Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences |
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| Authors: | HOLGER DASKE LUZI HAIL CHRISTIAN LEUZ RODRIGO VERDI |
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| Affiliation: | 1. University of Mannheim;2. The Wharton School, University of Pennsylvania;3. The Graduate School of Business, University of Chicago;4. Sloan School of Management, MIT. We appreciate the helpful comments of Ray Ball, Phil Berger, Hans Christensen, John Core, Ray Donnelly, Günther Gebhardt, Bob Holthausen, Andrew Karolyi, Steve Matsunaga, Jim McKeown, Martin Wallmeier, Michael Welker, and workshop participants at the 2008 American Accounting Association meeting, American University, Bucerius Law School, University of Chicago, Chinese University's CIG conference, Columbia University, Darden School, UC Davis Financial Markets Research conference, 2008 European Accounting Association meeting, Lancaster University, New York University, University of Oregon, Queen's University, Tilburg University, 2008 VHB Frühjahrstagung, 2008 Western Finance Association meeting, and the Wharton School. Christian Leuz gratefully acknowledges research funding provided by the Initiative on Global Markets (IGM) at the University of Chicago, Graduate School of Business. Holger Daske gratefully acknowledges the financial contribution of the European Commission Research Training Network INTACCT. |
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| Abstract: | This paper examines the economic consequences of mandatory International Financial Reporting Standards (IFRS) reporting around the world. We analyze the effects on market liquidity, cost of capital, and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects occur prior to the official adoption date. Partitioning our sample, we find that the capital‐market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self‐selection, the latter result cautions us to attribute the capital‐market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries make concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects. |
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