Rev Account Stud (2016) 21:898–1004

DOI 10.1007/s11142-016-9363-1

A review of the IFRS adoption literature

Emmanuel T. De George1 • Xi Li2,3 •

Lakshmanan Shivakumar1

Published online: 3 June 2016

 Springer Science+Business Media New York 2016

Abstract This paper reviews the literature on the effects of International Financial
Reporting Standards (IFRS) adoption. It aims to provide a cohesive picture of
empirical archival literature on how IFRS adoption affects: financial reporting
quality, capital markets, corporate decision making, stewardship and governance,
debt contracting, and auditing. In addition, we also present discussion of studies that
focus on specific attributes of IFRS, and also provide detailed discussion of research
design choices and empirical issues researchers face when evaluating IFRS adoption
effects. We broadly summarize the development of the IFRS literature as follows:
The majority of early studies paint IFRS as bringing significant benefits to adopting
firms and countries in terms of (i) improved transparency, (ii) lower costs of capital,
(iii) improved cross-country investments, (iv) better comparability of financial
reports, and (v) increased following by foreign analysts. However, these docu-
mented benefits tended to vary significantly across firms and countries. More recent
studies now attribute at least some of the earlier documented benefits to factors
other than adoption of new accounting standards per se, such as enforcement
changes. Other recent studies examining the effects of IFRS on the inclusion of
accounting numbers in formal contracts point out that IFRS has lowered the con-
tractibility of accounting numbers. Finally, we observe substantial variation in

& Lakshmanan Shivakumar

lshivakumar@london.edu
Emmanuel T. De George
edegeorge@london.edu
Xi Li
xili@temple.edu
1
London Business School, Regent’s Park, London NW1 4SA, UK
2
Fox School of Business, Temple University, Philadelphia, PA 19122, USA
3
London School of Economics and Political Science, Houghton Street, London WC2A 2AE, UK

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A review of the IFRS adoption literature 899

empirical designs across papers which makes it difficult to reconcile differences in

their conclusions.

Keywords Review  IFRS adoption  IFRS literature

JEL Classification M41  G14  G39

1 Introduction

This year marks the 11th anniversary since the European Union (EU) mandated
International Financial Reporting Standards (IFRS) for all companies listed on the
main European stock exchanges. Since its adoption by the EU, IFRS has had its
share of supporters and critics. One of its greatest successes has been its global
adoption, with tens of thousands of firms in over 100 countries currently reporting
under, or at least closely linking their local accounting standards to, IFRS. The
greatest criticisms leveled against IFRS have come from practitioners, who have
argued against the fair value requirements and the transparency and governance
structure of the board that issues the standards.1 In this paper, we review the
academic literature related to IFRS adoption, with a primary focus on understanding
its effects and consequences.
Although the 2005 adoption of IFRS was a major regulatory transition affecting
several tens of thousands of companies worldwide, its costs and benefits were
initially unclear. The debates over the consequences of IFRS adoption at the time
were largely constrained to conjectural statements due to lack of data (e.g., Ball
2006; Schipper 2003). Now, with the hindsight of over 10 years of IFRS reporting,
we review the academic literature to compile and evaluate the available empirical
evidence on the effects of IFRS adoption.
The simultaneous mandatory adoption of IFRS by a large number of countries
has provided empirical researchers with an unprecedented experiment to study the
consequences of accounting standard setting and how these consequences vary
across institutional and legal regimes. However, its effects on academic research
have gone beyond simply providing a useful context for researchers. It has also
kindled interest in cross-country accounting research and provided an opportunity
for greater involvement of researchers from across the globe. Not surprisingly, a
vast literature focusing on IFRS adoption has emerged.
If we had to summarize the development of the IFRS literature, the majority of
early studies paint IFRS as significantly benefiting adopting firms and countries in
terms of (i) improved transparency, (ii) lower costs of capital, (iii) improved cross-
country investments, (iv) better comparability of financial reports, and (v) increased
following by foreign analysts. Although many of these studies include caveats about
drawing strong inferences about the role of IFRS in causing the observed outcomes,

1
Stojilkovic (2011) and Jarolim and Oppinger (2012) discuss these criticisms. See also Financial
Director, ‘‘Long Road Ahead as IASB remedies governance concerns,’’ April 14, 2014.

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these tend to be minimal and often ignored by subsequent research.2 These studies
also typically do not clarify whether the terms ‘‘IFRS mandate’’ or ‘‘IFRS adoption’’
refer simply to the act of adopting new standards or include concurrent
improvements in the enforcement of financial reports. More recent studies attempt
to narrow down the sources of the observed benefits of IFRS adoption and conclude
that at least some of the earlier documented benefits are not driven by the adoption
of new accounting standards per se. Other recent studies examining the effects of
IFRS on the inclusion of accounting numbers in formal contracts (which we refer to
as the contracting role of accounting) point out that IFRS has lowered the
contractibility of accounting numbers.3
Given the rather limited evidence indicating that IFRS conveys unambiguous
benefits to adopters and financial statement users, the widespread adoption by many
countries over a short period is somewhat surprising. One possible explanation,
identified by Ramanna and Sletten (2014), is that IFRS adoption is self-reinforcing.
The perceived benefits, in terms of lowering cross-border transaction costs, increase
for a given country as more jurisdictions with economic ties to that country adopt
IFRS. Ramanna and Sletten (2014) empirically show that their hypothesis partly
explains the prevalence of IFRS adoption.
A variety of other reviews of IFRS-related research have been published.
Soderstrom and Sun (2007) provide an early review of studies focusing mainly on
the voluntary adoption of International Accounting Standards4 (IAS) or reconcil-
iations between IAS and US generally accepted accounting principles (GAAP). Hail
et al. (2010) review IFRS studies to determine the implications of US firms
potentially switching to IFRS. In particular, they study the effects of potential IFRS
adoption by the US on reporting quality, costs, and the capital market. Pope and
McLeay (2011) review the empirical IFRS studies emerging from the INTACCT
research program and discuss implementation of IFRS in the EU. Bruggemann et al.
(2013) provide an overview of the various IFRS studies without considering the
details of individual studies. A review by the financial reporting faculty at the
Institute of Chartered Accountants in England and Wales (ICAEW) summarizes the
empirical literature related to the effects of mandatory IFRS adoption from the
perspective of EU countries (ICAEW 2015). This review also discusses the
background of IFRS legislation. Ahmed et al. (2013a) conduct a meta-analysis of
the IFRS literature, drawing from a wide range of journals and working papers.
However, their analysis is limited to studies examining the effects of IFRS adoption
on value relevance, discretionary accruals, and analyst forecasts. Their meta-
2
The initial evidence on IFRS effects could also be affected by the publication bias prevalent in social
science research, whereby significant results tend to be published, as opposed to studies that fail to reject
the null.
3
Throughout this review, we distinguish between the contracting and valuation roles of accounting
numbers, with the former referring to the use of accounting numbers within formal contracts (such as in
debt covenants) and the latter referring to the use of accounting numbers for valuation decisions. We
classify the effects of accounting on the initiation and terms of contracts under the valuation role.
4
IAS were issued by the International Accounting Standards Committee (IASC) until 2000. In 2001, the
IASC was succeeded by the International Accounting Standards Board (IASB), which adopted the earlier-
issued IAS and started issuing new standards as IFRS. Throughout this review, we use the acronyms IFRS
and IAS interchangeably to describe IFRS.

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analysis mainly focuses on quantifying the adoption effects documented in prior

studies. More recently, Leuz and Wysocki (2016) review the financial reporting
regulation literature, drawing on both US and international evidence. Although their
focus is not on IFRS per se but more broadly on the economic effects of disclosure
regulation and reporting standards, they provide a brief synthesis of the empirical
findings associated with IFRS adoption. In particular, they discuss the empirical
challenges that researchers face when employing the IFRS setting and highlight the
limitations of drawing causal inferences in regulation research more generally.
In contrast to the preceding reviews, our review is not directed at a specific IFRS-
related question or issue or restricted to a specific geography. It is more
comprehensive and provides a relatively broad coverage of IFRS research topics.
We let the data dictate our selection of IFRS-related topics. We cover all of the
topics addressed by IFRS-adoption-related papers published in the following five
accounting journals between 1999 and 2015: Contemporary Accounting Research,
Journal of Accounting and Economics, Journal of Accounting Research, Review of
Accounting Studies, and The Accounting Review.5 We identify IFRS articles
published in these journals by searching for the keywords ‘‘International Accounting
Standards,’’ ‘‘IAS,’’ or ‘‘IFRS’’ in each title and text. The topics identified from this
process include the effects of IFRS adoption on (i) financial reporting quality, (ii)
capital market outcomes, (iii) corporate decision-making, (iv) stewardship and
governance, (v) debt contracting, and (vi) auditing. We exclude one study pertaining
to taxes due to the limited expertise of authors in that area.6 The review covers all
other papers published in the five aforementioned accounting journals. Although it
also covers IFRS papers published in other journals, its coverage of these other
journals is not intended to be complete.
Although our primary focus is on studies based on mandatory adoption, we also
review and incorporate evidence from early studies of voluntary adoption. In
addition, we link findings from IFRS research to the theoretical and empirical
findings reported in other contexts, typically in the US, to help readers appreciate
the relevance of these studies and to provide insights into how inferences vary
across contexts. In addition to published articles, we incorporate several working
papers for certain topics that lack a large body of published works.
Our objective is to provide a cohesive picture of the empirical archival literature
related to IFRS adoption. With this in mind, we emphasize similarities and
differences across the various studies in terms of not only their findings but also
their hypothesis development, methodological choices, and samples. In synthesizing
the empirical findings, we outline the theoretical underpinnings and arguments
linking IFRS adoption to the given economic or reporting outcomes or both. In
addition, we discuss studies that focus on specific attributes of IFRS and provide a
detailed discussion of the research design choices and empirical issues researchers
face in the IFRS setting.

