Product market effects of IFRS adoption

Prior literature finds that International Financial Reporting Standards (IFRS) adopters enjoy lower financing costs subsequent to IFRS adoption. We predict and find that mandatory IFRS adopters exploit lower financing costs to increase market share vis-à-vis non-adopters. This effect is robust across several different model specifications in a sample capturing the universe of public and private firms in the EU, in a matched sample of public and private firms, and in a public firm sample comparing mandatory and voluntary IFRS adopters. We further find that IFRS is associated with an increase (decrease) in industry sales concentration (competition), consistent with large public firms increasing market share. In supplemental analyses, we find that mandatory adopters issue more equity and debt after IFRS adoption and that larger market share gains accrue to those mandatory IFRS adopters that issue more equity and debt after IFRS adoption. Overall, we provide evidence of unintended product market consequences of IFRS adoption.     

IFRS adoption: A costly change that keeps on costing

This paper documents the results of a study exploring the transitionary and ongoing costs incurred by Australian companies from their use of IFRS. A longitudinal survey approach was adopted. Challenging the underlying logic of convergence, survey results highlighted that IFRS is costly for firms both in the lead up to adoption and thereafter. Specifically, the transition to IFRS imposed significant AIS, staff training and development, financial statement user education, and financial statement adjustment costs on many firms. Furthermore, many firms perceived that IFRS adoption has resulted in an ongoing increase of 20% or more on annual accounting and compliance costs.     

IFRS adoption in China and foreign institutional investments

We examine the effectiveness of China’s IFRS adoption from the perspective of an important set of financial report users, foreign institutional investors. We find that foreign institutional investment does not increase after China’s IFRS adoption, and some evidence that it actually declines, particularly among firms with weaker incentives to credibly implement IFRS, or with greater ability to manipulate IFRS’s fair value provisions. We also find that the association between earnings and returns generally declines after IFRS adoption, consistent with reduced earnings quality. In addition, we find that foreign institutional investors’ returns decrease after China’s IFRS adoption. Finally, the decline in foreign institutional investment is greater among investors from countries with weak institutions that have also adopted IFRS. Taken together, our evidence suggests that the weak institutional infrastructure in China’s transitional economy impairs IFRS’s intended goal of attracting institutional investment through improved financial reporting quality. Further, financial information users’ home country institutions and IFRS adoption experience affect the effectiveness of IFRS adoption.     

Structural changes in covenants through the adoption of IFRS in Brazil

This study examines changes in the structure of covenants in debt agreements of companies issuing debentures during the adoption of International Financial Reporting Standards (IFRS) in Brazil. We investigate debt contracts of public and private companies that issued debentures before and after IFRS adoption in Brazil, between the years 2006–2008 and 2011–2014. We develop a database with all covenants from 126 contracts via hand-collected data, with 78 contracts from before IFRS adoption and 48 contracts afterward. We find high increases in covenants after adoption. However, this growth is observed only for restrictive security and non-accounting covenants, excluding clauses with accounting multiples. Our results show that IFRS adoption in Brazil shifted incentives and, as a result, shaped a new structure of debt contracts. Our findings complement and expand previous studies and can be useful to academics, regulators and practitioners by showing that the incentives to use accounting figures and ratios shifted in the credit market after IFRS adoption.     

The impact of IFRS adoption on foreign direct investment

By analyzing a panel data set of over 1300 observations covering 124 countries, for the period from 1996 through 2009, this paper tests the basic argument that the adoption of International Foreign Reporting Standards (IFRSs) by a country results in increased foreign direct investment (FDI) inflows. Analysis of the data using an ordinary least squares (OLSs) approach provides evidence that adoption of IFRS leads to increased FDI inflows. The analysis indicates, however, that the overall increase in FDI inflows from IFRS adoption is due to the increase in FDI inflows by countries with developing, as opposed to developed, economies. A difference-in-difference test confirms these findings. A key potential driver for IFRS adoption by countries with developing economies is the desire to receive financial aid from the World Bank. This factor is explicitly taken into account using a two-stage instrumental variable (IV) model. The results using the IV model provide strong confirmation of the OLS results.     

