Mandatory Financial Reporting Environment and Voluntary Disclosure: Evidence from Mandatory IFRS Adoption

Using the mandatory adoption of International Financial Reporting Standards (IFRS) as an exogenous improvement to mandatory financial reporting, we document evidence supporting a complementary effect between mandatory and voluntary disclosures. We find that firms in countries that adopted IFRS in 2005 experience an increase in both the likelihood and frequency of management earnings forecasts relative to firms in countries that did not mandate IFRS. We also find that the increase in management forecasts is higher in countries where prior local GAAP are more different from IFRS or legal enforcement is stronger. Consistent with the confirmatory role of mandatory reporting, we also find that the increase in management forecasts following IFRS adoption is significantly mitigated for firms in financial industries, whose financial statements are less verifiable due to fair value estimates. Last, we find that the liquidity effect of IFRS is much larger when firms issue more management forecasts, suggesting that voluntary disclosure is an indirect mechanism through which IFRS brings benefits to capital markets.