Does IFRS improve the predictive ability of earnings and cash flows in African capital markets?

Abstract

This paper addresses the question whether adoption of IFRS in African countries was associated with greater predictive abilities of earnings and cash flows. This study is important and timely as International Accounting Standards Board (2010, 2015) asserts that fair value measures increase the predictive ability of earnings and cash flows. Fair value accounting is argued to be a primary measurement or valuation principle of IFRS. Motivated by the IASB views, this paper adopts the Kim and Kross (2005) model to test the developed hypotheses and uses five African countriesꞌ data namely; South Africa, Egypt, Kenya, Morocco and Botswana, for the period from 2002 to 2009. In general, the results indicate that adoption of IFRS does not lead to an increase in the predictive ability of current operating cash flows and earnings. This may be explained by the fair value opponents‘ argument that fair value measures are more transitory, less persistent and less conservative. One policy implication of this study is that; the adoption of IFRS alone is less likely to improve the predictive ability of earnings and cash flows. Due to prevalent nature of mixed legal origins and diverse culture in African countries, further research may examine how these institutional and environmental factors affect the predictive role of IFRS on earnings and cash flows.

Keywords: IFRS, Prediction, Accounting Measurement, Africa

JEL Classification: G14. M40. M41