Do Adoptions of International Financial Reporting Standards Enhance Capital Investment Efficiency?

Abstract

We examine whether adoptions of International Financial Reporting Standards (IFRS) enhance capital investment efficiency as measured by investment-cash flow sensitivity and value-enhancing risk taking for a comprehensive sample comprised of 10,340 mandatory and voluntary IFRS adoptions across 26 countries during the pre-financial crisis period of 2001-08. Our results reveal a positive association between mandatory IFRS adoptions and capital investment efficiency. In contrast to prior findings for capital market effects, this association is stronger in countries with weaker legal protections, more concentrated ownership, and prior reporting standards that differ more from IFRS. These findings lend support to mandatory but not voluntary IFRS adoptions serving to enhance firm-level capital investment efficiency, particularly in countries with weaker investor protections that mitigate capital market effects, with implications for standards setters, regulators and research design.

Keywords: IFRS adoption; capital investment efficiency; financial disclosure; information asymmetry; comparability of accounting information

JEL Classification: M41, G32, G33