Does Mandatory IFRS Adoption Improve the Credit Relevance of Accounting Information?

Abstract:     
We examine whether mandatory transition to IFRS affects the credit relevance of financial statements. We define credit relevance as the ability of accounting numbers to explain default probabilities reflected in S&P’s credit ratings. We find an improvement in credit relevance for firms in 17 countries that adopt IFRS after they are mandated in 2005. In contrast, for matched US firms there is a decline in credit relevance over the same period. Further, credit relevance is higher for mandatory IFRS adopters in the post-adoption period compared to US firms, whereas the opposite is true in the pre-adoption period. Finally, we show that the positive effect of IFRS on the credit relevance of financial statements is greater for mandatory adopters with speculative rather than investment credit ratings, and for those with larger reconciliations at first-time IFRS application. We interpret our findings as consistent with IFRS providing more relevant and informative accounting information to debt holders.

Number of Pages in PDF File: 41

Keywords: accounting regulation, IFRS, standard-setting, accounting quality, debt markets, credit ratings, credit relevance

JEL Classification: G15, G33, K20, M41, M48

working papers series