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http://ssrn.com/abstract=1511671
 
 

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Capital Market Effects of Mandatory IFRS Reporting in the EU: Empirical Evidence


Luzi Hail


University of Pennsylvania - The Wharton School

Christian Leuz


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

October 15, 2007


Abstract:     
This report provides a review of the academic literature relevant to the mandatory adoption of IFRS reporting for member countries of the European Union in 2005 and an empirical analysis of the associated capital-market effects. In the empirical analysis, we focus on the effects on firms' costs of capital and market liquidity. More specifically, we analyze the effect of mandated IFRS reporting on the implied cost of equity capital, percentage bid-ask spreads, the price impact of trades and the frequency of zero-return days. The analysis provides a mixed picture for the capital-market effects of mandatory IFRS reporting in the EU. For the mandatory IFRS period, we find some evidence that the cost of capital is lower for all firms reporting under IFRS and for those that adopted IFRS for the first time in 2005 (relative to non-IFRS firms). The effects are small in magnitude and depend on the choice of benchmark sample. However, it is possible that the results are weakened by anticipation effects in markets ahead of IFRS adoption. The liquidity proxies provide stronger results that are robust across different benchmarks. In particular, the findings for the price impact of trades and for the frequency of zero-return days suggest improvements in market liquidity after IFRS reporting becomes mandatory. The results for the bid-ask spreads point in the same direction, but are weaker. The results for all three liquidity proxies become statistically significant when we introduce firm-fixed effects. However, we caution to attribute the observed effects solely or even primarily to the adoption of IFRS itself. Recently many EU countries have changed their enforcement (and governance) regimes, which could play an important role in our findings.

Number of Pages in PDF File: 85

Keywords: Regulation, International accounting, European Union, IAS, Disclosure, Market liquidity, Cost of equity

JEL Classification: G14, G15, G30, K22, M41, M42

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Date posted: December 13, 2009 ; Last revised: November 20, 2011

Suggested Citation

Hail, Luzi and Leuz, Christian, Capital Market Effects of Mandatory IFRS Reporting in the EU: Empirical Evidence (October 15, 2007). Available at SSRN: http://ssrn.com/abstract=1511671 or http://dx.doi.org/10.2139/ssrn.1511671

Contact Information

Luzi Hail
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-8205 (Phone)
215-573-2054 (Fax)
Christian Leuz (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)
HOME PAGE: http://chicagobooth.edu/fac/christian.leuz
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org
European Corporate Governance Institute (ECGI)
Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Center for Financial Studies (CFS) ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
University of Pennsylvania - Wharton Financial Institutions Center
3641 Locust Walk
Philadelphia, PA 19104-6218
United States
CESifo Research Network
Poschinger Str. 5
Munich, DE-81679
Germany
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