Economic Consequences of IFRS Adoption: The Role of Changes in Disclosure Quality
56 Pages Posted: 30 Apr 2019
Date Written: March 1, 2019
This study adopts a two-step approach to highlight the disclosure quality channel that drives economic consequences of IFRS adoption. 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 and 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. Thus, the cost-benefit tradeoff of IFRS adoption is neither uniform across all IFRS-adopting countries nor across IFRS-adopters within each country.
Keywords: IFRS adoption; Nonmissing line items; Disclosure quality; Market liquidity; Audit fees
JEL Classification: M41; M48; G15
Suggested Citation: Suggested Citation