn from 33 countries from 2002 through 2008, we nd that
positive earnings reported under IFRS are no more or less persistent than earnings reported under U.S. GAAP but losses reported
under IFRS are less persistent than losses reported under U.S.
GAAP. Moreover, we nd that earnings reported under IFRS are
no more or less persistent and are no more or less associated with
future cash ows than earnings reported under non-U.S. DAS.
However, we nd that earnings reported under U.S. GAAP are more
closely associated with future cash ows than earnings reported
under IFRS. This is important if a key role of reported earnings is
to help investors form expectations about future cash ows. These
results should be of interest to academics and standard-setters as
they debate the merits of transitioning to IFRS, and to parties
who use reported earnings to form expectations about future earnings and cash ows.
2010 Elsevier Inc. All rights reserved.

Corresponding author. Tel.: +1 479 575 5227; fax: +1 479 575 2863.
E-mail address: LMyers@walton.uark.edu (L.A. Myers).
0278-4254/$ - see front matter 2010 Elsevier Inc. All rights reserved.
doi:10.1016/j.jaccpubpol.2010.10.001

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1. Introduction
In this paper, we examine whether earnings persistence and the association between current
accounting earnings and future cash ows differ for rms reporting under International Financial
Reporting Standards (IFRS) versus domestic accounting standards (DAS). We consider two forms of
DAS United States Generally Accepted Accounting Principles (U.S. GAAP) and non-U.S. DAS. Our
study is motivated by the initiative to establish a uniform set of international accounting standards,
which has gained considerable momentum in recent years. Firms in 117 countries, including all
publicly listed European Union (E.U.) rms, currently prepare their nancial statements in conformity with IFRS. Moreover, Canada, India, and Korea are set to adopt IFRS by 2011, the G-20 target date
(Heffes, 2009) and Japan began allowing listed companies to le under IFRS for scal years ending
after March 2010 (FSA, 2009). In the U.S., the move towards adopting a global set of accounting standards gained momentum in 2007 and 2008 when the Securities Exchange Commission (SEC) announced its decision to no longer require foreign corporations listed in the U.S. to reconcile
between IFRS and U.S. GAAP (SEC Release 33-8879) and proposed a roadmap for the mandatory
adoption of IFRS by U.S. rms (SEC Releases 33-8982; 34-58960). However, the SEC subsequently delayed making a nal decision on the proposed roadmap. Although the momentum towards the adoption of IFRS in the U.S. has slowed, the Financial Accounting Standards Board (FASB) and the
International Accounting Standards Board (IASB) have recommitted to converging U.S. GAAP and IFRS
by 2011 (Defelice, 2009).
The movement toward global acceptance of IFRS has generated considerable attention and debate.
Proponents maintain that requiring U.S. rms to report under IFRS will enhance the comparability of
nancial reports across countries and will bring greater efciency to rms reporting across multiple
jurisdictions (Covrig et al., 2007; Kim et al., 2007; Turley, 2007; Barth et al., 2008). Furthermore, some
proponents also maintain that since IFRS relies on a principles-based system, it is more likely to deter
fraud (Carmona and Trombetta, 2008). Opponents suggest that requiring U.S. rms to adopt IFRS will
be costly and that the benets of comparability may not be realized due to disparities in the application of IFRS across countries (Ciesielski, 2007; FFSA and AFG, 2007; Herz, 2007; Soderstrom and Sun,
2007; Turner, 2007; Holthausen, 2009; Sunder, 2009; Kvaal and Nobes, 2010; Hail et al., 2010, forthcoming). In addition, in 2009, SEC Chairman Mary Schapiro expressed reservations about the IASB and
about the quality of IFRS (Forgeas, 2008; Cohn, 2009; Leone, 2009). More recently, Howell (2010) reports that plans for the U.S. to move to global standards are vulnerable to major delays and that chief
executive ofcers have expressed concerns about incurring costs to convert to IFRS when the benets
of conversion are not clear. Finally, existing research has led some academics to suggest that competition between U.S. GAAP and IFRS is preferable to convergence of the standards or to the mandatory
adoption of IFRS by U.S. rms (Jamal et al., 2008, 2009; Sunder, 2009; Bradshaw et al., 2010; Kothari
et al., 2010).
We contribute to this debate by examining whether earnings persistence and the association
between current accounting earnings and future cash ows differ between IFRS versus DAS (both
U.S. GAAP and non-U.S. DAS). Our focus on earnings persistence is motivated by prior research (discussed below) suggesting that earnings management and analyst forecast errors differ for rms
reporting under IFRS versus DAS (Ashbaugh and Pincus, 2001; Barth et al., 2008; Ernstberger et al.,
2008; Jeanjean and Stolowy, 2008; Chen et al., 2010) and that earnings are more value-relevant under
IFRS than under DAS in some countries (Bartov et al., 2005; Ndubizu and Sanchez, 2006; Barth et al.,
2008). These differences may be due to differences in earnings persistence for rms reporting under
IFRS. Thus, we test whether earnings reported under IFRS are more persistent than earnings reported
under DAS.
Our focus on the association between current reported earnings and future cash ows is motivated
by the conceptual frameworks issued by both the FASB and the IASB, which suggest that nancial
reporting should provide information helpful to users in predicting future cash ows (e.g., FASB,
1978, Con 1; IASB, paragraph 10). Thus, the association between current earnings and future cash
ows is one measure of earnings quality that is consistent with the objectives set forth in both the
FASB and IASB conceptual frameworks.

