Economic Consequences of IFRS Adoption: The Role of Changes in Disclosure Quality

Abstract

This study adopts a two-step approach to highlight the disclosure quality channel that drives economic consequences of International Financial Reporting Standards [IFRS] adoption. This approach helps address the identification challenge noted by Leuz and Wysocki (2006) and offer direct evidence on the role of disclosure quality. In the first step, we document the impact of the IFRS mandate on changes in disclosure quality proxied by the granularity of line-item disclosure in financial statements. We find that IFRS-adopting firms provide more disaggregated information upon IFRS adoption, such as more granular disclosure of intangible assets and long-term investments on the Balance Sheet and greater disaggregation of depreciation, amortization, and non-operating income items on the Income Statement. In the second step, we link the observed disclosure changes to the benefits and costs of IFRS adoption. We show that greater disaggregated information due to IFRS adoption enhances market liquidity and decreases information asymmetry, but does not affect audit fees differentially. Our evidence has implications for standard-setters as they evaluate cost-benefit tradeoffs when considering disclosure changes in the future.

Keywords: IFRS adoption; Nonmissing line items; Disclosure quality; Market liquidity; Audit fees.

JEL Classification: M41; M48; G15.