Does Mandatory IFRS Adoption Affect Crash Risk?
Posted: 5 Jan 2015 Last revised: 14 Mar 2015
Date Written: January 4, 2015
We test whether mandatory IFRS adoption affects firm-level ‘crash risk,’ defined as the frequency of extreme negative stock returns. We separately analyze non-financial firms and financial firms because IFRS is likely to affect their crash risk differently. We find that IFRS adoption decreases crash risk among non-financial firms, especially among firms in poor information environments and in countries where IFRS adoption results in larger and more credible changes to local GAAP. In contrast, IFRS adoption has no effect on crash risk for financial firms, on average, but decreases crash risk among firms less affected by IFRS’s fair value provisions, and increases crash risk among banks in countries with weak banking regulations. Overall, our results are consistent with the increased transparency from IFRS adoption broadly reducing crash risk among non-financial firms, but more selectively among financial firms, and with financial regulations playing a complementary role in implementing IFRS among financial firms.
Keywords: International Financial Reporting Standards; Crash risk; Non-financial firms; Financial firms
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