The Effect of IFRS on Cross-Border Acquisitions

Abstract

We examine whether the 2005 mandatory adoption of IFRS is followed by an increase in cross-border acquisitions into the adopting countries and whether the association is driven by IFRS per se or by concurrent enforcement changes. Using the exogeneity of a firm’s listing status to identify the effect of IFRS, we document a significant increase in cross-border acquisitions of listed targets from the adopting countries. We find no evidence that the IFRS effect is driven by those countries that apparently bundled the IFRS adoption with enforcement changes. The evidence also suggests that the IFRS effect is likely due to the fact that many different countries use a common reporting system, as opposed to improvement in reporting quality at individual firms. In particular, we find that the increase in investment flow into the IFRS adopting countries comes mainly from other adopting countries and is significantly stronger when the increase in reporting uniformity associated with IFRS is higher. We also find no evidence that firms that voluntarily adopted IFRS prior to the mandatory adoption were more likely to become cross-border acquisition targets.

Keywords: IFRS, foreign direct investments, M&A, cross-border acquisitions

JEL Classification: F21, G34, M41