Mandatory IFRS adoption and executive compensation:Evidence from China

This study investigates how the mandatory adoption of International Financial Reporting Standards(IFRS) affects the contractual benefits of using accounting information to determine executive compensation in China. After controlling for firm and corporate governance characteristics, we find strong evidence supporting the positive role of mandatory IFRS adoption on the accounting-based performance sensitivity of executive compensation. Subsample analysis suggests that improvements in accounting-based performance sensitivity after IFRS adoption differ across regions with various levels of institutional quality and across firms that are affected to a different extent by the adoption. Additional analysis supports the argument that the positive effects of IFRS adoption on the use of accounting performance in executive compensation are driven by the reduction in accounting conservatism associated with IFRS adoption.     

Government quality,auditor choice and adoption of IFRS: A cross country analysis

We examine the association between country-level government quality and firms' choice of external auditors. Using a cross-sectional sample of 142,193 firm-year observations from 46 countries over 1998–2007, we show that the government quality of a country has a significant positive effect on the likelihood of choosing Big 4 auditors by firms in that country. We also show that firms in countries with strong governments that have adopted IFRS are more likely to choose Big 4 than non-Big 4 auditors. To our knowledge, this is the first study of its kind to provide direct evidence on the role of government quality in firms' choice of external auditors. Choice of a Big 4 auditor may be regarded as a proxy for the demand for high quality financial reporting, and thus the results provide insights for policy makers on the importance of government quality toward improving financial reporting quality in a country.     

Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management

This paper examines whether firms substituted real earnings management for accrual-based earnings management after the International Financial Reporting Standards (IFRS) became mandatory. Using a sample of 101,331 firm-year observations from 33 countries between 2000 and 2010, we show that IFRS adoption came with the unintended consequence of certain firms substituting real earnings management for accrual-based earnings management, especially among firms in countries with strict enforcement regimes. Furthermore, we document that the trade-off is confined to EU countries in which strong firm-level characteristics (i.e. the firm-level mechanism of control, the market’s level of scrutiny, and firm-specific incentives to provide transparency) are coupled with strong enforcement. We also show that IFRS had an effect in countries outside the EU, albeit at a different time. Overall, the results suggest that accounting regulators’ efforts to increase earnings quality might have had the unintended consequence of increasing real earnings management activities.     

Changes in the value relevance of goodwill accounting following the adoption of IFRS 3

This study examines the value relevance effects of changes in goodwill accounting in a European setting. International Financial Reporting Standard (IFRS) 3 replaced accounting rules that emphasized goodwill amortization over short useful lives which kept goodwill balances low. Goodwill accounting under IFRS 3 largely relies on manager fair value estimates of acquired business units. Using Swedish data, we show that goodwill amortizations were not value-relevant prior to the adoption of IFRS 3. However, impairments reported in addition to amortization were significantly related to stock returns during that period. In contrast, under the impairment-only regime prescribed by IFRS 3, impairments are no longer statistically related to stock returns.     

IFRS adoption and analysts’ earnings forecasts: Australian evidence

We study 145 large listed Australian firms to explore the impact of international financial reporting standards (IFRS) adoption on the properties of analysts’ forecasts and the role of firm disclosure about IFRS impact. We find that analyst forecast accuracy improves, and there is no significant change in dispersion in the adoption year, suggesting that analysts coped effectively with transition to IFRS. However, we do not observe the expected relationship between firms’ IFRS impact disclosures in their financial statements issued at the end of the transition year with forecast error and dispersion in the adoption year. The results question the timeliness and usefulness of financial statement disclosure, even in a setting where disclosure was mandated by accounting standards (AASB 1047 and AASB 1) and firms had strong incentives to provide information to analysts.     

