The Determinants and Consequences of Heterogeneous IFRS Compliance Levels Following Mandatory IFRS Adoption: Evidence from a Developing Country

48 Pages Posted: 25 Jan 2010 Last revised: 16 Jan 2012

See all articles by Francesco Bova

Francesco Bova

University of Toronto - Rotman School of Management

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy

Date Written: December 15, 2011

Abstract

The adoption of international accounting standards, namely the IFRS, at the country level has sparked two contrasting, but not mutually exclusive, viewpoints. One view is that IFRS engenders better reporting standards and uniform adoption allows for greater comparability. The upshot is that IFRS adoption will improve a firm’s information environment and hence contribute towards a lower cost of capital. The alternative view is that accounting quality is shaped by political and economic forces and hence higher quality accounting standards will not necessarily translate into higher quality reporting. We empirically evaluate these arguments on IFRS adoption using both private and publicly traded firm observations from Kenya, a developing country with relatively open capital markets but limited enforcement resources. Our analysis takes advantage of a unique dataset involving firm-specific measurements of IFRS compliance. We find that while both private and public firms are required to adhere to IFRS, public, rather than private firms, exhibit greater IFRS compliance. Highlighting the influence of capital market openness, we find that foreign ownership is positively and significantly correlated with IFRS compliance. Probing the underlying causal relationship, additional analysis suggests that greater foreign ownership leads to greater IFRS compliance. Examining the effects of IFRS compliance, higher compliance is positively associated with share turnover. Overall, our evidence illustrates both the importance of economic incentives in shaping IFRS compliance and the capital market benefits to being compliant with IFRS in a low enforcement country.

Keywords: IFRS, standard enforcement, foreign ownership, public ownership, Kenya

JEL Classification: M41, M44, M47, G15, G38

Suggested Citation

Bova, Francesco and Pereira, Raynolde, The Determinants and Consequences of Heterogeneous IFRS Compliance Levels Following Mandatory IFRS Adoption: Evidence from a Developing Country (December 15, 2011). Journal of Intrernational Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1542240 or http://dx.doi.org/10.2139/ssrn.1542240

Francesco Bova (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-978-3985 (Phone)

Raynolde Pereira

University of Missouri at Columbia - School of Accountancy ( email )

337 Cornell Hall
Columbia, MO 65211
United States
573-882-6253 (Phone)

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