The Impact of IFRS on the Relationship between Conservatism and Investment Efficiency
Comptabilité Contrôle Audit, Forthcoming
33 Pages Posted: 7 Jan 2015
Date Written: January 6, 2015
We test to see whether a higher degree of conservatism is associated with greater investment efficiency (reducing over- and under-investment) for a sample of French firms before and after the mandatory adoption of IFRS in 2005. While a theoretical link between conservatism and investment efficiency is easily established, the question is whether this link still remains after the adoption of IFRS, which are generally considered to reduce conservatism. Empirical tests find a significant decrease in conservatism after IFRS adoption. This result is consistent with the results reported by Piot et al. (2011), Ahmed et al. (2013) and André et al. (2013). Our results show that in the pre-IFRS period, conservatism limited over- and under-investment. For the post-IFRS period, however, conservatism does not seem to play any role in improving investment efficiency. This paper contributes to the academic and regulatory debate over the economic consequences of the qualitative characteristics of useful financial information and the impact of IFRS adoption. The adoption of IFRS has certainly led to a new equilibrium between the various qualitative characteristics of financial information, but the costs and benefits of that equilibrium remain difficult to measure.
Keywords: Conservatism, Earnings quality, Investment effeciency, Over- and Under-investment, IFRS, France
JEL Classification: M41, G31
Suggested Citation: Suggested Citation