50 Pages Posted: 18 Apr 2010 Last revised: 22 Aug 2013
Date Written: August 22, 2013
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. Further, economic ties with the European Union are a particularly important source of network effects. The results, robust to numerous alternative hypotheses and specifications, suggest IFRS adoption was self-reinforcing during the sample period, which, in turn, has implications for the consequences of IFRS adoption.
JEL Classification: M44, M41
Suggested Citation: Suggested Citation
Ramanna, Karthik and Sletten, Ewa, Network Effects in Countries’ Adoption of IFRS (August 22, 2013). Harvard Business School Accounting & Management Unit Working Paper No. 10-092. Available at SSRN: https://ssrn.com/abstract=1590245 or http://dx.doi.org/10.2139/ssrn.1590245
By Ray Ball