Network Effects in Countries’ Adoption of IFRS

Abstract:     
If the differences in accounting standards across countries reflect relatively stable institutional differences (e.g., auditing technology, the rule of law, etc.), why did several countries rapidly, albeit in a staggered manner, adopt IFRS over local standards in the 2003–2008 period? We test the hypothesis that perceived network benefits from the extant worldwide adoption of IFRS can explain part of countries’ shift away from local accounting standards. That is, as more jurisdictions with economic ties to a given country adopt IFRS, perceived benefits from lowering transactions costs to foreign financial-statement users increase and contribute significantly towards the country’s decision to adopt IFRS. We find that perceived network benefits increase the degree of IFRS harmonization among countries, and that smaller countries have a differentially higher response to these benefits. The results, robust to numerous alternative hypotheses and specifications, suggest IFRS adoption is self-reinforcing, which, in turn, has implications for the consequences of IFRS adoption.

Number of Pages in PDF File: 48

JEL Classification: M44, M41

working papers series