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105

Using a sample of 58,832 rm-year observations drawn from 33 countries from 2002 through 2007,
we conduct empirical tests that examine earnings persistence and the association between earnings
and future cash ows for rms reporting under IFRS relative to two control samples. The rst control
sample (the U.S. GAAP sample) consists of all rm-year observations reporting under U.S. GAAP. The
second control sample (the non-U.S. DAS sample) consists of all rm-year observations reporting under non-U.S. DAS.
When we compare earnings reported under IFRS versus U.S. GAAP, we nd no difference in the persistence of positive earnings across rms reporting under the two standards, but nd that losses reported under IFRS are less persistent than losses reported under U.S. GAAP. Moreover, future cash
ows have a lower association with current earnings reported under IFRS than under U.S. GAAP. However, we nd no evidence of a systematic difference between IFRS and non-U.S. DAS in terms of earnings persistence and/or the association between current earnings and future cash ows. These ndings
are robust to controls for cross-country factors including legal structure, investor rights, ownership
equity, the importance of equity markets, the strength of legal enforcement, book-tax conformity,
country xed effects, and year xed effects.
The results of our study are important for a number of reasons. First, they provide information to
standard-setters and legislators around the world as they weigh the costs and benets of transitioning to IFRS. Our results suggest that earnings reported under IFRS are no more closely associated
with future earnings but are less closely associated with future cash ows than are earnings reported under U.S. GAAP. Hail et al. (2010, forthcoming) suggest that the direct effect of IFRS adoption on the quality of U.S. nancial reporting is likely to be small because U.S. GAAP are of high
quality. However, our results suggest that along at least one dimension the ability to predict future
cash ows the quality of U.S. nancial reporting may actually decline with the adoption of IFRS.
We suggest that this difference in the ability to predict future cash ows supports calls for allowing
competition between IFRS and U.S. GAAP rather than requiring all U.S. rms to adopt IFRS or converging IFRS and U.S. GAAP (Jamal et al., 2008, 2009; Sunder, 2009; Bradshaw et al., 2010; Kothari
et al., 2010).
Second, our results add to the literature on analyst forecast accuracy. We nd that earnings
persistence is not signicantly different for rms reporting under IFRS versus non-U.S. DAS.
Therefore, previously documented differences in analyst forecast accuracy for IFRS versus nonU.S. DAS rms (Ashbaugh and Pincus, 2001; Ernstberger et al., 2008) do not appear to be the result of differences in the underlying persistence of those earnings. Instead, these differences may
be the results of increased disclosures that occur along with the adoption of IFRS (Daske and
Gebhardt, 2006).
Finally, our results should be of interest to investors, analysts, creditors, and other parties who
use reported earnings information to form expectations about future earnings and cash ows. For
example, prior research suggests that lenders charge lower interest rates, extend larger loans, and
impose fewer restrictive covenants on rms that switch from reporting under non-U.S. DAS to
reporting under IFRS (Kim et al., 2007); however, our results show that earnings reported under
IFRS are no more closely related to future earnings and future cash ows than are those reported
under non-U.S. DAS. Furthermore, nancial statement users should take into account the lower
association between current earnings and future cash ows under IFRS as compared to U.S. GAAP
in their prediction models.
The remainder of this paper is organized as follows. Section 2 discusses prior literature and develops our hypotheses. Section 3 describes our empirical models, sample selection, and descriptive statistics. Section 4 discusses the results of our empirical tests, and Section 5 concludes.

2. Prior literature and hypotheses development

Two committees of the American Accounting Association the Financial Accounting Standards
Committee (see Jamal et al., 2008, 2009) and the Financial Reporting Policy Committee of the Financial
Accounting and Reporting Section (see Hopkins et al., 2008; Bradshaw et al., 2010) have reviewed

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the extensive academic literature on IFRS.1 Hopkins et al. (2008) suggest that the decision to eliminate
the previously-required Form 20-F reconciliation between IFRS and U.S. GAAP for foreign registrants is
premature because material differences exist between the two standards, because information in the reconciliation is currently impounded into stock prices, and because differential implementation and
enforcement of standards across countries may reduce the comparability of nancial reports across jurisdictions.2 Jamal et al. (2008, 2009) assert that there is no conclusive evidence that nancial reports prepared using U.S. GAAP are better than reports prepared using IFRS, and recommend that the SEC allow
U.S. companies to choose between IFRS and U.S. GAAP rather than mandate the adoption of IFRS. Similarly, Kothari et al. (2010) provide a survey and economic analysis of the properties of GAAP and conclude that, rather than converging U.S. GAAP with IFRS, competition between the FASB and the IASB
would allow GAAP to better respond to market forces. Soderstrom and Sun (2007) review the literature
on accounting quality and IFRS adoption. They point out that the majority of studies focus on value-relevance, information content, timeliness, and other stock price-related measures, and suggest that these
studies do not provide a complete view of usefulness because they focus solely on how information is
reected in stock market investors expectations. Finally, Bradshaw et al. (2010) conclude that it is not
clear that IFRS reect a set of accounting standards that are of equivalent or greater quality relative that
U.S. GAAP. They suggest that although both IFRS and U.S. GAAP represent high-quality accounting standards, material reconciling items continue to exist.
We extend the literature on the attributes of nancial reports prepared under IFRS by examining
whether current earnings are more or less persistent and/or more or less closely associated with future
cash ows for rms reporting under IFRS versus those reporting under U.S. GAAP or non-U.S. DAS. In a
related study, Gordon et al. (2008) examine a sample of foreign rms that led Form 20-F Reconciliations from IFRS to U.S. GAAP over the period 20042006. They nd that accrual quality, earnings predictability, and cash predictability are not signicantly different overall for the IFRS and U.S. GAAP
earnings measures but do vary with nancial reporting incentives.3 In addition, although they present
data suggesting that earnings persistence, cash persistence, and earnings smoothness are higher for the
IFRS measure, they do not perform statistical tests of signicance on these differences.4 These results
are suggestive but, as the authors state, their sample is composed solely of foreign rms choosing to list
on U.S. stock exchanges, so the inferences may not generalize to a broader sample of rms. In contrast, we
directly examine whether IFRS or U.S. GAAP provides earnings that are more persistent and more closely
associated with future cash ows across a broad spectrum of rms in 33 countries.
Our results should be of interest to many stakeholders (e.g., creditors, customers, suppliers, as well
as investors). While some of these stakeholders are primarily interested in valuation, others are not.
Holthausen and Watts (2001) conclude that contracting, litigation, political considerations, and tax
considerations are all factors affecting the nature of GAAP and that inputs to equity valuation is not
1
This extensive academic literature includes a large number of papers addressing various aspects related to the use of IFRS for
nancial reporting. For example, Tarca (2004) and Francis et al. (2008) study factors leading rms to voluntarily adopt IFRS. Leuz
and Verrecchia (2000), Dargenidou et al. (2006), Daske (2006), Kim and Shi (2007, 2008), Kim et al. (2007), Daske et al. (2008),
Platikanova (2009), and Wu and Zhang (2009) study the economic benets and costs of adopting IFRS. Kinnunen et al. (2000),
Ashbaugh and Olsson (2002), Bartov et al. (2005), Lin and Chen (2005), LaPointe-Antunes et al. (2006), Ndubizu and Sanchez
(2006), Barth et al. (2008), and Gjerde et al. (2008) study the value-relevance and/or information content of earnings under IFRS
versus DAS. Harris and Muller (1999), Niskanen et al. (2000), Lin and Chen (2005), Christensen et al. (2009), Schadewitz and Vieru
(2007), Chen and Sami (2008), and Henry et al. (2009) study the properties and value-relevance of reconciliations from IFRS to DAS,
and Chen et al. (1999), Ashbaugh and Pincus (2001), Daske and Gebhardt (2006), Haverty (2006), LaPointe-Antunes et al. (2006),
Soderstrom and Sun (2007), Van der Meulen et al. (2007), Barth et al. (2008), and Christensen et al. (2009) study the attributes of
nancial statements prepared using IFRS.
2
Consistent with this, Henry et al. (2009) nd that reported net income was 59 (29) percent higher in 2004 (2005) under IFRS
than under U.S. GAAP for 83 E.U. companies cross-listed in the U.S. and providing Form 20-F reconciliations.
3
Gordon et al. (2008) measure accrual quality as the standard deviation of the residual from a regression of accruals on future
year, current year, and previous year cash ows from operations, earnings predictability as the standard deviation of the residual
from a regression of current year net income on prior year net income, and cash predictability as the standard deviation of the
residual from a regression of current year operating cash ows on prior year operating cash ows and accruals.
4
Gordon et al. (2008) measure earnings persistence as the estimated coefcient on previous year net income from a regression
of current year net income on previous year net income, cash persistence as the estimated coefcient on previous year operating
cash ows from a regression of current year operating cash ows on previous year operating cash ows and accruals, and earnings
smoothness as the standard deviation of net income divided by the standard deviation of operating cash ows.