5
Our search period starts in 1999, as we find no published papers related to IAS in these journals before
then.
6
Chan, Lin, and Mo (2010) examine the effect of IFRS adoption on tax non-compliance.

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In terms of structure, we divide the review into sections based on the topics
covered and attempt to ensure that each section stands alone as much as possible.
People working on specific IFRS-related topics should be able to benefit by reading
even a limited part of this review. In line with this approach, each section also
typically ends with a summary and suggestions for future research.
The remainder of this paper is structured as follows. The next section provides a
brief historical perspective on IFRS adoption. It discusses the objectives and
avowed benefits of IFRS adoption as presented around the large-scale adoption in
2005 in addition to the uncertainties and concerns expressed around that time. Our
aim is not to track the chronological development of IFRS up to their eventual
global adoption, but rather to provide a context for understanding the issues
examined in the IFRS literature and to evaluate the contributions of that literature.7
The studies discussed in subsequent sections supply empirical evidence relevant to
the debate over the benefits and limitations of IFRS adoption.
Sections 3 to 9 present the documented effects of IFRS adoption along a variety
of dimensions. Section 3 reviews the studies that examine the most direct effect of
IFRS adoption, i.e., their effect on financial reporting quality. As several studies
assume that IFRS improve reporting quality, the discussion in this section outlines
the empirical evidence for this assumption. Section 4 examines studies that evaluate
the stock market valuation effects of IFRS, how IFRS adoption has affected
information asymmetry in the stock markets, and the attendant consequences such
as those on liquidity, cost of capital, analyst following, and cross-border capital
flows. Section 5 considers papers that examine the real effects of IFRS adoption and
how corporate decision-making has been influenced by IFRS reporting changes.
Sections 6 and 7 examine the stewardship and debt-contracting roles of IFRS. These
sections review studies that examine how the use of accounting numbers in
executive compensation, managerial monitoring, and debt markets have changed
with IFRS adoption. Section 8 focuses on studies related to the auditing issues
surrounding IFRS. Section 9 examines studies that focus on specific accounting
attributes of IFRS. Section 10 reviews the empirical choices made by various
studies and conducts meta-analysis of these choices in the context of IFRS research.
Finally, we present our conclusions in Section 11.

2 Background to IFRS adoption

2.1 History and development of IFRS

The history of IFRS extends over 40 years. The first set of IAS was issued in 1971
by the International Accounting Standards Committee (IASC), which was
subsequently restructured to form the International Accounting Standards Board
(IASB). The IASB has globally reshaped the map of financial reporting as
evidenced by the large number of countries that have adopted IFRS. This holds true

7
For a detailed history of the IASC and its evolution into the IASB, we refer the reader to studies by
Camfferman and Zeff (2007) and Zeff (2012).

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even when one excludes EU adoption, which provided the initial impetus for
broader acceptance of IFRS.8
In the EU, most companies with securities traded on regulated markets have been
required to prepare consolidated accounts in accordance with IFRS (as endorsed by
the European Commission [EC]) for financial years starting on or after Jan. 1,
2005.9 However, a delayed adoption was allowed for companies that had only debt
securities traded publicly. Several other jurisdictions such as Hong Kong and
Australia chose to adopt IFRS around the same period with several others later
following suit.
IFRS introduction seems to have had a substantial effect on the reported financial
statements of firms. Even in the UK, where the local GAAP have been viewed as
similar to IFRS, the financial reports of some firms have changed dramatically under
IFRS. For instance, in its reconciliation of profits under IFRS and UK GAAP,
Vodafone disclosed a net profit of £6.5 billion based on IFRS for fiscal 2005 and a
net loss of £6.9 billion under UK GAAP, with the difference largely explained by
goodwill amortization alone. British Airways similarly reported a decline of nearly
two-thirds in its shareholders’ equity as a result of having to recognize pension
liabilities on the balance sheet under IFRS. Under UK GAAP, the company
disclosed the liabilities in its footnotes. These examples show how just one or two
accounting items can substantially affect a company’s reported profits.10 This
clearly indicates that IFRS adoption has had a major effect on the financial reports
of firms, even in countries whose GAAP and IFRS are similar.

2.2 Objectives and rational for IFRS adoption

Two oft-stated objectives of IFRS adoption are to (i) enhance reporting quality and
(ii) improve the comparability of financial statements across countries. This view is
enshrined even in the European Parliament’s Regulation 1606/2002, which required
the EU to adopt IFRS. The regulation states that IFRS adoption is intended to
achieve ‘‘a high degree of transparency and comparability of financial statements
and hence an efficient functioning of the (EU) Community capital market and of the
Internal Market.’’
Confirming these objectives, the IASB states that the main purpose of its work
is:
… to develop, in the public interest, a single set of high quality,
understandable, enforceable and globally accepted financial reporting stan-
dards based on clearly articulated principles. These standards should require
high quality, transparent and comparable information in financial statements
and other financial reporting to help investors, other participants in the various

8
This regulation (Regulation 1606/2002) was adopted by the Council of Ministers of the EU on June 7,
2002.
9
This regulation was subsequently enacted into law by the European Parliament on Sept. 11, 2002.
10
Barth et al. (2014), who analyze reconciliations of net income across IFRS and local GAAP, find that
the effect of IFRS on net income tends to be larger for firms in the UK than in many other European
countries.

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capital markets of the world and other users of financial information make
economic decisions.

2.2.1 Enhance reporting quality

The objective of IFRS to provide ‘‘a single set of high quality’’ accounting standards
is often quoted and emphasized by its promoters. Although the goal of enhancing
reporting quality should be welcomed, as it promotes business by ameliorating
information asymmetry issues, translating it into practice is unlikely to be a smooth
or straightforward process. First, this objective is silent as to what ‘‘high quality’’
means. Dechow et al. (2010) observe that accounting quality is conditional on the
decision relevance of the financial information and so is better defined in the context
of a specific decision model. For instance, although the liquidation values of assets
are important inputs into decision-making by long-term debt holders, they are less
useful for equity investment decisions. Dechow et al. (2010) conclude that ‘‘there is
no measure of earnings quality that is superior to all decision models,’’ implying
that an objective to prepare a single set of high quality standards for all identified
users may not necessarily be achievable. Consistent with this concern, some recent
studies point out that the emphasis of the role of IFRS in valuation has made
accounting numbers less useful for inclusion in debt contracts (e.g., Ball, Li, and
Shivakumar 2015).
Second, the development of high quality accounting standards may not
automatically translate into firms providing high quality financial reports. Reporting
quality is determined partly by the quality of accounting rules, but it is also affected
by the innate reporting incentives facing managers and incentives facing enforcers
of the accounting rules, which include auditors, capital market and other financial
regulators, courts, etc. There is little reason to expect that the incentives and
economic forces faced by managers and regulators of listed companies in a large
open economy like the UK are the same as those in a relatively closed economy like
Qatar. In general, managerial reporting incentives and accounting enforcement are
endogenous to a country’s economic, legal, and cultural environments. For instance,
managers’ reporting incentives are affected by how financial statement numbers are
used in contracts, which in turn are likely to depend on legal dictates, by cultural
values such as the religious beliefs of and trust between individuals, and by
institutional factors such as firms’ ownership structures and corporate governance.
The enforcement of accounting rules also depends on the extent to which business
transactions are conducted at arm’s length. When companies rely frequently on
closed-door dealings that do not require reliance on publicly available financial
reports, regulators’ incentives to enforce accounting rules are reduced. The
reporting and enforcement incentives are also affected by governments’ decisions to
tie accounting numbers to tax policies.
Fox et al. (2013) illustrate the links between accounting numbers and legal,
cultural, and institutional factors in relative detail through a comparison of Italy and
the UK, which represent extremes within Europe along these dimensions. First, in
terms of legal systems, Italy is a civil-law country; its accounting standards are
subservient to its Civil Code, and its accounting regulations tend to be incorporated

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into its national laws. The authors also observe that accounting standards in Italy
‘‘are not compulsory but … have an integrative and interpretative function with
respect to the provisions of the law.’’ In contrast, financial reporting in common-law
countries like the UK tends to be less heavily regulated by statutes, and national
laws tend to be less detailed and permit judgment, allowing accounting standards to
play a more prominent role in UK financial reporting. Second, in terms of
institutional factors and specifically corporate ownership, UK firms rely on capital
markets to raise money, and so financial reporting is needed to ensure transparency
and market efficiency. However, companies in Italy are often family owned and
financed through banks, making creditors’ needs more dominant in financial
statements. Finally, in terms of culture, the UK has traditionally relied on accrual
accounting as a key concept, while prudence has traditionally dominated in Italy.
The close link between financial reporting and legal, cultural, and institutional
factors indicates that the cost-benefit trade-off of requiring firms to prepare high
quality financial reports is not identical across countries. Accounting standards that
may appear beneficial in the context of an open or developed economy may be less
so elsewhere. A glaring example is the emphasis of IFRS on fair value accounting,
which provides value-relevant information when fair values are obtained from deep
and liquid markets but may permit manipulation in countries where capital markets
are illiquid, opaque, underregulated or insufficiently representative of the economy
(Fiechter and Novotny-Farkas 2015).
Finally, in more recent mission statements, the IASB emphasizes the trans-
parency of financial reports as part of the objectives of IFRS.11 However, it is
unclear whether greater transparency translates to better quality financial state-
ments, as mandating higher transparency requirements can lead firms to engage in
costly real earnings management, i.e., structure their transactions to hide informa-
tion or achieve specific reporting goals. Although most empirical evidence suggests
that transparency in financial statements is useful to capital market participants,
these studies are silent as to how much transparency is optimal and whether greater
transparency necessarily promotes overall efficiency.

