Introduction of International Accounting Standards, Disclosure Quality and Accuracy of Analysts' Earnings Forecasts

We examine whether the introduction of international accounting standards by German companies has improved the accuracy of analysts' forecasts, and what role changes in the quality of disclosures have played in this process. We develop a structural equation model that allows us to separate the effects of changes in disclosure quality from other effects of the introduction of international accounting standards on forecast errors. Our sample comprises 1,908 firm-years covering the period from 1997 to 2005. We measure disclosure quality with data from a yearly annual-report competition. We find that the introduction of international accounting standards has been associated with a significant improvement in forecast accuracy. Increases in the quality of companies' disclosures appear to have contributed to this improvement. However, the disclosure effect, while significant, explains only a small portion of the overall improvement in forecast accuracy. Further analyses show that differences in disclosure quality are more relevant for German GAAP companies than for IFRS/US GAAP companies. Moreover, only the quality of notes to companies' financial statements appears to matter to analysts; the quality of management reports appears to make no difference. Our results are robust to a variety of tests concerning the sample composition, the operationalisation of variables and the estimation procedure.