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107

a dominant force. Moreover, Barth et al. (2001) focus on future cash ows rather than share prices because cash ow is a primitive valuation construct and share prices fail to accurately reect the differential persistence of accruals and cash ows. For these reasons, we focus directly on earnings
persistence and the association between current earnings and future cash ows rather than on the
relation between current earnings and stock prices or changes in stock prices.
Prior research suggests that there are signicant differences between earnings reported under IFRS
and DAS, including U.S. GAAP (Haverty, 2006; Ding et al., 2007; Hopkins et al., 2008; OConnell and
Sullivan, 2008; Henry et al., 2009). Earnings reported under IFRS may differ from earnings reported
under DAS in terms of persistence or in the usefulness of earnings for predicting future cash ows because of differences in reporting exibility. Specically, IFRS are commonly viewed as being more
principles-based, while DAS, at least in some countries (and especially in the U.S.), are more rulesbased (Ijiri, 2005; Bennett et al., 2006; Reilly, 2007).5 Carmona and Trombetta (2008) argue that
rules-based standards impose uniform accounting treatment on rms operating in different circumstances and this uniformity imposes an informational cost because it reduces the information that can
be extracted from observing the rms accounting policy choices. However, Bradshaw and Miller
(2008) argue that harmonizing standards does not necessarily result in a harmonization of accounting
practices. Sunder (2009) further argues that standards become more rules-based over time in response
to business and political pressures and that applying a single set of principles-based standards to all
companies worldwide will not necessarily make nancial reports more comparable or assist nancial
statement users in making better decisions.6
If managers use the increased reporting exibility under IFRS to convey private information, earnings reported under IFRS may be more persistent and/or more closely associated with future cash
ows than earnings reported under U.S. GAAP or non-U.S. DAS. However, if managers use their discretion to report earnings optimistically or opportunistically, earnings reported under IFRS may be less
persistent and/or less closely associated with future cash ows than earnings reported under U.S.
GAAP or non-U.S. DAS.
Results from prior studies of analyst forecast errors suggest that earnings persistence may differ for
rms reporting under IFRS versus U.S. GAAP or non-U.S. DAS (although these studies do not explicitly
examine earnings persistence). For example, Ashbaugh and Pincus (2001) nd that analyst forecast errors are smaller after the adoption of IFR. However, Ernstberger et al. (2008) nd that analyst forecasts
are more accurate when rms report under U.S. GAAP versus IFRS, and nd that analyst forecast accuracy improves for German rms switching from German GAAP to IFRS or to U.S. GAAP, but not from
U.S. GAAP to IFRS, or from IFRS to U.S. GAAP. We suggest these differences may be due to differences in
the persistence of earnings reported under IFRS, U.S. GAAP, and non-U.S. DAS.
Prior studies of earnings properties also suggest that earnings persistence may differ for rms
reporting under IFRS versus U.S. GAAP or non-U.S. DAS. Barth et al. (2008) nd evidence of less earnings management, more timely loss recognition, and more value-relevance for rms reporting under
IFRS versus matched samples of rms reporting under non-U.S. DAS.7 In contrast, Chen et al. (2010)
nd more earnings smoothing and less timely recognition of large losses following the mandatory adoption of IFRS in 15 E.U. countries. Similarly, Jeanjean and Stolowy (2008) nd that earnings management
5
Proponents of more principles-based standards argue that they allow managers more discretion to use their judgment to
convey information (PwC 2007a, 2007b, 2007c). Consistent with this, a report written by the Big Four audit rms plus Grant
Thornton and BDO Siedman suggests that virtually all stakeholders favor the idea of one set of principles-based standards and
express concerns about countries, including the U.S., that rely on overly prescriptive rules-based standards (Leone, 2008; Taub,
2008).
6
For example, U.S. GAAP and IFRS often differ with respect to revenue recognition. The more principles-based nature of IFRS
often allows technology companies to recognize revenues much earlier than under U.S. GAAP. However, a survey by BDO Siedman
found that 60% of the technology company chief nancial ofcers surveyed agree that revenue recognition rules for technology
rms are better under U.S. GAAP than under IFRS (Johnson, 2008).
7
More specically, Barth et al. (2008) nd the variability of the change in net income (scaled by total assets) is signicantly
larger and the magnitude of the negative correlation between accruals and cash ows is signicantly smaller for rms reporting
under IFRS than for rms reporting under non-U.S. DAS. In addition, rms reporting under IFRS recognize large losses more
frequently than do rms reporting under non-U.S. DAS. They nd no signicant difference in the ratio of the variability of net
income changes to the variability of cash ow changes or in the frequency of small positive earnings numbers across the two
groups.

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did not decline following the mandatory adoption of IFRS in Australia, France, and the United Kingdom.
Although these studies suggest that the properties of earnings differ across reporting standards, they do
not test for differences in earnings persistence.
In summary, both Ashbaugh and Pincus (2001) and Ernstberger et al. (2008) nd differences in analyst forecast accuracy across rms reporting under IFRS, U.S. GAAP, and non-U.S. DAS, and Barth et al.
(2008) and Chen et al. (2010) nd differences in earnings properties, including smoothing, timeliness
of loss recognition, and value-relevance, across reporting standards. These ndings are consistent with
differences in earnings persistence across standards; however, they provide conicting predictions as
to whether earnings persistence is expected to be higher or lower under IFRS versus U.S. GAAP or nonU.S. DAS. Thus, we examine whether, on average, earnings persistence is higher or lower under IFRS, as
compared to U.S. GAAP or non-U.S. DAS, but we make no directional predictions.
We also examine the associations between current earnings and future cash ows. The conceptual
frameworks of the FASB and the IASB uniformly suggest that nancial reports should provide information helpful to users in evaluating the rms ability to generate future cash ows. For example, the U.S.
FASBs conceptual framework states that nancial reporting should provide information helpful to
users in assessing the amounts, timing, and uncertainty of prospective net cash inows (FASB,
1978, Con 1). The IASBs conceptual framework states that nancial statements should provide information helpful to users in evaluating an enterprises ability to generate cash and cash equivalents, and
should provide information about the timing and certainty of those future cash ows (IASB, paragraph
10). Moreover, the IASBs framework states that the objective of nancial reporting is to provide information about the nancial position, performance, and changes in nancial position of an enterprise
(IASB, paragraphs 1214).
Managers may also use the increased reporting exibility available under IFRS (as discussed above)
to convey more information about future cash ows. Badertscher et al. (2010) nd that for a sample of
U.S. rms that meet or beat analyst forecasts and subsequently restated earnings, the initially reported
(i.e., misstated) earnings were less positively associated with one-period-ahead cash ows than were
the restated earnings. However, for rms that did not meet or beat analyst forecasts, initially reported
earnings were more positively associated with one-period-ahead cash ows than were restated earnings. Thus, managers can use their discretion over reported earnings to provide more or less information about future cash ows. Because of this, greater reporting exibility under IFRS may result, on
average, in a higher or lower association between current earnings and future cash ows, so we examine whether current earnings reported under IFRS are, on average, more or less closely associated with
future cash ows than are earnings reported under U.S. GAAP or non-U.S. DAS, but again make no
directional predictions.
3. Empirical models, sample selection, and descriptive statistics
3.1. Empirical models
We test for differences in earnings persistence and associations between current earnings and future cash ows across reporting regimes using the following models (country and rm subscripts are
suppressed)8:

EARNt1 IFRS  a0 a1 EARNt a2 LOSSt a3 EARN  LOSS GAAP=DAS

 c0 c1 EARN c2 LOSSt c3 EARN  LOSS hcountry hyear et

CFOt1 IFRS  b0 b1 EARN b2 LOSS b3 EARN  LOSS GAAP=DAS

 x0 x1 EARNt x2 LOSS x3 EARN  LOSS wcountry wyear kt

where EARN = net income before extraordinary items (Compustat Global data Item #32); CFO = cash
ows from operations, measured as EARN  accruals, where accruals are calculated as the change
8

We assess the statistical signicance of all of our models using Rogers standard errors, clustered by rm.

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109

in noncash current assets (Item #75Item #60) less the change in current liabilities (Item #104) plus
the change in the current portion of long-term debt (Item #94) plus depreciation (Item #11), following
Pincus et al. (2007); LOSS = an indicator set to one if EARN is negative in year t, zero otherwise;
IFRS = an indicator set to one for rms in the IFRS sample, zero otherwise; GAAP = an indicator set
to one for rms in the U.S. GAAP sample, zero otherwise; DAS = an indicator set to one for rms in
the non-U.S. DAS sample, zero otherwise; hcountry = country xed effects in the future earnings model9;
hyear, year xed effects in the future earnings model; wcountry = country xed effects in the future cash
ows model; and wyear = country xed effects in the future cash ows model.
We scale both EARN and CFO by average total assets (Item #89). We include LOSS and the interaction EARN  LOSS in our regressions to allow for differences in earnings persistence and in the association between current earnings and future cash ows across rms reporting current year prots
versus losses.10 Hayn (1995) and Collins et al. (1999) conclude that losses are less informative than profits about a rms future prospects. Since the publication of these studies, the partitioning of prot and
loss rms has become common in empirical research on rms reporting under U.S. GAAP.11 Moreover,
Bartov et al. (2005) nd that the relation between earnings and returns differs for prot and loss rms
reporting under IFRS and Ndubizu and Sanchez (2006) conclude that losses reported by Chilean rms
under U.S. GAAP are more timely, conservative, and informative about expected future normal earnings
than are losses reported by Peruvian rms under IFRS. These differences lead us to believe that the relation between current and future earnings and between current earnings and future cash ows may differ
for rms reporting losses versus prots. Moreover, the extent of these differences may be unequal across
rms reporting under U.S. GAAP versus IFRS.
We include year and country variables to control for xed cross-country and time effects. As part of
our sensitivity analyses, we also conduct our tests using the 2 year average future earnings and cash
ows. In addition, we conduct analyses including ve country-level variables from La Porta et al.
(1998) which control for cross-country differences in institutional structures and accounting structures, specically, code- versus common-law, investor rights, ownership concentration, importance
of equity markets, legal enforcement, and book-tax conformity. We describe these results in the
robustness tests section (Section 4).
In models (1) and (2), we stack two regressions into one model: the rst regression is estimated
using IFRS observations only, and the second regression is estimated using GAAP or DAS observations
only.12 Estimating the regressions in a stack allows us to test for statistically signicant differences in the
coefcients. The coefcients on EARN estimate earnings persistence in model (1) and the association between earnings and future cash ows in model (2) for rms that report non-negative earnings in year t.
Thus, we are interested in whether the coefcients on EARN are equal for IFRS and U.S. GAAP or non-U.S.
DAS rms (i.e., we test whether a1 = c1 in model (1) and whether b1 = x1 in model (2)). If a1 (or b1) is
signicantly greater than c1 (or x1), this suggests that earnings persistence is higher (or current earnings
are more closely associated with future cash ows) for rms reporting under IFRS than for rms reporting under U.S. GAAP or non-U.S. DAS when those rms report non-negative earnings. Similarly, if a1 (or
b1) is signicantly less than c1 (or x1), this suggests that earnings persistence is lower (or current earnings are less closely associated with future cash ows) for rms reporting under IFRS than for rms
reporting under U.S. GAAP or non-U.S. DAS when those rms report non-negative earnings.13
9

We follow Hope (2003) in including country indicator variables to control for xed cross-country differences.
Note that allowing the persistence coefcients in our models to vary across prot and loss rms is less restrictive than forcing
the coefcients to be the same. That is, if the persistence coefcients for prot and loss rms are equal, then our models will allow
for that relation (i.e., the coefcients will be equal). However, if the persistence coefcients differ for prot versus loss rms, our
models allow for the observed coefcients to differ.
11
See, for example, Joos and Plesko (2005), Klein and Marquardt (2006), Darrough and Ye (2007), Franzen and Radhakrishnan
(2009), Balakrishnan et al. (2010), Dhaliwal et al. (2010), and Li (2010).
12
Our use of stacked regressions is similar to that in Riedl (2004).
13
Note that we estimate the average persistence coefcient by reporting standard (i.e., for all rms reporting under U.S. GAAP,
IFRS, or domestic standards) rather than estimating a separate persistence coefcient by reporting standard for each country.
Modeling the later would require that we include an interactive effect for each country-standard and would make estimation of the
model non-tractable. Because of this, we focus our analyses on the average persistence level for IFRS, Domestic Standards, and US
GAAP rms. In addition, we acknowledge that accounting quality may differ across countries within these sub-samples. However,
we suggest that this may induce noise rather than bias.
10

