Re-examining the impact of mandatory IFRS adoption on IPO Underpricing
The Review of Accounting Studies, Forthcoming
Posted: 23 Sep 2019 Last revised: 28 Dec 2020
Date Written: December 22, 2020
In the mid-2000s, the European Union (EU) adopted a number of regulatory reforms intended to increase transparency and disclosure for IPO firms, including mandating the use of International Financial Reporting Standards (IFRS). The reforms also included (1) adoption of the Prospectus Directive (PD), which mandated increased IPO prospectus disclosures and (2) increased accounting enforcement. These new regulations apply only to IPOs listing on “EU-regulated” markets; firms admitted to trading on “exchange-regulated” markets are exempt from these regulations. We examine the impact of these regulations on IPO firms. For firms listing on EU-regulated markets, we find no association between IFRS and IPO underpricing; however, we find a significant decrease in IPO underpricing associated with adoption of the PD in countries that also increased accounting enforcement. Further, we confirm that after 2005, most IPOs on exchange-regulated markets went public using domestic accounting standards, not IFRS. Our findings are important since they suggest that mandatory IFRS adoption did not play a major role in reducing IPO underpricing and contrast sharply with the results of prior research, which failed to account for IPOs on exchange-regulated markets. Our evidence highlights the importance of controlling for contemporaneous changes in regulations and details of the institutional setting before attributing major economic consequences to a switch from domestic accounting standards to IFRS.
Keywords: Mandatory IFRS adoption, IPO Underpricing, European Union, Prospectus Directive, EU-Regulated Market, Exchange-Regulated Market
JEL Classification: G15, M41, M48
Suggested Citation: Suggested Citation