2.3 Improve reporting comparability

Even without necessarily improving reporting quality, IFRS may prove econom-
ically beneficial by merely narrowing cross-country differences in financial reports
and promoting international trade. For instance, EU Regulation 1606/2002 states
that: ‘‘This Regulation reinforces the freedom of movement of capital in the internal
market and helps to enable Community companies to compete on an equal footing
for financial resources available in the Community capital markets, as well as in
world capital markets.’’ Along similar lines, emphasizing the need for global
accounting standards to make cross-country transactions less costly and more
efficient, former SEC Chairman Christopher Cox observes the following:

11
See http://www.ifrs.org/About-us/Pages/IFRS-Foundation-and-IASB.aspx.

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And markets are really just aggregations of people, all of whom communicate
better if they speak the same language. … Breaking down barriers between
nations and among social classes, which commerce does, has advanced the
cause of civilization. That has always been the idea behind the SEC’s
cooperative initiatives with the International Accounting Standards Board, and
with the authorities in over one hundred nations that today are using
International Financial Reporting Standards. (Cox 2014)
Confirming these benefits of improved comparability, Standard & Poor’s notes
that ‘‘[g]lobal accounting and disclosure standards will be of great value to our
analysts, by improving data consistency and enabling enhanced global peer
comparisons.’’12
However, as discussed earlier, financial reporting quality is determined not only
by accounting standards but also by a country’s legal system, culture, and
institutions. As a result, researchers and practitioners have questioned the ability of
a common accounting standard, even if mandated, to achieve convergence in the
quality of reported financial statements (e.g., Ball et al. 2000; Ball et al. 2003). Ball
et al. (2000) provide empirical support for this concern by showing that reported
accounting numbers in shareholder-model countries reflect economic losses in a
timelier manner than in stakeholder-model countries.
Even if IFRS achieve global convergence in the short term, observers have
questioned whether these benefits are sustainable. By adopting IFRS, a country
essentially allows a foreign entity with no local accountability to dictate reporting
laws and thereby control the economic incentives and activities of its people and
businesses. Cox (2014) points to this concern as a reason why a full-scale adoption
of IFRS is unlikely to occur in the US. Several major IFRS-adopting economies
have protected themselves from this concern by requiring a national standard setter
to review and, if needed, modify IFRS before they become the law of the land.13
This approach to protecting legislative sovereignty may lead each national regulator
to adopt certain standards while rejecting others and over time cause countries to
diverge in their accounting standards.14
Setting aside the achievability of global standardization, Dye and Sunder (2001)
and Sunder (2011) question whether having a single global set of accounting
standards is even desirable. They point to a variety of benefits to a world that allows
firms to follow either IFRS or US GAAP, including the opportunity to empirically
evaluate the effects of new accounting standards and to study the pros and cons of
principles- and rules-based systems in practice. They contend that multiple

12
Comment letter to SEC on allowing US issuers to prepare financial statements in accordance with
IFRS (August 7, 2007).
13
Along these lines, publicly listed companies within the EU must comply only with IFRS endorsed by
the European Commission (EC). The EC is not a national standard setter per se but a transnational EU
committee.
14
On Nov. 19, 2004, the EC endorsed IAS 39 with the exception of two ‘‘carve-outs’’: one relating to the
Full Fair Value Option and the other to hedge accounting. In July 2005, the EU adopted an amended
version of the regulation for the fair value option. Some hedge accounting requirements under IAS 39 are
still to be endorsed.

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reporting regimes would encourage positive innovations in financial reporting

quality through the effects of competition.

2.4 Initial fears and uncertainties about IFRS adoption

The initial period of IFRS adoption was riddled with uncertainties. Reflecting this
concern, former IASB Chairman Sir David Tweedie warned: ‘‘The first year will
always be difficult. It’s the biggest change for Europe since the Euro was
introduced. Of course, there are going to be a few blips; it’s to be expected.’’15
The frequency and speed with which new pronouncements were being introduced
also concerned practitioners. The IASB issued 29 new standards and amendments to
existing standards in the 13 months between December 2003 and December 2004.
In December 2003 alone, the IASB issued 15 amendments to IAS. Moreover, in
2005, after the firms had started reporting under IFRS, about 10 amendments were
issued.
The ‘‘100 Group of finance directors’’ and ICAEW critiqued the IASB approach
as substituting clarity for complexity and complained that standards, particularly
those related to fair value reporting, were developing in the wrong direction. There
were also complaints that IFRS introduced too much subjectivity and compromised
comparability.16
Based on a survey of 149 finance professionals conducted in October 2004,
KPMG global director Mark Vaessen noted that uncertainty over the final standards
and those that would be applicable in the EU delayed the preparation of many EU
companies for IFRS adoption.17 Based on a survey of 60 managers from Australia’s
top 200 corporations conducted by Jones and Higgins (2006), preparers felt
unprepared for adoption and were skeptical about the claimed benefits. Surveyed
buy- and sell-side analysts also expressed doubts about their abilities to distinguish
between the effects of accounting changes from IFRS adoption and the effects of
changes in underlying business performance. The biggest knowledge gaps seemed
to involve the most effective reporting issues, with nearly two-thirds of the surveyed
analysts stating that they knew little about the new standards for mergers and
acquisitions (M&A) and financial instruments and more than half claiming
ignorance as to the effects of accounting for share options.18 These findings led
to concerns that share prices could be negatively affected or become more volatile
after the introduction of IFRS: ‘‘IFRS won’t change the underlying performance of a
business or cash flow, but the markets may not see it that way.’’19
Auditors also raised concerns around the lack of preparation for the introduction
of IFRS. The ICAEW claimed that tardy preparation for IFRS adoption by some

15
‘‘IASB chairman offers respite in big impact pronouncements’’ (http://www.cch.co.uk/, December 17,
2004).
16
See ‘‘IFRS under attack,’’ Accountancy, Sept. 1, 2005.
17
‘‘Publication of the first quantified explanations of the impact of IFRS heralds the start of a very
different phase in their implementation—communicating the findings,’’ Accountancy Live, January 2005.
18
‘‘Avoid nasty shocks: get to grips with IFRS,’’ Accounting, February 2005.
19
‘‘IFRS sparks share price fears,’’ Accountancy, December 2004.

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firms could cause them to receive qualified audit opinions upon IFRS adoption. The
chairman of ICAEW’s Audit and Assurance Faculty, Andrew Ratcliffe, also pointed
out that auditors had to be more alert about the potential for greater earnings
management under IFRS.20
IFRS adoption also left uncertainty in the minds of investors over surprises that
could emerge during the transition. Peter Elwin, head of accounting and valuation at
Cazenove, noted that ‘‘one is always slightly concerned about the unknown.’’
Morgan Stanley Vice-President Leon Michaelides expressed a similar sentiment.21
These concerns were exacerbated because only a minority of smaller UK companies
had provided information about the effects of IFRS for their firms as of July 2005.
Despite the preceding concerns, the adoption of IFRS was relatively smooth. A
survey of about 200 fund managers conducted by PwC and Ipsos MORI in 2006
revealed that nearly 75 % of respondents felt that IFRS did not adversely affect their
perceptions of firm value. In addition, firms’ disclosures of the effects of IFRS
seemed to alleviate transitional surprises. A review of 1250 annual reports of
required pre-transition disclosures conducted by the Australian Securities and
Investment Commission found that ‘‘all entities … had successfully provided the
required disclosures of the impacts of AIFRS by explaining the key differences in
accounting practices they expected under AIFRS.’’
However, the smooth transition of IFRS still leaves unanswered the questions of
whether IFRS adoption brought tangible benefits and, if so at what cost. These
important issues have been evaluated by empirical research papers, which we
discuss as follows.

3 IFRS and financial reporting quality

Many proponents believe that IFRS reporting is of a higher quality than previous
local GAAP and that its adoption improves financial transparency, lowers
information asymmetry in capital markets, promotes cross-border comparability,
attracts foreign capital flows, and consequently lowers the cost of capital for firms in
adopting countries (e.g., Levitt 1998; IASB 2002). Given these oft-repeated
benefits, it is of little surprise that the earliest IFRS studies typically focus on
evaluating the quality of financial reports under IFRS following Europe’s
mandatory IFRS adoption.
Several studies have attempted to provide direct evidence of IFRS reporting
quality by examining the properties of accounting numbers. We begin this section
by reviewing the evidence from voluntary adoptions and then discuss the evidence
based on mandatory adoption. In a separate subsection, we discuss the effects of
IFRS adoption on comparability, a dimension of reporting quality given explicit
importance in the IFRS conceptual framework.

20
‘‘Tardy IFRS prep will lead to audit qualifications,’’ Accountancy, September 2004.
21
‘‘Investors fear IFRS surprises,’’ Accountancy Age, July 2005.