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We are also interested in the summed coefcients on EARN and on the interaction term EARN LOSS (i.e., in a1 + a3 and c1 + c3), which estimate earnings persistence and the association between
earnings and future cash ows respectively for rms that report losses in year t. Thus, we perform similar tests of equality across reporting standards to investigate whether earnings persistence and the
association between current earnings and future cash ows differ for loss rms (i.e., we test whether
a1 + a3 = c1 + c3 for model (1) and whether b1 + b3 = x1 + x3 for model (2)).
3.2. Sample selection
To select our sample, we obtain all rm-year observations from the Compustat Global Industrial/
Commercial le from 2002 through 2008 with sufcient data to calculate our accounting variables.14
We begin our sample period in 2002 to correspond with the European Parliament and Councils endorsement of IFRS, which required E.U. rms to prepare their nancial statements in conformity with IFRS
starting in scal 2005. We impose four additional data requirements. First, we follow Bartov et al.
(2005) and delete observations that do not provide fully consolidated nancial data. Second, we delete
any observations where the rm changed from domestic standards to IFRS in the current or future year.15
Third, we delete observations in the top or bottom 1/2% of the distributions of our continuous accounting
variables in each year to remove potential outliers. Finally, we require countries to have at least 40
usable observations with sufcient data in the year to be included in the sample,16 and include only
observations from countries with La Porta et al. (1997, 1998) proxies for country-level institutional structures and accounting structures (i.e., legal origin, investor rights, ownership concentration, the importance of the equity market, and the strength of the legal enforcement).
These restrictions result in a nal sample of 58,832 rm-year observations drawn from 33 countries. Table 1 presents a list of the countries in our sample and partitions on whether the country allows rms to report under IFRS during at least part of our sample period. Table 1 also provides the
number of sample observations from each country. The majority of countries included in our sample
allow the use of IFRS (25 versus 8); however, more observations are drawn from countries that do not
allow IFRS (N = 31,601) than from countries that allow IFRS (N = 27,231). Furthermore, for those observations drawn from countries that do not allow IFRS (N = 31,601), more observations are drawn from
countries other than the U.S. (N = 20,243) than from the U.S. (N = 11,358).
3.3. Sub-sample construction
We use the Compustat Global accounting standard variable (data item = ASTD) to classify observations into two groups. Consistent with Daske et al. (2008), the IFRS group consists of observations with
ASTD codes of DI, DA, or DT. The U.S. GAAP group consists of observations with ASTD codes of DU, MU,
or US. The non-U.S. DAS group consists of observations with ASTD codes of DD, DO, DR, DS, MI, or LJ.
Our tests investigate the earnings persistence and the associations between current earnings and future cash ows for IFRS versus U.S. GAAP rms and for IFRS versus non-U.S. DAS rms.
3.4. Descriptive statistics
In Table 2, Panel A, we present descriptive statistics for the test variables in models (1) and (2) for
our full sample. Approximately 10% of all observations report under IFRS (so 20% of rm-year observations from countries that allow IFRS report under IFRS) and 27% of sample observations report a loss.
In Panel B, we present Spearman and Pearson correlations. The correlations between current earnings
14
Since the dependent variables in models (1) and (2) are future earnings and future cash ows, respectively, the dependent
variables are from 2003 through 2008.
15
Our empirical tests require 2 years of data so this requirement ensures that the standards used are consistent between years t
and t + 1.
16
We require 40 usable observations in a year to ensure that our results are not driven by extremely small samples in particular
countries.

T.J. Atwood et al. / J. Account. Public Policy 30 (2011) 103121

111

Table 1
Sample countries and reporting practices under IFRS.
Country

Countries having resident rms reporting under IFRS

Australia
3939
Austria
204
Belgium
275
Brazil
482
Denmark
380
Finland
366
France
1847
Germany
2004
Greece
257
Hong Kong
589
Indonesia
834
Italy
713
Korea
1059
Malaysia
3018
Mexico
293
Netherlands
440
Norway
382
Philippines
331
Singapore
1750
South Africa
590
Spain
408
Sweden
776
Switzerland
736
Thailand
1291
U.K.
4267
Total

27,231

Countries having no resident rms reporting under IFRS

Canada
1855
Chile
391
India
555
Ireland
84
Japan
12,917
New Zealand
342
Taiwan
4099
U.S.
11,358
Total

31,601

and future earnings and between current earnings and future cash ows are positive and signicant
(p 6 0.01).
In Table 3, we present descriptive statistics (i.e., means and medians) by reporting regime and test
for differences across reporting regimes. We nd that observations reported under IFRS have signicantly higher mean and median future earnings, future cash ows, and current earnings than do
observations reported under U.S. GAAP or non-U.S. DAS. We also nd that rms reporting under IFRS
have a signicantly lower incidence of losses than rms reporting under either U.S. GAAP or non-U.S.
DAS.
4. Empirical results
4.1. IFRS versus U.S. GAAP
In this section, we investigate whether earnings are more or less persistent and/or more or less closely associated with future cash ows under IFRS versus U.S. GAAP. These comparisons are especially
important given that foreign rms are no longer required to reconcile earnings reported under IFRS to

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Table 2
Descriptive statistics and correlations.
Variable

Mean

Panel A: Descriptive statistics

EARNt+1
0.006
CFOt+1
0.040
EARNt
0.000
27%
LOSSt
IFRS
10%
GAAP
20%
DAS
70%
N
58,832
EARNt+1

CFOt+1

Std. dev.

Q1

Median

Q3

0.158
0.168
0.159

0.000
0.003
0.006

0.032
0.062
0.028

0.072
0.118
0.068

EARNt

LOSSt

IFRS

Panel B: Pearson (above the diagonal) and spearman (below the diagonal) correlations
0.801
0.673
0.484
0.047
EARNt+1
CFOt+1
0.659
0.577
0.395
0.049
EARNt
0.729
0.492
0.638
0.046
LOSSt
0.533
0.375
0.769
0.041
IFRS
0.066
0.060
0.065
0.041
GAAP
0.044
0.047
0.033
0.028
0.166
DAS
0.081
0.080
0.071
0.002
0.501

GAAP

DAS

0.003
0.010
0.016
0.028
0.166

0.028
0.041
0.016
0.002
0.501
0.770

0.770

Notes: Bolded text indicates that the correlation is signicant at p < 0.10; EARN = net income before extraordinary items (Item
#32); CFO = cash ows from operations; IFRS = one for rms in the IFRS sample, zero otherwise; GAAP = one for rms in the
GAAP sample, zero otherwise; and DAS = one for rms in the GAAP sample, zero otherwise.

Table 3
Univariate comparisons between observations reporting under IFRS versus non-U.S. domestic accounting standards (non-U.S. DAS)
and under IFRS versus U.S. domestic accounting standards (U.S. GAAP).
IFRS

U.S.
GAAP

Non-U.S.
DAS

IFRS versus U.S.

GAAP

IFRS versus. non-U.S.

DAS

Non-U.S. DAS versus. U.S.

GAAP

5724

11,946

41,162

EARNt+1
Mean
(t-stat)
Median
(Z-stat)

0.028

0.005

0.003

(9.33)***

(11.71)***

(1.19)

0.045

0.040

0.028

(6.10)***

(18.36)***

(13.26)***

CFOt+1
Mean
(t-stat)
Median
(Z-stat)

0.065

0.043

0.035

(8.40)***

(12.59)***

(4.44)***

0.080

0.073

0.057

(5.64)***

(16.79)***

(13.93)***

EARNt
Mean
(t-stat)
Median
(Z-stat)

0.023

0.005

0.001

(10.39)***

(10.88)***

(1.97)**

0.042

0.036

0.025

(7.28)***

(17.71)***

(10.47)***

LOSSt
Mean
(t-stat)

21%

29%

27%

(11.27)***

(8.97)***

(5.23)***

Notes: All variables are dened as in Table 2; IFRS = the IFRS sample; non-U.S. DAS = the non-U.S. domestic accounting standards
sample; and U.S. GAAP = the U.S. domestic accounting standards sample.
**
Signicance at 5%.
***
Signicance at 1%.