The impact of IFRS adoption on the value relevance of book value and earnings

In this study, we investigate the impact of IFRS adoption in Europe and Australia on the relevance of book value and earnings for equity valuation. Using a sample of 3488 firms that initially adopted International Financial Reporting Standards (IFRS) in 2005, we are able to compare the figures originally reported for the 2004 fiscal years to the IFRS figures that were provided in 2005 as the 2004 IFRS comparative figures. As part of the inquiry, we introduce a cross-product term, equal to the product of EPS and BVPS, into the traditional linear pricing models. The estimated coefficient on the cross-product term is statistically significant and negative, as theory suggests in the presence of important nonlinearities. Further, there is increased non-linearity in the data subsequent to IFRS adoption, with the increase being most pronounced for firms in Common Law countries. With non-linear effects controlled for, there is no observed change in price relevance for firms in either Code Law or Common Law countries, contradicting the results from the linear pricing models. The results also suggest that the distribution of measurement errors becomes more similar across Code Law and Common Law countries after the adoption of IFRS, removing one difference between these groups. Thus, IFRS enhances comparability, an inference that would not be possible had we confined the analysis only to linear pricing models.     

Towards the global adoption of XBRL using International Financial Reporting Standards (IFRS)

XBRL is a language based on XML for the electronic communication of business information. It is designed to improve the exchange, aggregation and analysis of corporate data requiring disclosure, through a unique tagging structure that provides interoperability. But, the proliferation of a multitude of XBRL taxonomies, based on different accounting principles, can risk the objectives of standardization, comparability and re-usability of the information that is sought with XBRL. It is therefore essential to develop global accounting standards as a unique foundation on which the XBRL taxonomies can be established, so that it becomes possible to compare the financial information originating from various countries. Along these lines, the International Financial Reporting Standards (IFRS-GP) taxonomy was created to establish a common ground for international firms and create a platform that would enhance the benefits of XBRL. This paper examines whether the IFRS-GP taxonomy, at its current state, adequately covers European companies' dissemination practices and strengthens the benefits of XBRL. Our results provide implications for the evaluation of the effectiveness of the IFRS-GP taxonomy and shed light on directions that may lead to the improvement of this taxonomy.     

An analysis of the effect of mandatory adoption of IAS/IFRS on earnings management

This paper examines whether mandatory adoption of international accounting standards, IAS/IFRS, by French companies is associated with lower earnings management. In addition, the impact of six factors that may be related to earnings management level are also considered: the independence and the efficiency of the board of directors, the separation of roles of CEO and Chairman of the board, the existence of an independent audit committee, the existence of block shareholders, the quality of the external audit and the listing on foreign financial markets.Based on a sample of 353 French listed groups relating to the period 2003–2006, our results show that the mandatory adoption of IAS/IFRS is associated with a reduction in the earnings management level. In addition, the independence and the efficiency of the board of directors, the existence of an independent audit committee, the existence of block shareholders, the quality of the external audit and the listing on foreign financial markets are important factors for enforcement of IAS/IFRS in France. Mandatory adoption of IAS/IFRS has decreased earnings management level for companies with good corporate governance and those that depend on foreign financial markets.     

IFRS adoption in Europe and investment-cash flow sensitivity: Outsider versus insider economies

We examine the economic consequences of the mandatory adoption of IFRS in EU countries by showing which types of economies have the largest reduction in investment-cash flow sensitivity post-IFRS. We also examine whether the reduction in investment-cash flow sensitivity depends on firm size as well as economy type.We find that the investment-cash flow sensitivity of insider economies is higher than that of outsider economies pre-IFRS and that IFRS reduces the investment-cash flow sensitivity of insider economies more than that of outsider economies. Also, we find that small firms in insider economies have the highest sensitivity of investment to lagged cash flow pre-IFRS, and that they are no longer sensitive to lagged cash flow post-IFRS. Overall, our results suggest that IFRS adoption might have improved the functioning of capital markets in relation to small firms in insider economies.     