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3.1 Evidence from voluntary IFRS adoption

Although large-scale mandatory adoption of IFRS did not occur until 2005, a
handful of European countries had allowed firms to voluntarily report under IAS
since the early 1990s. Focusing on these voluntary adopters, researchers have
attempted to provide initial insights into the potential economic consequences of
IFRS adoption.
Based on a sample of 80 German industrial firms that voluntarily adopted IAS
from 1998 to 2002, Hung and Subramanyam (2007) examine the effects on reported
financial statement numbers. They take advantage of the requirement of IAS-
adopting German firms to report financial statements under both local GAAP
(‘‘Handelsgesetzbuch’’) and IAS in the adoption year. Analyzing the differences in
reported numbers across these accounting standards, they find that total assets and
book value of equity are significantly larger under IAS and that there is more cross-
sectional variation in book value and net income under IAS relative to German
GAAP. They also find that the adoption of IAS does not improve value relevance or
timeliness of financial statement information. A notable feature of the study is its
ability to control for underlying economic activities, as it focuses on data related to
the same firm-year across two accounting standards. As with any evaluation of
voluntary adoptions, self-selection bias is a concern, although the study attempts to
mitigate this with the Heckman procedure.
Bartov et al. (2005) compare the value relevance (as a proxy for overall
information related to quality of earnings) across a sample of 417 German firms that
reported under IAS, US GAAP, or local German GAAP (HGB). In contrast to the
findings of Hung and Subramanyam (2007), Bartov et al. (2005) find a higher value
relevance for German firms reporting under either IAS or US GAAP than under
local GAAP.22 As there are significant methodological and sample-related
differences across the two studies, it is difficult to pinpoint why they reach
different conclusions. For instance, Bartov et al. (2005) omit book value of equity
from their value relevance regressions, which may bias their coefficient on earnings
(Soderstrom and Sun 2007). By focusing on both pre- and post-adoption data,
Bartov et al. (2005) may increase the power of their tests relative to Hung and
Subramanyam (2007), who focus only on reported numbers in the year of adoption.
However, by comparing financial statements for the same year for the same firms
under two different accounting standards, Hung and Subramanyam (2007) mitigate
the contamination errors and biases arising from omitted correlated variables.
Switching from the German setting, Kinnunen et al. (2000) examine a sample of
19 Finnish firms reporting under both IAS and local Finnish GAAP from 1984 to
1991 to evaluate how the informativeness of IAS numbers varies across two
different sets of investors, i.e., domestic and foreign investors. By comparing the
earnings response coefficients for stocks that can be held by either domestic or
foreign investors with those for restricted stocks (i.e., those that can be held by

22
Bartov et al. (2005) do not find evidence to suggest that US GAAP are of a higher value relevance than
IAS, suggesting that their results are driven by a higher value relevance of both US GAAP and IAS over
local German GAAP.

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domestic investors only), they find that the information content of IAS reported
numbers is higher for foreign investors.
For a sample of 35 Swiss firms, Auer (1996) documents an increase in the
variance of abnormal returns around earnings announcements for firms switching
from local Swiss GAAP to IAS and concludes that IAS-compliant numbers are more
informative to Swiss investors. However, these results and those of Kinnunen et al.
(2000) should be interpreted with caution given the small sample sizes and self-
selection issues inherent in voluntary adoption studies.
Switching to US capital markets, Harris and Muller (1999) study a sample of 31
cross-listed foreign firms that voluntarily reported under IFRS between 1992 and
1996 and reported reconciliations of IAS earnings and book values of equity based
on US GAAP via Form-20F filings. The authors examine the value relevance of the
reconciliation items (i.e., their ability to explain stock prices and returns) and find
modest evidence of the value relevance of earnings reconciliation adjustments based
on market value and return tests. In additional tests, they find mixed evidence as to
which accounting method produces amounts that are more highly associated with
market values, i.e., IAS amounts are more highly associated with prices per share
and US GAAP amounts are more highly associated with returns.23 Notably, the
authors document little difference between IAS and US GAAP earnings and book
values of equity, reporting average aggregate adjustments of just 0.27 and 0.31 % of
IAS owners’ equity, respectively. However, these relatively small differences may
result in part because firms cross-listing to the US are typically large, have better
information environments, and tend to choose accounting policies that are more
consistent with US GAAP (e.g., Ashbaugh and Olsson 2002).
In a related study, Chen and Sami (2008) examine short-term trading volume
reactions to information contained in Form 20-F reconciliations of IAS to US
GAAP. Based on a sample of 48 non-US firms cross-listed in the US and reporting
under IAS, they find that the magnitude of reconciliation adjustments is significantly
positively associated with abnormal volume in the 2 days around the Form 20-F
filing date in both the local and US markets. They conclude that reconciliation
adjustments provide information over and above those contained in IAS reports.
Other studies also present country-specific evidence that shows little advantage
of moving to IAS. Van Tendeloo and Vanstraelen (2005) find that German firms that
voluntarily apply IAS do not exhibit differences in earnings management attributes
compared with those applying local German GAAP. Daske (2006) finds that the cost
of equity capital is not significantly different across German firms adopting either
IAS or US GAAP.
The foregoing studies are based on country-specific settings, which offer the
advantage of holding constant institutional factors (e.g., listing requirements, market
microstructures, and enforcement). However, generalizations of evidence from
these studies could be problematic.
Expanding beyond country-specific analysis, Barth, Landsman, and Lang (2008)
study a matched sample of 327 IAS adopters and non-adopters across 21 countries

23
Venkatachalam (1999) provides a nice discussion of alternative explanations for and interpretations of
the mixed results of Harris and Muller (1999).

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for 1994 through 2003 to examine whether voluntary IAS reporting is associated
with better accounting quality. They define accounting quality along three
dimensions: the extent of earnings management, timely loss recognition, and value
relevance. Their arguments for an increase in quality stem from the assumption that
IAS better reflects the economic reality and decreases managerial discretion in terms
of accounting choices and that IAS adoption is accompanied by greater enforce-
ment. Based on univariate analysis, they find little difference in accounting quality
between adopters and non-adopters in the pre-adoption period. However, the
difference turns significant in the post-adoption period, indicating that IAS adoption
is associated with lower earnings management, more timely loss recognition, and
greater value relevance. Their results support the notion that IAS adoption increases
accounting quality relative to local GAAP. Although the authors are careful not to
attribute their findings solely to changes in accounting standards and interpret ‘‘IAS
adoption’’ as encompassing all relevant changes to the financial reporting system,
including changes in enforcement, subsequent research has often loosely attributed
the study’s findings exclusively to changes in accounting standards.
Christensen et al. (2015) revisit the evidence provided by Barth et al. (2008) in
the context of a single country, i.e., Germany, where firms could voluntarily adopt
IFRS between 1998 and 2005 but have been required to since 2005. The authors
conjecture that voluntary adopters, but not mandatory adopters, are likely to
represent firms that face net benefits from IFRS adoption. Replicating the
methodology of Barth et al. (2008) separately for voluntary and mandatory
adopters, they find that the subsample of voluntary adopters exhibit significantly
lower earnings management, more timely loss recognition, and greater value
relevance, while mandatory adopters exhibit little improvement in accounting
quality. They conclude that ‘‘the adoption of IFRS does not necessarily lead to
higher quality accounting, at least not when the preparers have no incentives to
become more transparent in their reporting.’’ Although their evidence speaks to the
effects of IAS/IFRS adoption in only one country, it more broadly raises questions
about the role of mandatory IFRS adoption in improving accounting quality.
Overall, research based on large samples has documented that voluntary IFRS
adoption leads to improved financial reporting quality. However, these results do
not endure when underlying institutional details and economic activities are held
constant, as in the study by Hung and Subramanyam (2007). Although these studies
attempt to rule out self-selection biases, one should be aware that the potential for
such biases remains in any voluntary adoption setting.

3.2 Evidence from mandatory adoption

Following the mandatory adoption of IFRS in the EU and several other countries,
several studies have revisited the effects of IFRS adoption on reporting quality.
Based on a sample of firms from 20 countries that mandatorily adopted IFRS in
2005, Ahmed et al. (2013b) investigate whether IFRS adoption lowers income
smoothing, decreases earnings aggressiveness (measured as positive excess accruals
and less timely loss recognition), and decreases earnings management to meet/beat
targets. Their research design allows them to compare the reporting quality of IFRS

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adopters to a matched sample of non-adopters, where the matching accounts for

proxies for country-level enforcement and firm-level characteristics. Their analyses
reveal that mandatory adopters exhibit greater income smoothing, greater earnings
aggressiveness, and a more delayed recognition of losses but are not statistically
different from matched non-adopters in their earnings management to meet/beat
targets. These results are particularly driven by firms in countries with relatively
strong enforcement standards. They conclude that accounting quality in general
decreases after IFRS adoption, particularly for adopters in countries with strong
enforcement regimes.
In contrast to Ahmed et al. (2013b), Barth et al. (2012) find that the value
relevance of net income and book value of equity following mandatory IFRS
adoption increases under IFRS. However, Barth et al. (2012) do not primarily study
value relevance; they focus more on evaluating the comparability of financial
reports between IFRS adopters and US firms. In a related study, Barth et al. (2014)
examine whether reconciliations of local GAAP numbers to IFRS numbers are
value relevant to investors. Based on a sample of 1201 firms in 15 European
countries, they find that reconciliation adjustments for net income and book value of
equity are value relevant in the sense that they are cross-sectionally related to stock
prices. When the authors focus on the value relevance of adjustments that
specifically relate to the application of IAS 39 (financial instruments), they find that
these amounts are value relevant for financial firms but not for non-financials. The
authors interpret this finding as an indication that financial firm investors consider
fair value measurements under IAS 39 as more relevant than domestic GAAP
measurements. Notwithstanding the preceding findings, the extent to which
evidence of value relevance is helpful in assessing accounting standards has been
debated (see Holthausen and Watts 2001; Barth et al. 2001).
Chen and Sami (2013) examine investor reactions to information contained in the
Form 20-F reconciliation of IFRS to US GAAP during the mandatory adoption
period (2005–2006). Based on a sample of 195 firms cross-listed in the US and
reporting under IFRS, they find a positive association between the magnitude of
reconciliation adjustments and abnormal volume in the 2 days surrounding the
Form 20-F filing date, consistent with prior results of Chen and Sami (2008).
However, the reaction is only evident for firms with low institutional ownership and
first-time IFRS adopters. Their results suggest that 20-F reconciliations provide
useful information to at least a subset of firms and that the elimination of these
reconciliations may impose an information loss on less sophisticated investors.
Kim et al. (2012a) examine the stock market consequences of the SEC’s decision
in 2007 to eliminate 20-F reconciliations. Using a treatment sample of 78 foreign
cross-listed firms that mandatorily report under IFRS and a control sample of 162
cross-listed firms that do not use IFRS, they fail to find empirical evidence to
support the claims that eliminating 20-F reconciliations harms the information
environment measured along a variety of dimensions, including market liquidity,
probability of informed trading (PIN), cost of equity, analyst forecasts properties,
institutional ownership, and stock price efficiency. They also partition their sample
based on the magnitude of absolute differences between IFRS and US GAAP