U.S. GAAP and because U.S. rms may be transitioning from U.S. GAAP to IFRS over the next few years.
We rst test for differences across the IFRS and U.S. GAAP samples using all sample observations re-

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Table 4
Tests of associations between current earnings and future earnings for observations reporting under IFRS versus U.S. GAAP.

EARNti IFRS  a0 a1 EARNt a2 LOSSt a3 EARNt  LOSSt  GAAP  c0 c1 EARNt

c2 LOSSt c3 EARNt  LOSSt  hcountry hyear et

IFRS

Panel A: 1-year-ahead (i = 1)

Panel B: 2-year-ahead avg.

((i = 1 + i = 2)/2)

IFRS sample

IFRS sample

LOSS
EARN  LOSS
Country indicators
Year indicators
Adjusted R2
N
Test of coefcient equality
EARN (test a1 = c1)
EARN  LOSS (test a3 = c3)
EARN + EARN  LOSS (test
a1 + a3 = c1 + c3)

U.S. GAAP
sample

0.026
(3.53)***

GAAP
EARN

0.707
(23.21)***
0.032
(4.61)***
0.237
(3.85)***
Yes
Yes
0.522
17,670
Diff
0.007
(0.18)
0.198
(2.84)***
0.205
(3.49)***

U.S. GAAP
sample

0.046
(2.45)**
0.034
(3.60)***
0.714
(33.35)***
0.021
(4.95)***
0.038
(1.16)
Yes
Yes

0.643
(15.09)***
0.020
(2.61)***
0.158
(2.33)**
Yes
Yes
0.522
17,670

0.055
(2.69)***
0.641
(25.85)***
0.012
(1.93)*
0.029
(0.57)
Yes
Yes
0.435
12,731

Diff
0.001
(0.03)
0.187
(2.20)**
0.186
(2.49)**

Notes: All variables are dened as in Table 2; t-stats (in parentheses) are based on standard errors clustered by rm.
*
Signicant at 10%.
**
Signicant at 5%.
***
Signicant at 1%.

ported under IFRS regardless of the country of origin and all sample observations reported under U.S.
GAAP regardless of the country of origin. Here, N = 17,670.
Table 4, Panel A presents the results for model (1), comparing 1-year-ahead earnings persistence
for observations reported under IFRS versus U.S. GAAP. The earnings persistence parameters are signicantly positive at approximately 0.71 for both samples (a1 = 0.707 for IFRS rms and c1 = 0.714
for U.S. GAAP rms) and a test of equality reveals that they do not differ across accounting standards
(i.e., for the test of a1 c1, p > 0.10, so we do not reject the null hypothesis that a1 = c1). Thus, positive
earnings reported under IFRS are no more or less persistent than positive earnings reported under U.S.
GAAP. For the IFRS sample, the persistence of current reported losses (a1 + a3 = 0.470) is lower than
the persistence of prots (a1 = 0.707) and this difference is signicant (a3 = 0.237, p 6 0.01). In contrast, for U.S. GAAP rms, the persistence of losses (c1 + c3 = 0.676) and the persistence of prots
(c1 = 0.714) are not signicantly different (i.e., for the test of c3 0, p > 0.10, so we do not reject the
null hypothesis that c3 = 0). Furthermore, a joint test of equality reveals that the persistence of losses
reported under IFRS (a1 + a3 = 0.470) is lower than the persistence of losses reported under U.S. GAAP
(c1 + c3 = 0.676) and this difference is signicant (i.e., for the test a1 + a3 c1 + c3, p 6 0.01, so we reject the null hypothesis that a1 + a3 = c1 + c3). This may be due to rms ability to report signicantly
higher earnings under IFRS in general (OConnell and Sullivan, 2008; Henry et al., 2009), which makes
reported losses less likely to occur, or due to more frequent recognition of large losses under IFRS
(Barth et al., 2008).17
17
Barth et al. (2008) compares IFRS rms to non-U.S. DAS rms and conclude that the non-U.S. DAS rms smooth earnings by
delaying the effects of negative outcomes, resulting in less timely loss recognition.

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T.J. Atwood et al. / J. Account. Public Policy 30 (2011) 103121

Table 5
Tests of associations between current earnings and future cash ows for observations reporting under IFRS versus under U.S. GAAP.

CFOti IFRS  b0 b1 EARNt b2 LOSSt b3 EARNt  LOSSt  GAAP  x0 x1 EARNt

x2 LOSSt x3 EARNt  LOSSt  wcountry wyear et

IFRS

Panel A: 1-year-ahead (i = 1)

Panel B: 2-year-ahead
avg.((i = 1 + i = 2)/2)

IFRS sample

IFRS sample

LOSS
EARN  LOSS
Country indicators
Year indicators
Adjusted R2
N
Test of coefcient equality
EARN (test b1 = x1)
EARN  LOSS (test b3 = x3)
EARN + EARN  LOSS (test
b1 + b3 = x1 + x3)

U.S. GAAP
sample

0.057
(5.52)***

GAAP
EARN

0.568
(13.29)***
0.007
(0.95)
0.073
(1.14)
Yes
Yes
0.469
17,670
Diff
0.100
(1.96)**
0.064
(0.87)
0.164
(3.01)***

U.S. GAAP
sample

0.089
(4.62)***
0.062
(4.92)***
0.668
(24.25)***
0.010
(2.20)**
0.009
(0.25)
Yes
Yes

0.522
(10.48)***
0.003
(0.40)
0.037
(0.49)
Yes
Yes
0.471
12,602

0.095
(4.48)***
0.623
(21.54)***
0.005
(0.97)
0.011
(0.24)
Yes
Yes

Diff
0.100
(1.74)*
0.048
(0.55)
0.148
(2.12)**

Notes: All variables are dened as in Table 2; t-stats (in parentheses) are based on standard errors clustered by rm.
*
Signicant at 10%.
**
Signicant at 5%.
***
Signicant at 1%.

