Effect of Mandatory IFRS Adoption on Accounting-Based Prediction Models for CDS Spreads

Abstract

In this study, we examine the effects of mandatory IFRS adoption on accounting-based prediction models of CDS spreads for a sample of 292 firms in 16 countries. In our examination, we estimate the models for both financial and non-financial firms before and after mandatory IFRS adoption. We find that mean and median absolute percentage prediction errors are larger for both financial and non-financial firms after mandatory IFRS adoption. We also estimate accounting-based prediction models of CDS spreads separately for financial and non-financial US firms as a benchmark. Although US firms also show an increase in the mean and median absolute percentages of prediction errors over the same period, our findings from regressions that use a difference-in-difference design indicate that the increase is significantly greater for firms in countries that adopted IFRS mandatorily. We also find that in the post-adoption period, prediction errors are larger for firms in countries with weaker institutions such as low levels of property rights and more restrictive access to credit.

Keywords: IFRS, credit markets

JEL Classification: M40