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earnings (before the elimination of 20-F reconciliations) and still find no significant
effects on liquidity, PIN, and cost of equity.
Similarly, Chen and Khurana (2015) examine stock market reactions to SEC
announcements relating to the decision to eliminate 20-F reconciliations for IFRS
reporters. This approach allows the authors to estimate the net cost or benefit of
eliminating the reconciliations to investors. They document a positive stock market
reaction for US cross-listed firms that report under IFRS relative to a benchmark
sample of cross-listed non-IFRS and domestic US firms. In additional cross-section
analysis, they find that this effect is positively associated with proxies for cost
savings and negatively associated with the magnitude of IFRS reconciliation
amounts. The authors conclude that the costs of preparing and auditing the 20-F
reconciliations generally outweigh concerns about information loss from their
elimination.
Consistent with the mixed evidence presented by cross-country studies, country-
specific studies also yield contradictory findings related to the effects of mandatory
IFRS adoption on reporting quality. For instance, based on a sample of 150 German
high-tech firms that transitioned to IFRS from US GAAP in 2005, Lin et al. (2012)
find that accounting quality worsened after the switch, with IFRS accounting
numbers exhibiting more earnings management, less timely loss recognition, and
less value relevance. Based on a sample of 297 large non-financial UK firms that
adopted IFRS mandatorily, Horton and Serafeim (2010) find that the disclosure of
IFRS reconciliation adjustments provides information when the reconciliations are
negative, suggesting that IFRS allows for the credible communication of bad news.
The authors also provide evidence of IFRS adjustments having incremental value
relevance over and above UK GAAP numbers. Based on a sample of 91 Finnish
firms, Lantto and Sahlstrom (2009) find that the adoption of IFRS rules related to
fair value, financial instruments, leases, and income taxes significantly affects key
financial ratios. Comparing financial ratios based on accounting numbers reported
under both IFRS and local GAAP in the transitional year, the authors find that
profitability ratios increased by 9–19 %, P/E ratios decreased by 11 %, and gearing
increased by 2.9 %. These mixed findings in country-specific studies may partly
reflect the differences in local GAAP in place before the IFRS mandate.
Focusing on another aspect of accounting quality, Landsman et al. (2012)
examine the information content of earnings announcements in countries that
mandate IFRS adoption relative to countries that retain domestic accounting
standards. The authors measure information content as either abnormal return
volatility or abnormal trading volume. These measures are predicated on the notion
that the greater the information, the greater the revision of investors’ beliefs, leading
to a higher return volatility around earnings announcements. Furthermore, greater
information content increases the heterogeneity in investors’ responses to earnings
news, leading to increased trading around earnings announcements. Adopting a
difference-in-differences approach, the authors compare changes in information
content for firms from 16 mandatory-IFRS-adopting countries against those for
firms in 11 countries that retained local GAAP. The results from their sample of
21,703 earnings announcements over the 2002–2007 period reveal a positive
association between mandatory adoption and the information content of earnings

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announcements, indicating that investors view IFRS earnings as being of higher

quality than local GAAP. As the increases are persistent, the authors conclude that
alternative explanations based on uncertainty around the initial adoption or lack of
familiarity with IFRS are not tenable.24 However, without knowing the identity of
the traders inducing the greater trading and return volatility, it is difficult to attribute
the observed changes unambiguously to improved transparency under IFRS. For
instance, if IFRS leads to greater informed trading (as may happen if IFRS numbers
are easier to manipulate, as argued by Ahmed et al. 2013b), then one would also
observe higher volatility and trading around earnings announcements.
The preceding findings based on stock market effects generally indicate that
IFRS better meets the needs of stock market participants. However, this evidence is
insufficient to attribute the stock market effects to the accounting standards alone, as
mandatory adoption dates can be contaminated by other events or changes in the
reporting incentives of firms. One explanation for the observed change, which may
or may not be endogenous to the IFRS mandate, is the increased tendency of firms
to provide management forecasts around IFRS adoption, as documented by Li and
Yang (2015). If Li and Yang (2015) are correct in suggesting that the increased
management forecasts arise from improved earnings quality under IFRS, then the
forecasts provide a mechanism through which IFRS affect stock prices. However, if
managers start to provide additional non-financial information along with earnings
forecasts, then the preceding results may suffer from contamination bias.25
Stock market investors are only one set of users of financial statements. As
reporting must be judged in the context of a specific user, one should be careful not
to extrapolate the preceding findings as indicative of the unconditional superiority of
IFRS over domestic GAAP or of IFRS adoption benefitting the economy as a whole.
Moreover, given the greater emphasis of IFRS on the valuation role of financial
reports, the stock-market-based findings are to an extent expected for countries
where the local GAAP were developed with users other than stock market investors
in mind, such as in cases where the country’s economy is not capital market
intensive.
Lang and Stice-Lawrence (2015) go beyond the usual analysis of reported
financial numbers and extend the IFRS literature to encompass qualitative
disclosures in financial reports. Based on textual analysis of 87,608 annual reports
of firms from 40 countries between 1998 and 2011, they find that IFRS reports tend
to be significantly longer and contain less boilerplate language than non-IFRS
annual reports. In addition, they find greater comparability between textual
disclosures of IFRS reports relative to that within non-IFRS annual reports. Based
on these results, they conclude that mandatory IFRS adoption has probably
increased the quality of textual disclosures.

24
Truong (2012) provides corroborative evidence based on analysis of New Zealand firms. He
documents a significant increase in information content over the 1994–2009 period, with a marked
increase immediately following the adoption of IFRS.
25
We discuss the contamination issues associated with mandatory IFRS adoption studies in detail in
Sect. 10.

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3.3 Financial reporting quality and comparability

Comparability is an important characteristic of financial reporting quality. It is

defined as the quality of information that enables users to identify and understand
similarities and differences between accounting items (2010 IFRS Conceputal
Framework). That is, financial reports are considered comparable if similar
economic transactions yield similar accounting items and different economic events
result in different reported items. The importance placed on this attribute by
standard setters is evident given the following statement of the IFRS conceptual
framework: ‘‘Information about a reporting entity is more useful if it can be
compared with similar information about other entities and with similar information
about the same entity for another period or another date.’’ The EU regulation for
IFRS adoption (EC No. 1606/2002) also states comparability across markets as a
reason for its adoption.
As empirical analysis of comparability is relatively new in the accounting
literature, we begin by providing a general discussion of the research methods
employed to measure comparability before reviewing the comparability literature
specific to IFRS adoption.

3.3.1 Measures of reporting comparability

Although the term ‘‘comparability’’ is widely used by practitioners, regulators, and

researchers, little effort has gone into estimating comparability until recently.
Comparability can refer to the similarity in inputs of a reporting system (i.e.,
accounting methods, transaction structures, business model), the similarity in
recognized accounting numbers (reported earnings or assets and liabilities), or the
similarity in reporting structures and disclosures. Early studies of comparability
focus on either levels of financial or valuation ratios, such as returns on equity and
price-earnings ratios, or stock market valuations of accounting data. For instance,
Joos and Lang (1994) evaluate how profitability ratios and value relevance measures
vary across France, Germany, and the UK and conclude that country-specific
accounting practices affect accounting-based performance measures. Although the
authors point out that variations in economic effects across countries are unlikely to
explain their conclusions, their approach to estimating accounting comparability
does not directly control for the differences in economic transactions across their
sample firms.
Subsequent studies develop input-based measures of comparability. For instance,
Bae et al. (2008) construct a cross-country measure of comparability based on the
degree to which local accounting standards deviate from IAS. This measure has
been adopted by several studies, particularly in the examination of cross-country
differences in the effects of IFRS adoption. Based on a survey of partners in large
accounting firms in 60 countries (see Nobes 2001), Bae et al. (2008) identify 21 key
accounting rules and score them for each country based on their variations from
IAS. By comparing the 21 country-specific scores across two countries, they
calculate a country-pair measure of GAAP difference equal to the number of items
for which the scores differ across the countries. This measure considers two

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accounting standards as similar (i.e., low accounting distance) when both sets of
rules either comply with or deviate from IAS. Although this survey-based approach
can help explain the cross-country differences in accounting standards, there are
three specific drawbacks due to the way it is implemented. First, the survey data
examined by Nobes (2001) are based on accounting standards in place as of Dec. 31,
2001 and ignore any subsequent revisions made to local GAAP in the lead-up to
IFRS adoption. In addition, the data ignores any country-specific carve-outs or
differences in the application of IFRS by national regulators. Second, this approach
assumes that countries whose local GAAP differ significantly from IAS also differ
significantly from one another, which may not be true. To overcome the issue
presented by an absence of direct comparison between local GAAP, Yu and Wahid
(2014) modify the measure by determining whether the countries share the same
legal origin. That is, country pairs whose local GAAP differ from IAS are assumed
to also differ from each other only if they do not share the same legal origin. Third,
the measure captures differences in standards, which may or may not result in
meaningful differences in the actual reported amounts or disclosures.
De Franco et al. (2011) provide an output-based measure of comparability that
has been heavily adopted in recent studies. They characterize two firms’ accounting
systems as comparable if they produce similar financial statements for a given set of
economic events. Relying on stock returns as a proxy for the net effects of economic
events relevant to financial reports, the authors calculate comparability based on the
ability of stock returns to explain contemporaneous earnings. In the first step, for
each firm quarter, they estimate an earnings-returns regression using earnings and
stock returns in the previous 16 quarters to obtain model parameters. In the second
step, for each firm quarter, they calculate the absolute difference between the
earnings predicted using the firm’s own parameters and the earnings predicted using
a peer firm’s parameters. The comparability measure for a firm quarter is the
average absolute difference in predicted earnings over the previous 16 quarters.
The measure used by De Franco et al. (2011) focuses exclusively on earnings
comparability, which, while important, does not capture all of the dimensions of
reporting. Moreover, due to its reliance on stock returns as a proxy for economic
events, the measure may be affected by cross-firm differences in stock liquidity,
price efficiency, growth options, the pervasiveness of non-financial information, and
other factors that influence earnings-returns relations. As the measure adopted by De
Franco et al. (2011) relies on a linear regression of earnings on returns, it may be
affected by nonlinearity in the earnings-returns relationship. Nevertheless, this
measure takes an important step forward by focusing on the outputs of financial
reporting systems, which are determined not just by accounting rules but also by
enforcement and reporting incentives.
Barth et al. (2012) modify the measure used by De Franco et al. (2011) in several
ways. First, they reverse the regression equation, and, rather than using stock returns
as the only dependent variable in their analysis, they alternatively use stock returns,
stock prices, or cash flows as dependent variables. Second, they extend the list of
explanatory variables to include several accounting items such as earnings, book
value of equity, earnings changes, and a loss dummy. Similar to the approach of De
Franco et al. (2011), they calculate the absolute differences in stock returns (or stock

