Intra-Industry Information Transfer

This study investigates the impact of the implementation of IFRS on intra-industry information transfer. Intra-industry information transfer occurs when an earnings announcement released by a firm contains ‘industry-specific’ information which is informative to investors. Investors can use this information to speculate about the earnings of other firms operating in the same industry. Many firms mandatory adopted IFRS in 2005. The implementation of IFRS should lead to a better comparability between financial figures of different firms what will improve the accounting quality. The increase in accounting quality and the better comparability between annual accounts makes it easier for investor to discover ‘industry-specific’ information and use this information for their investment decision. Therefore I made the assumption that the implementation of IFRS lead to a higher magnitude of intra-industry information transfer. There are different methodologies to measure intra-industry information transfer already used in prior research. I replicate the non-directional methodology of Foster (1981) to measure the magnitude of intra-industry information transfer. This methodology takes the abnormal return variance as a proxy for intra-industry information transfer. The abnormal return variance is the abnormal return of a firms stock surrounding an earnings announcement compared to the abnormal return of the same stock at a non-announcing period. So the abnormal return variance actually shows the reaction of a stock price assignable to the earnings announcement released. To investigate if the magnitude of intra-industry information transfer increased after the implementation of IFRS two different samples are selected, a pre-IFRS period (2001-2004) and a post-IFRS period (2005-2010), which are compared to each other. To get a good insight if the magnitude of intra-industry information transfer is increased a Spearman rank correlation test is performed with the abnormal return variances in both periods. The outcomes of this test for both periods are compared with each other, and show an increase in intra-industry information transfer after the implementation of IFRS.