Table 5, Panel A presents the results for model (2), comparing the association between current
earnings and 1-year-ahead cash ows for observations reported under IFRS versus U.S. GAAP. Here,
we nd that current earnings are signicantly positively associated with future cash ows for rms
reporting prots under IFRS (b1 = 0.568) and under U.S. GAAP (x1 = 0.668) but, importantly, tests of
equality reveal that the association between current earnings and future cash ows is signicantly
more positive for prot rms reporting under U.S. GAAP than for prot rms reporting under IFRS
(b1 x1, p 6 0.05). For both IFRS and U.S. GAAP rms, the association between current year losses
and future period cash ows is not signicantly different from the association between current year
prots and future period cash ows (b3 = 0, x3 = 0). Similarly, current earnings are signicantly positively associated with future cash ows for rms reporting losses under IFRS (b1 + b3 = 0.495) and under U.S. GAAP (x1 + x3 = 0.659) but, importantly, tests of equality reveal that the association between
current earnings and future cash ows is signicantly more positive for loss rms reporting under U.S.
GAAP than for loss rms reporting under IFRS (b1 + b3 x1 + x3, p 6 0.01).
Overall, Tables 4 and 5 reveal that, on average, losses reported under U.S. GAAP provide more information for predicting future earnings than do losses reported under IFRS and both prots and losses
reported under U.S. GAAP provide more information for predicting future cash ows than do prots
and losses reported under IFRS.
4.2. IFRS versus non-U.S. DAS
We next compare earnings persistence and the association between earnings and future cash ows
for the IFRS and non-U.S DAS samples, using all available sample observations reporting under IFRS

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T.J. Atwood et al. / J. Account. Public Policy 30 (2011) 103121

regardless of country of origin and under non-U.S. DAS regardless of country of origin. Here,
N = 46,886.
Table 6, Panel A presents the estimation results for model (1), which measures 1-year-ahead earnings persistence. The earnings persistence coefcients are positive and signicant for earnings reported under both IFRS (a1 = 0.709) and non-U.S. DAS (c1 = 0.736), and a test of equality reveals
that these coefcients are not signicantly different across the two samples (i.e., for the test
a1 c1, p > 0.10, so we do not reject the null hypothesis that a1 = c1). While earnings persistence is
also lower for loss rms than for prot rms in both samples (a1 + a3 = 0.465 for IFRS rms and
c1 + c3 = 0.538 for non-U.S. DAS rms), the persistence of reported losses is not signicantly different
for rms reporting under IFRS versus non-U.S. DAS. Thus, we nd no evidence that earnings are more
or less persistent under IFRS than under non-U.S. DAS.
Table 7, Panel A presents the estimation results for model (2), which tests the associations between
current earnings and 1-year-ahead cash ows. As is the case for the earnings model, we nd that the
association between current earnings and future cash ows is signicant and positive under both
reporting regimes (for prot rms, b1 = 0.565 under IFRS and x1 = 0.619 under non-U.S. GAAP; for loss
rms, b1 + b3 = 0.488 under IFRS and x1 + x3 = 0.525 under non-U.S. GAAP), and these associations are
not signicantly different across the two reporting regimes. Moreover, the association between current earnings and future cash ows is signicantly lower for rms reporting losses than for rms
reporting prots for the non-U.S. DAS sample (x3 = 0.094) but this association is not signicantly different for prot versus loss rms reporting under IFRS. Finally, joint tests of equality reveal that there

Table 6
Tests of associations between current earnings and future earnings for observations reporting under IFRS versus non-U.S. domestic
accounting standards (non-U.S. DAS).

EARNti IFRS  a0 a1 EARNt a2 LOSSt a3 EARNt  LOSSt  DAS  c0 c1 EARNt

c2 LOSSt c3 EARNt  LOSSt  hcountry hyear et

IFRS

Panel A: 1-year-ahead (i = 1)

Panel B: 2-year-ahead avg.

((i = 1 + i = 2)/2)

IFRS sample

IFRS sample

LOSS
EARN  LOSS
Country indicators
Year indicators
Adjusted R2
N
Test of coefcient equality
EARN (test a1 = c1)
EARN  LOSS (test a3 = c3)
EARN + EARN  LOSS (test
a1 + a3 = c1 + c3)

U.S. GAAP sample

0.029
(5.22)***

DAS
EARN

0.709
(23.86)***
0.033
(4.72)***
0.244
(4.09)***
Yes
Yes
0.446
46,886
Diff
0.026
(0.80)
0.045
(0.72)
0.071
(1.32)

U.S. GAAP
sample

0.035
(5.21)***
0.019
(3.59)***
0.736
(50.42)***
0.028
(12.54)***
0.198
(9.14)***
Yes
Yes

0.644
(15.63)***
0.022
(2.75)***
0.165
(2.49)**
Yes
Yes
0.421
37,867

0.029
(4.86)***
0.665
(38.67)***
0.021
(8.65)***
0.139
(5.18)***
Yes
Yes

Diff
0.021
(0.48)
0.026
(0.37)
0.047
(0.77)

Notes: All variables are dened as in Table 2; t-stats (in parentheses) are based on standard errors clustered by rm. Signicant
at 10%.
**
Signicant at 5%.
***
Signicant at 1%.

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T.J. Atwood et al. / J. Account. Public Policy 30 (2011) 103121

Table 7
Tests of associations between current earnings and future cash ows for observations reporting under IFRS versus non-U.S.
domestic accounting standards (non-U.S. DAS)

CFOti IFRS  b0 b1 EARNt b2 LOSSt b3 EARNt  LOSSt  DAS  x0 x1 EARNt

x2 LOSSt x3 EARNt  LOSSt  wcountry wyear kt
Panel A: 1-year-ahead (i = 1)
IFRS sample
IFRS
DAS
EARN
LOSS
EARN  LOSS
Country indicators
Year indicators
Adjusted R2
N
Test of coefcient equality
EARN (test b1 = x1)
EARN  LOSS (test b3 = x3)
EARN + EARN  LOSS (test
b1 + b3 = x1 + x3)

U.S. GAAP sample

0.070
(9.66)***

0.565
(13.58)***
0.008
(1.06)
0.077
(1.25)
Yes
Yes
0.350
46,886
Diff
0.053
(1.19)
0.017
(0.25)
0.037
(0.73)

2
Panel B: 2-year-ahead avg.
((i = 1 + i = 2)/2)
IFRS sample

U.S. GAAP sample

0.077
(9.07)***
0.067
(9.90)***
0.619
(33.73)***
0.018
(7.18)***
0.094
(3.75)***
Yes
Yes

0.530
(10.85)***
0.002
(0.30)
0.050
(0.69)
Yes
Yes
0.386
37,271

0.080
(10.55)***
0.572
(29.47)***
0.013
(4.91)***
0.058
(2.09)**
Yes
Yes

Diff
0.042
(0.81)
0.008
(0.11)
0.034
(0.55)

Notes: All variables are dened as in Table 2; t-stats (in parentheses) are based on standard errors clustered by rm. Signicant
at 10%.
**
Signicant at 5%.
***
Signicant at 1%.

is no signicant difference in the association between current losses and future cash ows for rms
reporting under IFRS versus rms reporting under non-U.S. DAS.
Together, the results presented in Tables 6 and 7 suggest that earnings reported under IFRS are generally no more or less closely associated with future earnings and/or future cash ows than are earnings reported under non-U.S DAS.
4.3. Robustness test
We perform four robustness tests to examine whether our main results are sensitive to alternative
variable measurements, to additional control variables, to alternative econometric models, or to sample selection. First, we estimate our models using a more long-term measure of future earnings and
cash ows. Specically, we calculate the average future earnings and cash ows using 1- and
2-year-ahead data.18 Our sample size decreases to 12,602 observations for the IFRS versus U.S. GAAP
sample and to 37,271 observations for the IFRS versus non-U.S. GAAP sample. We nd that the results
using the 2-year-ahead average (see Panel B of Tables 47) are qualitatively similar to those reported
using 1-year ahead measures (i.e., Panel A of Tables 47).
18
We do not use 3 years of future data because this severely limits our sample. Here, scal 2005 would be the last base year in
our sample, with future earnings and cash ows being calculated using data from scal 2006, 2007, and 2008. Given that E.U. rms
are required to prepare their nancial statements in conformity with IFRS starting in scal 2005, this methodology would result in
only one potential observation per IFRS rm for those adopting in 2005.