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prices or cash flows) predicted using IFRS and US firm parameters. Finally, they
calculate the comparability measure by averaging the absolute differences in stock
returns, stock prices, and cash flows. A clear advantage of this measure is that it
does not rely on stock returns as a lone proxy for economic outcomes and allows a
variety of accounting items to be considered simultaneously for comparability.
However, this measure continues to rely on the assumption of a linear relationship
between earnings and proxies for economic activities.
Seeking to measure earnings comparability for a sample of private firms, Cascino
and Gassen (2015) develop a reporting comparability model based on a model that
uses contemporaneous cash flows to explain accruals. Following a logic similar to
that of De Franco et al. (2011), they calculate comparability as the average absolute
difference in predicted accrual values using a firm’s own parameters and the fitted
values obtained using a peer firm’s parameters. As accruals distinguish accounting
from mechanical cash counting, this model is more focused on the key role of
accounting and can also take advantage of studies that attempt to develop
theoretically motivated accrual models. In addition, the measure is not affected by
specific aspects of stock market functioning and characteristics.
Disclosure comparability receives the least attention in the literature, partly due
to its inherent difficulty. The few studies addressing this issue tend to do so using
small samples of hand-collected and manually coded data to compare the existence,
type, and length of disclosures across different reporting regimes. For instance,
Ashbaugh and Pincus (2001) construct three measures of the cross-country
comparability of accounting standards based on differences in disclosure require-
ments and measurement methods. Using data from 1993 based on an international
sample of 80 firms that voluntarily adopted IAS, the authors compare the existence
and length of disclosure requirements between the firms’ local GAAP and IAS.26
They score the differences in disclosure requirements for eight accounting rules and
convert these scores into a disclosure-comparability index (DISCLOSE). The
authors also construct a comparability index of the available measurement methods
(METHODS) for four accounting rules (depreciation, leases, pensions, and research
and development). Finally, the authors combine these two indices to create an
aggregate measure of reporting comparability (IASSET). Although these measures
attempt to directly compare accounting standards in terms of their disclosure
requirements and breadth of accounting choices, the few accounting items for which
differences are analyzed and the subjectivity inherent in scoring the differences
limit its appeal. Similar to the measure adopted in Bae et al. (2008), using IAS as a
benchmark to compare accounting standards does not permit direct pair-wise
comparisons of accounting standards. Moreover, relative to De Franco et al. (2011)
and Barth et al. (2012), whose approaches can be applied to large samples, the
manual coding required under this approach limits its applicability to large samples.
It also cannot be easily adapted to capture time variations in disclosure or
26
The eight items are listed as follows: existence of statement of cash flow, disclosure of accounting
policies, disclosure of a change in accounting policies, disclosure of the effect of a change in accounting
estimates, disclosure of prior period adjustments, disclosure of post-balance-sheet events, disclosure of
related party transactions, and disclosure of segment information. See Table A1 (p. 438) of Ashbaugh and
Pincus (2001) for specific details about their measures.

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accounting standards, which matters especially for countries that have faced
frequent changes in their accounting regulations.
Lang and Stice-Lawrence (2015) evaluate the comparability of financial reports
for a sample of non-US firms using the cosine similarity of words contained in the
firms’ annual reports. This measure compares the relative word frequencies between
two annual reports, with a score of 0 indicating no overlapping words and a score of
1 indicating identical proportions of words. Although this approach has the
advantage of comparing disclosures across a large sample of firms, its applicability
is limited to firms that provide English-language reports, which would result in a
selection bias in an international setting.

3.3.2 IFRS adoption and comparability

Proponents of IFRS have argued that globally mandating a uniform accounting

standard should improve financial statement comparability and allow investors and
firms to make better investment decisions. The argument rests on the notion that
greater comparability increases the information available to decision-makers by
allowing them to better understand competitors’ financial reports and thereby
enhances information transfers across many firms and across countries.
IFRS is in fact well placed to improve comparability due to its focus on
principles rather than rules. By encouraging managers to prepare financial
statements based on the essence of an economic transaction rather than a set of
relatively inflexible rules, IFRS can ensure that managers account for like
transactions in a like manner and dissimilar transactions differently (Schipper
2003). However, for this strength to be realized, strong enforcement is required.
Weak enforcement can worsen comparability under principles-based accounting
standards, as the flexibility can lead managers to opportunistically select dissimilar
accounting methods for the same set of transactions. A related concern is the larger
set of accounting choices offered under IFRS. As standard setters observe,
‘‘permitting alternative accounting methods for the same economic phenomenon
diminishes comparability’’ (2010 IFRS Conceptual Framework).
Some researchers have questioned the ability of IFRS to provide truly
comparable financial reports based on the argument that reporting quality is not
only determined by accounting standards, but also by firms’ reporting incentives. In
their examination of reporting quality in four East Asian countries, Ball et al. (2003)
find that, although accounting standards in these countries are comparable with
those in common-law countries (such as UK GAAP, US GAAP, and IAS), their
financial statements are of a lower quality. They conclude that merely changing
accounting standards in a country would be insufficient to improve reporting
quality. Corroborative evidence for this view is provided by Jayaraman and Verdi
(2013), who show that greater economic integration following the introduction of
the euro is associated with increases in accounting comparability within the
Eurozone. Their evidence points to the need for economic integration across
countries to achieve better comparability of financial reports.
Empirical studies attempt to illuminate the comparability-related effects of IFRS
adoption in two broad ways: (i) by using direct measures of comparability (e.g.,

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Barth et al. 2012) or (ii) by examining observable market outcomes of comparability

(e.g., Wang 2014; Brochet et al. 2013). The first set of studies is often limited in its
ability to draw conclusions about overall comparability, as empirical proxies for
comparability focus only on a specific reporting dimension (such as earnings or
disclosures). However, it has the advantage of being able to identify the source of
comparability. The second set infers changes in comparability based on observed
changes in the information environment but cannot attribute the comparability
changes to specific reporting dimensions.
Motivated by the debate over US firms adopting IFRS and the 2007 SEC ruling
allowing US cross-listed firms to file IFRS-compliant financial statements, Barth
et al. (2012) evaluate the relative comparability of the two accounting regimes (i.e.,
IFRS and US GAAP). Adopting both a modified version of the measure of
comparability used by De Franco et al. (2011) and a measure based on a comparison
of value relevance, Barth et al. (2012) document that IFRS adoption is associated
with a significant increase in the comparability of financial statements across IFRS
firms and a size-and-industry-matched sample of US firms. Moreover, the
comparability across IFRS and US firms is generally higher when firms adopt
IFRS mandatorily, are from common-law countries, or are from countries with
higher enforcement. The researchers also find that economic integration arising
from globalization has little effect on reporting comparability. Based on these
factors, they conclude that mandatory IFRS adoption and the international co-
ordination of accounting regulations have improved the global comparability of
accounting numbers.
Some studies attempt to directly evaluate changes in cross-country comparability
measures following IFRS adoption. Using the value relevance of earnings and book
value of equity to assess the comparability of accounting numbers, Liao et al. (2012)
show that French and German IFRS earnings and book values are comparably
priced in the year after IFRS adoption but become less comparable in later years.
While Lang et al. (2010) provide a difference-in-differences analysis of a sample of
IFRS adopters and non-adopters, finding that adoption increases co-variation in the
earnings of firms from different countries (measured as the adjusted R2 from the
regressions of a firm’s earnings on a matched peer firm’s earnings) but decreases
earnings comparability, as measured by De Franco et al. (2011).27 The findings of
these two studies do not support the claim that IFRS adoption enhances the
comparability of financial statements.
Through a comparative study of the effects of IFRS adoption on earnings
comparability across countries that adopted the euro (‘‘euro adopters’’) and those
that did not (‘‘non-adopters’’), Jayaraman and Verdi (2013) investigate whether
economic integration complements or substitutes accounting harmonization.
Conducting difference-in-differences analysis across 15 countries (11 euro adopters
and four non-adopters), they document that IFRS-induced improvements in
accounting comparability are around three times larger within euro-adopter
countries than in other EU countries. They conclude that IFRS adoption is better

27
For each firm, Lang et al. (2010) select matched peers from firms that are domiciled in a different
country but have the same two-digit SIC classification as the first firm.

