Evidence on Fair Value in Profit Forecasts: An Analysis Considering the Idiosyncratic Differences in the Influence of the Legal Systems

Objective: this study examines how fair value (FV) accounting affects the accuracy of financial analysts’ earnings forecasts and whether this effect varies by legal system (Common Law vs. Civil Law) and International Financial Reporting Standards (IFRS) adoption. Methods: using a panel of 1,420 publicly listed companies in 40 countries from 2011 to 2018 (over 32,000 company-quarter observations), we apply generalized linear mixed models to account for the multilevel structure of the data (including time, companies, and countries). We estimate six models to test the direct and interaction effects of FV and IFRS, including stratification by legal system. Results: the results indicate that FV usage is associated with lower forecast errors, especially in Civil Law countries. The interaction between FV and IFRS does not significantly affect accuracy in Common Law countries but enhances forecast precision in Civil Law contexts. Conclusions: these findings highlight the importance of institutional environments in shaping the effectiveness of accounting practices, reinforcing the need for cross-country perspectives in international accounting research.