T.J. Atwood et al. / J. Account. Public Policy 30 (2011) 103121

117

Second, we test the robustness of our results to additional control variables. To control for crosscountry differences in institutional and accounting structures, we add variables to models (1) and
(2) that capture cross-country differences in legal systems (code law versus common-law), investor
rights, ownership concentration, importance of equity markets, and legal enforcement from La Porta
et al. (1998) and book-tax conformity from Atwood et al. (2009). The results (untabulated) are qualitatively similar to those reported. We also estimate the model with industry xed effects (untabulated) and nd similar results as well.
Third, we use an alternative econometrical model. Recall that we estimate models (1) and (2) using
a stacked regression approach in order to facilitate the interpretation and comparison of the estimated
coefcients. An alternative is to model the associations using triple interactions as follows:

EARNt1 d0 GAAP=DAS d1 EARNt d2 LOSSt d3 EARN  LOSSt d4 GAAP=DAS  EARNt

d5 GAAP=DASt  LOSSt d6 GAAP=DASt  EARNt  LOSSt hcountry hyear
et

CFOt1 r0 GAAP=DAS r1 EARNt r2 LOSSt r3 EARN  LOSSt r4 GAAP=DAS

 EARNt r5 GAAP=DASt  LOSSt r6 GAAP=DASt  EARNt  LOSSt wcountry
wyear kt

where all variables are dened previously.

In model (3), the coefcients of interest are d4 and d6. The coefcient d4 measures the difference in
earnings persistence when earnings are positive for IFRS versus U.S. GAAP or non-U.S. rms, and
d4 + d6 measures the difference in earnings persistence when earnings are negative for IFRS versus
U.S. GAAP or non-U.S. rms. In model (4), the coefcients of interest are r4 and r6. The coefcient
r4 measures the difference in the association between earnings and future cash ows when earnings
are positive for IFRS versus U.S. GAAP or non-U.S. rms, and r4 + r6 measures the difference in the
association between earnings and future cash ows when earnings are negative for IFRS versus U.S.
GAAP or non-U.S. rms. We estimate models (3) and (4) (untabulated) and nd similar results.19
Finally, to investigate whether our results are a function of those rms that voluntarily elect to
early adopt IFRS, we identify the early adopters in our sample and remove them when we run our
tests. To identify the early adopters, we hand-collect mandatory IFRS adoption dates from the IASB
website. If a rm reports under IFRS in a reporting period before the mandatory adoption date, we
code it is a voluntary adopter and remove it from the sample for this robustness test. We also remove
from the sample any non-U.S. rm that voluntarily elects to report under U.S. GAAP. We nd that 3.4%
of the rms in our sample are removed based on these two additional criteria. The removal of these
rms eliminates unobservable factors associated with the decision to adopt IFRS or U.S. GAAP which
potentially bias our results. We nd that all of our results hold when these rms are omitted.
5. Conclusion
Motivated by the current debate regarding the adoption of IFRS in the U.S., we investigate whether
the use of domestic accounting standards (DAS) versus IFRS is associated with differences in earnings
persistence and the association between current earnings and future cash ows. We use a sample of
rm-year observations from 33 countries to examine differences for rms reporting under IFRS relative to two DAS control samples a sample consisting of all rms reporting under U.S. GAAP (the U.S.
GAAP sample) and a sample consisting of all non-U.S. rms reporting under their local domestic standards (the non-U.S. DAS sample). We nd that current and future earnings are positively associated
19
Specically, when we estimate the models using IFRS and U.S. GAAP rms, we nd that d4 is insignicant (d4 = 0.007, p > 0.10)
and that (d4 + d6) is positive (d4 + d6 = 0.205) and signicant (p < 0.01). Using this sample, we also nd that r4 is positive
(r4 = 0.100) and signicant (p < 0.05) and that (r4 + r6) is positive (r4 + r6 = 0.164) and signicant (p < 0.01). When we estimate
the models using IFRS and non-U.S. GAAP rms, we nd that the coefcient estimates are as follows: d4 = 0.026, (d4 + d6) = 0.071,
r4 = 0.053, and (r4 + r6) = 0.037, but that d4, (d4 + d6), r4, but (r4 + r6) are all insignicantly different from zero.

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T.J. Atwood et al. / J. Account. Public Policy 30 (2011) 103121

and that losses are generally less persistent than prots in all three samples. We further nd no signicant difference in the persistence of positive earnings reported under IFRS versus under U.S. GAAP
or under IFRS versus non-U.S. DAS. However, we nd that losses reported under IFRS are less persistent than losses reported under U.S. GAAP but the persistence of losses reported under IFRS is not signicantly different from the persistence of losses reported under non-U.S. DAS.
We also examine the association between current reported earnings and future cash ows for rms
reporting under IFRS versus U.S. GAAP and non-U.S. DAS. We nd that current earnings are positively
associated with future cash ows across all reporting regimes and nd no difference in the association
between current earnings and future cash ows across prot and loss rms reporting under IFRS and
U.S. GAAP; however, losses reported under non-U.S. DAS are less closely associated with future cash
ows than are prots. More importantly, current earnings and losses reported under U.S. GAAP are
more closely associated with future cash ows than are current earnings and losses reported under
IFRS. These differences suggest that current earnings and losses are more informative about future
cash ows for rms reporting under U.S. GAAP than for rms reporting under IFRS. These ndings
are robust to controls for year and country xed effects and for cross-country factors including legal
structure, investor rights, ownership equity, the importance of equity markets, and the strength of legal enforcement. We nd no signicant differences for IFRS versus non-U.S. DAS rms in terms of associations between current prots or losses and future cash ows.
Our results provide useful information to U.S. standard-setters as they consider the costs and benets of adopting IFRS because they imply that accounting earnings prepared under IFRS tell us less
about future cash ows than accounting earnings prepared under U.S. GAAP even though earnings
persistence is similar across all reporting regimes. Our results suggest that, while IFRS and U.S. GAAP
are both high quality sets of accounting standards, U.S. GAAP is superior with respect to the prediction
of future cash ows. We acknowledge that versions of IFRS have emerged throughout the world and
thus, our tests compare U.S. GAAP to the average of all rms reporting under (some version of) IFRS.
Since we cannot know which version the U.S. will adopt (or whether a new version will emerge), our
statements refer to the average quality of nancial statements currently issued under IFRS.
Acknowledgements
We thank workshop participants at the University of Arkansas for helpful comments and suggestions. James Myers gratefully acknowledges nancial support from the Ralph L. McQueen Professorship at the University of Arkansas, and Linda Myers gratefully acknowledges nancial support from
the Garrison/Wilson Chair at the University of Arkansas.
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