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at improving reporting comparability when the underlying economic environments

are similar.
Cascino and Gassen (2015) focus on the institutional determinants of the link
between IFRS adoption and comparability. Rather than using a simple time-series
indicator variable to capture IFRS adoption, they examine whether changes in cross-
country information transfers following IFRS adoption are associated with the
magnitude of reporting effects from IFRS adoption. This slight modification to the
research approach reveals only weak evidence of a link between mandatory IFRS
adoption and improved reporting comparability. To test whether a lack of incentives
to comply with accounting rules explains the initial marginal results, the authors
hand-collect accounting measurement information and disclosure compliance data
from the 2006 financial reports of a sample of German and Italian mandatory
adopters. They find that firms that comply better with IFRS enjoy more
comparability. When they repeat analysis for a broader sample of IFRS-adopting
firms and countries using instruments to proxy for compliance incentives, they reach
the same inference.
Cascino and Gassen (2015) also test the comparability effect of mandatory
IFRS adoption using a within-country matched sample of private firms as a
control group. As pointed out by Ball and Shivakumar (2005), private firms have
lower compliance incentives than public firms. This allows researchers to study
the role of compliance while holding the institutional environment faced by the
firms constant. Consistent with their earlier conclusions, Cascino and Gassen
(2015) report that the comparability effect of mandatory IFRS adoption is mainly
observed for public firms. They also find that IFRS adoption causes public firms
to become less comparable with local private firms that continue to report under
domestic GAAP. Overall, their results show that, although cross-country
comparability improvements require compliance with standards, within-country
reporting comparability is affected by mandating IFRS adoption for some
companies (i.e., listed firms) alone.
In contrast to studies that evaluate comparability directly, Wang (2014) and Yip
and Young (2012) study cross-border intra-industry information transfers and draw
inferences about the comparability of financial statement information. These studies
are predicated on the notion that a firm’s investors can extract more value-relevant
information from a foreign peer’s report when the two firms employ more
comparable measures in their reports.
Wang (2014) investigates whether accounting standard harmonization enhances
the comparability of financial information across countries by examining changes in
cross-border information transfers upon IFRS adoption. She uses a pair-wise
research design containing 26,349 firm-pair-year observations for 4467 unique firms
from 46 countries, covering the period 2001–2008. To increase the chances of
detecting transnational information transfers, she focuses on 575 earnings
announcements made by global industry leaders, defined as the three largest firms
in each year for each of the 30 Fama–French industry groups. For each earnings
announcement, she examines the price reactions of all other non-announcing firms
in the same industry that are domiciled in a country different from that of the

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announcing firm.28 Consistent with the importance of earnings comparability to

information transfers, she reports that non-announcing firms react more strongly to
the earnings announcements of a global leader when both firms report under IFRS
than when they report under different accounting standards. Moreover, via
difference-in-differences analysis, she finds that mandatory IFRS adopters react
more strongly to the earnings announcements of voluntary adopters in the post-
adoption period than in the pre-adoption period and that this effect is not observed
for non-adopters. Her findings are consistent with mandatory IFRS adoption along
with contemporaneous regulatory changes improving earnings comparability.
However, the larger transnational information transfer between firms using the
same accounting standards is significant only for announcing firms domiciled in
countries with stricter enforcement regimes and stronger reporting incentives,
suggesting that the mere adoption of standards is insufficient to improve
comparability. Furthermore, consistent with Jayaraman and Verdi (2013), Wang
(2014) finds that these transnational information transfers are stronger when the
firm-pairs are domiciled in countries with tighter economic integration.
In a concurrent study, Yip and Young (2012) find more nuanced results by
expanding the measures of comparability for a sample of 2562 mandatory adopting
firms within 17 EU countries.29 They study both facets of comparability, i.e.,
similarities in accounting items between firms engaged in similar transactions and
differences in accounting items between firms engaged in dissimilar economic
activities and implement three measures of comparability: (i) similarity in
accounting functions that translate economic events into accounting data (e.g., De
Franco et al. 2011), (ii) the degree of information transfer, and (iii) similarity in the
information content related to earnings and book value of equity. For firms in the
same industry but domiciled in different countries, the authors document
improvements in all three comparability measures following IFRS adoption.
However, for firms in different industries and domiciled in different countries, they
find that IFRS contributes little to the changes in comparability measures. The
authors conclude that IFRS adoption improves the cross-country comparability of
financial information by making reports of similar firms look more alike but does
not make reports of firms with different economic activities appear any more
dissimilar. However, they note that comparability improvements are primarily
observed only in firm-pairs from countries with the same legal origin (measured as
either common- or code-law countries). This is consistent with the importance of
financial reporting incentives and the effectiveness of legal enforcement in
achieving comparability following IFRS adoption.
However, when interpreting the evidence from the preceding information transfer
studies, one should keep in mind that cross-border information transfers may
increase even in the absence of improvements in reporting comparability. To
understand this, consider two countries that have very similar local GAAP that are
28
To ensure that the transnational information is relevant for a domestic firm, Wang (2014) requires
matched non-announcing firms to have foreign sales and to not have announced their own earnings before
the earnings announcements by a global leader.
29
Wang (2014) and Yip and Young (2012) exclude financial firms from their samples. Wang (2014) also
excludes utilities.

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922 E. T. De George et al.

not oriented to meet the needs of stock-market investors. If one of these countries
adopts the more valuation-oriented IFRS, causing financial reports to become more
dis-similar across the two countries, then we would still observe an increase in
cross-border information transfers, as investors in the second country would react to
the increased availability of value-relevant information. Such cross-border infor-
mation transfers may be even higher when both countries rather than just one adopt
IFRS, although the comparability of financial reports need not necessarily change
relative to those based on their respective local GAAP.
To isolate the capital market benefits arising from improvements in compara-
bility (defined as the precision of information transferred across firms) as opposed to
improvements in information quality (defined as the precision of firm-specific
information), Brochet et al. (2013) exploit the UK setting, in which the domestic
GAAP are often viewed as similar to IFRS. They surmise that any capital market
benefits associated with IFRS adoption in the UK are likely to be due to
improvements in comparability rather than improvements in firm-specific informa-
tion quality. The capital market benefits from improved comparability arise through
greater transnational information transfers engendered by EU-wide IFRS adoption.
Examining a sample of 663 large and relatively more profitable UK firms, Brochet
et al. (2013) find a significant reduction in abnormal returns associated with insider
purchases in the post-IFRS-adoption period. This finding supports the view that
IFRS adoption improves reporting comparability for outside investors and thereby
lowers the degree of information asymmetry between insiders and outsiders,
limiting the ability of insiders to exploit their private information. They further
support this finding with cross-sectional tests that show that the greatest reductions
in profitability of insider trades occur in firms that experience larger improvements
in comparability following IFRS adoption. Finally, they report weak evidence of
changes in the profitability of insider trading for stocks listed on the AIM, whose
operations tend to be more domestically focused, making transnational information
less relevant. Although their results support their predictions, the study is unclear
about which types of private information are lost to insiders through cross-country
information transfers that are above and beyond any pre-existing intra-industry
information transfers from domestic companies.
Turning to the effect of comparability on investors’ decisions, DeFond et al.
(2011) test whether improved financial statement comparability across countries
following IFRS adoption leads to greater cross-border investment. Their predictions
are based on the notion that improved financial statement comparability decreases
the information acquisition costs of global investors, thus removing barriers to
foreign investment (e.g., Kang and Stulz 1997; Covrig et al. 2007).30 However, they
note that the cross-border investment benefits of IFRS adoption are likely to be
realized only when IFRS is credibly implemented, although they do not discuss
which enforcement mechanisms lead to that. They empirically test their predictions
for a sample of mandatory IFRS adopters in 14 EU countries and firms reporting
under domestic GAAP in 10 non-adopting countries for the 2003–2004 and

30
We discuss these arguments in greater detail in Sect. 4.3.

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2006–2007 periods.31 They find that mandatory IFRS adoption results in greater
investments by foreign mutual funds in countries with strong implementation
credibility and specifically among firms that experience relatively large increases in
accounting uniformity. Uniformity is measured for each industry in each country as
the number of firms in that industry reporting based on the same GAAP after IFRS
adoption relative to the number of firms in that industry before IFRS adoption.
These results support the view that harmonization through IFRS increases demand
from foreign investors by improving comparability.32
Young and Zeng (2015) investigate another consequence of improved compa-
rability following IFRS adoption for multiples-based valuation. Based on a sample
of firms from 15 EU countries over the 1997–2011 period, the authors document
that multiples-based valuations using foreign peers’ multiples significantly improves
following the mandatory adoption of IFRS.33 Specifically, they find that pricing
accuracy improves by 2 % per year on average over the sample 1997–2008 period.
To ensure their results are not driven by the general effects of increased economic
integration over the sample period, they partition their sample based on the
magnitude of IFRS adjustments made to opening shareholders’ equity upon
transition. They find that the firms that had the greatest reporting differences relative
to IFRS experienced the largest gains in pricing accuracy, relative to the firms that
experienced greater alignment between local reporting practices and IFRS. They
conclude that improved accounting comparability under IFRS has allowed investors
to better value stocks through improved peer selection.
In conclusion, although studies focusing on direct measures of comparability
yield only weak evidence, studies focusing on the capital market effects of
comparability generally show a stronger increase in comparability following IFRS
adoption. Taken together, the empirical results for comparability provide a general
picture that comparability matters to investors and that improvements in compa-
rability enhance the information environment, particularly for foreign investors.
However, the data do not support the notion that simply harmonizing accounting
standards can achieve full comparability in financial reporting. The evidence
provided by most studies suggests that reporting comparability is affected by a
variety of factors in addition to accounting standards, such as reporting incentives,
underlying economic integration, and institutional factors.
In spite of advances in our understanding of comparability, much remains to be
considered. The research still lacks detailed analysis of why and how accounting
comparability arises. Are certain accounting attributes more important in achieving
31
DeFond et al. (2011) omit the year of mandatory adoption (i.e., 2005), arguing that investors may not
fully understand IFRS-compliant financial statements or that preparers might not have applied new rules
consistently in this transition year.
32
Given that IFRS adoption is associated with an increase in the issuance of annual reports in English
(Jeanjean et al. 2015), the evidence related to cross-border capital flow around IFRS adoption may also
reflect the benefits of lowering language barriers rather than those of IFRS reporting.
33
Young and Zeng (2015) assess the performance of multiples-based valuation using three criteria:
pricing accuracy (defined as the difference between the actual stock price and valuation implied by
foreign peers), the ability of the implied values to explain cross-sectional variations in observed stock
prices, and the ability of foreign peers’ valuation multiples to predict firms’ future market-to-book
multiples.

