Adopting a Label: Heterogeneity in the Economic Consequences of IFRS Adoptions
63 Pages Posted: 12 Apr 2007 Last revised: 15 Jun 2011
Date Written: October 31, 2009
This paper examines market liquidity and cost of capital effects associated with voluntary IFRS adoptions around the world. In contrast to prior work, we focus on the heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement IFRS. Some firms may simply adopt the label, while for others IFRS adoption may be part of a strategy to increase their commitment to transparency. To illustrate these differences, we classify firms into ‘label’ and ‘serious’ adopters using changes in firms’ underlying reporting incentives and actual reporting behavior, and then analyze whether capital markets respond differently around IFRS adoptions. We find that, on average, voluntary IFRS adoptions are not associated with capital market benefits, especially when compared to other forms of commitment such as cross-listing in the U.S. Consistent with our predictions, we find an increase in market liquidity and a decline in the cost of capital for ‘serious’ adopters. These benefits are likely attributable to broader changes in firms’ commitment to transparency, and not just IFRS.
Keywords: International accounting, Reporting incentives, IAS, U.S. GAAP, Disclosure, Cost of equity, Enforcement, IFRS implementation
JEL Classification: G14, G15, G30, K22, M41, M47
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