Product Market Effects of IFRS Adoption

Abstract

Prior literature finds International Financial Reporting Standards (IFRS) adopters enjoy lower financing costs subsequent to IFRS adoption. This study extends this literature by examining the effect on the product market. We predict and find that mandatory IFRS adopters exploit lower financing costs to increase market share vis-à-vis non-adopters. This effect is robust across several different model specifications in a sample capturing the universe of public and private firms in the EU; in a matched sample of public and private firms; and in a public firm sample comparing mandatory and voluntary IFRS adopters. We further find IFRS is associated with an increase (decrease) in industry sales concentration (competition), consistent with large public firms increasing market share. In supplemental analyses, we find that mandatory adopters issue more equity and debt after IFRS adoption and that larger market share gains accrue to those mandatory IFRS adopters that issue more equity and debt after IFRS adoption. Overall, we provide evidence of unintended product market consequences of IFRS adoption: an increase in mandatory adopters’ market share and an overall reduction in industry competition.

Keywords: financial reporting regulation, product market competition

JEL Classification: D43, G32, G38