The Impact of Legal and Voluntary Investor Protection on the Early Adoption of International Financial Reporting Standards (IFRS)

Summary Prior studies explain the early adoption of International Financial Reporting Standards (IFRS) by firm-specific benefits. However, IFRS adoption also leads to increased disclosure and reduced accounting choices, resulting in a loss of private benefits for company insiders. This paper argues that this loss depends on characteristics of the institutional environment (i.e. the level of investor protection). We find that in countries with strong laws or extensive corporate governance codes IFRS is more likely adopted as the loss of private benefits for company insiders is smaller. Furthermore, corporate governance recommendations are as effective as laws in stimulating IFRS adoption and become more important when laws are weaker. We thank the FWO for the financial support (FWO-project G.0244.02). We gratefully acknowledge the comments of the participants of the 26th Annual European Accounting Association Congress in Seville (2003), and of the International Accounting Section Mid-year Conference of the American Accounting Association in San Diego (2004). We acknowledge the comments of the discussant and participants of the Accounting Research Day in Antwerp (May 2004). Special thanks go to M. Willekens, J. Suys, and W. Landsman and two anonymous referees.