The effect of mandatory IFRS adoption on real and accrual-based earnings management activities

This study examines the effect of mandatory adoption of International Financial Reporting Standards (IFRS) on both accrual-based and real earnings management. While prior literature has mainly examined the effects of IFRS adoption on accrual-based earnings management, no study to date has focused on the impact of IFRS adoption on real earnings management. Using a sample of 15,206 observations from 22 European countries between 2000 and 2010, this study employs a control sample of voluntary adopters and applies a differences-in-differences design to control for confounding concurrent events. The results suggest that mandatory IFRS adoption had no significant impact on either real or accrual-based earnings management practices. Additional analysis on a sub-sample of firms with relatively strong earnings management incentives supports a dominant role for firm-level reporting incentives over accounting standards in shaping financial reporting quality.     

Perceived costs and benefits of IFRS adoption in Saudi Arabia: An exploratory study

In response to a current lack of research in the Middle East, this study aims to critically evaluate the perceived costs and benefits associated with the adoption of International Financial Reporting Standards (IFRS) in Saudi Arabia, the world's leading oil and natural gas exporter. Using documentary analysis and interviews with stakeholders (account preparers from listed companies in Saudi Arabia, auditors from Big 4 and local accountancy firms, and university academics), the study contributes to the literature by concluding that the benefits of IFRS adoption in Saudi Arabia outweigh the costs. Importantly, a lack of qualified accountants, significant dependence on Big 4 accounting firms, inadequate coverage of IFRS in university education, and a lack of research are identified as major obstacles to the effective implementation of IFRS. The findings offer a possible policy agenda for local and international policy makers.     

IFRS adoption in Spain and the United Kingdom: Effects on accounting numbers and relevance

This paper examines the quantitative impact of mandatory IFRS adoption on financial reporting issued by first-time adopters. It analyses whether relevance of financial information is higher under IFRS than the information provided in financial statements prepared under local GAAP when investors have to make decisions in the capital markets. Both studies compare results in Spain and in the United Kingdom, whose accounting systems have been traditionally considered in opposite groups. The results of the research reveal that the quantitative impact is significant in both countries and, against what we expected, it is higher in the United Kingdom. We also observe that IFRS have negative effect on the relevance of financial reporting in both countries, although this effect has only been significant in Spain.     

Convergence of accounting standards and financial reporting externality: evidence from mandatory IFRS adoption

Using mandatory adoption of International Financial Reporting Standards (IFRS) as a natural experiment, we examine whether reporting externalities can be magnified when financial disclosures are based on a common set of accounting standards. Specifically, we investigate and find that the changes in publicly available information of mandatory IFRS adopters (due to the convergence of accounting standards) can impact the investment efficiency of prior voluntary adopters. While we document positive externalities of mandatory IFRS, we also observe heterogeneity in these spillover effects at the firm and the country level, suggesting that externalities increase with improvements in the comparability of accounting information.     

Mandatory IFRS adoption and analyst forecast accuracy: the role of financial statement-based forecasts and analyst characteristics

Review of Accounting Studies - This study examines whether the improvement in analyst forecast accuracy around mandatory IFRS adoption is associated with the improvement in the accuracy of...     

Control over accounting standards within the European Union: The political controversy surrounding the adoption of IFRS 8

This paper presents an analysis of the struggle for power within the international accounting arena by examining a highly politicised debate surrounding the adoption of International Financial Reporting Standard (IFRS) 8, Operating Segments, which saw the European Union (EU) attempting to contest the authority of the International Accounting Standards Board (IASB). Informed by a broadly institutional approach, the paper reports the results of interviews with preparers, legislators, regulators, auditors and users about the introduction of IFRS 8 and focuses on how the European Parliament (EP) required the European Commission (EC) to initiate its own consultation procedures as part of a new endorsement process. Findings from this study highlight how the debate over the adoption of IFRS 8 led to the EU implementing a structure that is arguably more aligned to the European tradition of State involvement in the regulatory process. In this sense, while the EU's position vis-à-vis the IASB remains relatively weak, they have, however, initiated a forum whereby the pronouncements of the IASB can be contested.