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comparability than others? Do greater managerial subjectivity and accounting

choices help or hamper comparability? Are the documented effects of comparability
improvements around IFRS adoption sustainable in the long run?

4 Effects of IFRS on stock markets

Regulators and standard setters alike have expressed the view that the adoption of
IFRS will ‘‘reduce the cost of capital and open new opportunities for diversification
and improved investment returns’’ (Tweedie 2006). Proponents have pointed to an
increase in transparency, greater accounting quality, and enhanced comparability as
paving the way for an increase in liquidity and reductions in cost of equity capital.
The EC regulation mandating IFRS (EC 1606/2002) itself cites capital market
benefits as a primary reason behind the switch, observing that they contribute ‘‘to
the efficient and cost-effective functioning of the capital markets.’’
Previous theoretical predictions and empirical evidence related to the link
between financial reporting quality and capital market consequences have been
mixed. In general, these theories find that increasing firms’ commitment to
transparency and disclosure can lower information asymmetry in capital markets
and thus increase investors’ willingness to trade, thereby boosting the stock price
(e.g., Diamond and Verrecchia 1991; Lambert et al. 2007; Botosan and Plumlee
2002). Moreover, better quality corporate reporting can reduce estimation risk and
improve risk sharing in the economy, thus decreasing firms’ cost of capital (e.g.,
Barry and Brown 1985).
In the context of IFRS adoption, a number of studies attempt to quantify the
effect of IFRS adoption on stock markets by studying changes in information
asymmetry, liquidity, cost of capital, valuation, and cross-border capital flows
between the pre- and post-IFRS-adoption periods. These studies are motivated by
the conjecture that ‘‘principles-based’’ IFRS improve transparency as a consequence
of their greater reliance on fair-value accounting, increased disclosures, better cross-
country comparability, and more economically motivated reporting and that this
improved transparency leads to lower information asymmetry and attendant stock
market effects. Further justifications for the link between IFRS and improved
financial transparency are also often provided based on initial empirical evidence
linking IFRS adoption to improved reporting quality, although as discussed in
Sects. 3.2 and 3.3, recent studies provide mixed evidence of this link.
Furthermore, for IFRS adoption to noticeably affect capital markets, reporting
practices must vary significantly from previously established local GAAP. As some
countries’ domestic GAAP are more similar to IFRS than others, researchers exploit
this cross-country difference in the effects of IFRS to better link observed stock
market effects to IFRS adoption.
The rest of this section is organized as follows. Section 4.1 reviews studies that
investigate investors’ responses to IFRS adoption. Section 4.2 discusses evidence
pertaining to the effects of IFRS adoption on analyst following and forecasts.
Section 4.3 reviews IFRS-related studies of cross-border capital flows. The final
section reviews studies focusing on market liquidity and the cost of capital.

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4.1 Investor perception of IFRS

Armstrong et al. (2010a) provide early large-sample evidence of investors’

perceptions of IFRS adoption by examining the short-window market reactions
surrounding 16 events between 2002 and 2005 that increased the likelihood of the
EU adopting IFRS to evaluate whether stock investors perceived adoption as value
enhancing or destroying. Based on a sample of firms with equity traded on European
stock exchanges and therefore affected by the IFRS mandate, Armstrong et al.
(2010a) document an incrementally positive 3-day market reaction to events that
increased the likelihood of IFRS adoption, beginning with the decision of the EU in
2002 to adopt IFRS.
The authors find positive market reactions for analyses based on market-adjusted
returns, where the choice of market returns becomes important. The average raw
market responses to the events examined are negative. Some of the announcement
dates examined in their study have world-market returns as large in magnitude as
-4.4 %. A quick review of Dow Jones News Wire for the reasons behind the large
drops in a few IFRS announcement dates reveals that some announcement dates
were affected by contaminated events, such as world markets being rocked by profit
warnings from the US tech sector on June 19, 2002, and February 3, 2004. To the
extent that contaminated events affect the DJ Stoxx 1800 (excluding Europe) index
more than European stocks, market-adjusted returns for Europe (measured as
European stock returns adjusted for returns on the DJ Stoxx 1800 excluding Europe)
may be noisy.
To better link European stock market reactions to IFRS news, Armstrong et al.
(2010a) conduct a cross-sectional analysis of announcement returns on firm-specific
characteristics and find that the positive market reactions are larger for firms that are
more likely to benefit from adoption, such as those with lower information quality
and higher information asymmetry. The positive stock price reaction is also
observed for firms with high quality information in the pre-adoption period,
suggesting that IFRS benefits are not simply associated with improving firms’
reporting quality but are at least partly attributable to the benefits from accounting
standard harmonization. Finally, consistent with investors’ concerns over the
enforcement of IFRS, the authors find an incrementally negative reaction for firms
domiciled in code-law countries (i.e., less investor protection). Although focusing
on a narrow (3-day) event window mitigates the effects of confounding events that
occur outside the IFRS announcement window, it still leaves open the possibility
that investors’ responses to the anticipated changes in enforcement and regulation
accompany the passage of IFRS adoption.
Although the US has not adopted IFRS reporting, a few studies evaluate the
potential benefits of IFRS adoption from the perspective of US investors. Joos and
Leung (2013) study the market reactions to 13 events between 2007 and 2012
pertaining to the SEC’s contemplation of mandatory IFRS adoption for US firms.
They find that investors’ reactions to announcements that increase the likelihood of
IFRS adoption are more positive for firms that are likely to benefit from
convergence but less so for firms with a higher litigation risk. Prather-Kinsey and
Tanyi (2014) use a similar setting but focus on the price reactions of firms with

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American depositary receipts (ADR) that report under IFRS. They also observe a
positive market reaction to SEC announcements pertaining to potential IFRS
adoption for these ADR firms.

4.2 Effects of IFRS adoption on analyst following and forecast properties

Although they do not focus primarily on IFRS adoption, Bae et al. (2008) provide
evidence that is directly relevant to understanding the effects of IFRS on analyst
following and forecast properties. The authors explore whether GAAP differences
across countries are associated with the number of foreign analysts following the
firms and their forecast accuracy.34 Their sample consists of 6888 foreign analysts
covering 6169 firms from 49 different countries (1176 country-pairs) between 1988
and 2004. Using two novel measures of pairwise GAAP differences between
countries (i.e., the extent of the difference between the GAAP the firm follows and
the prevalent GAAP in the analyst’s home country), they find that foreign analyst
following is negatively related to GAAP differences and weakly associated with
forecast accuracy. These results indicate the costs associated with differences in
accounting standards across countries and speak of the potential benefit of
accounting harmonization. That even sophisticated users of financial information
like analysts benefit from accounting harmonization reveals the potential gains for
other types of capital-market participants.
Several studies directly evaluate the effects of voluntary and mandatory IFRS
adoption on analyst following and forecast properties. Ashbaugh and Pincus (2001)
examine an international sample of 80 non-US firms that voluntarily adopted IAS
from 1990 to 1993. They contend that IAS adoption improves the predictability of
earnings by restricting the choice of accounting measurement methods that
managers can adopt. Consistent with this, they find that the absolute values of
analysts’ forecast errors declined after adoption and that this decrease related cross-
sectionally to the effect of adoption on a firm’s accounting standards. Although they
attempt to control for the variety of observed factors driving voluntary adoption,
their analyses remain open to the self-selection concerns usually seen in studies of
voluntary adoption.
Comparing mandatory IFRS adopters to firms that had earlier voluntarily adopted
IFRS, Byard et al. (2011) examine how the IFRS mandate affects analysts’ forecast
errors. They find that the absolute value of forecast errors and dispersion decreases
after mandatory IFRS adoption but only for firms domiciled in countries with strong
enforcement and where IFRS adoption significantly changed accounting standards.
Bilinksi et al. (2013) find that the improved analyst performance following IFRS
adoption can also be extended to analysts’ predictions of target prices. Tan et al.
(2011) extend this line of thinking to study the pervasiveness of the improvements
in analyst coverage and forecast accuracy across analyst groups. They find that,
although IFRS adoption increases coverage from both foreign and local analysts, it

34
Although Bae et al. (2008) do not focus on IFRS adoption, in a supplementary analysis, they document
that analysts familiar with IAS are more likely to start following a firm after its voluntary IAS adoption.

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A review of the IFRS adoption literature 927

improves the forecast accuracy of foreign analysts only. They find IFRS has little
effect on the forecasting ability of local analysts.
Examining why IFRS adoption may improve analysts’ forecast accuracy for
adopting firms, Horton et al. (2013) test whether the improvement arises from (i) a
higher quality of IFRS, (ii) a greater comparability after IFRS adoption, or (iii) the
additional opportunities available to managers under IFRS to manipulate earnings to
meet the forecasts. To this end, the authors classify analysts into three categories:
(i) those who focus on only a single set of local GAAP in the pre-IFRS period but
analyze reports under both local GAAP and IFRS in the post-IFRS period, (ii) those
who focus on a single set of local GAAP in the pre-IFRS period and switch entirely
to IFRS reports in the post-IFRS period, and (iii) those who focus on multiple sets of
local GAAP in the pre-IFRS period but switch entirely to IFRS reports in the post-
IFRS period. Horton et al. (2013) predict that IFRS adoption decreases compara-
bility for the first category of analysts, leaves comparability unaffected for the
second category, and improves comparability for the third category. In contrast,
they predict that all three categories of analysts benefit from IFRS adoption if IFRS-
related benefits arise through improved reporting quality. Their analysis supports the
view that IFRS helps analyst forecasting mainly through the improvement of
reporting quality and comparability. They find no evidence that managers engage in
greater earnings management to meet analysts’ forecasts under IFRS.
One simple explanation for the observed improvements in analysts’ forecast
accuracy is that managers provide more earnings guidance following IFRS
adoption. This view emerges from the findings of Li and Yang (2015), who show
that IFRS adoption is associated with an increased tendency of managers to provide
earnings guidance. However, as Li and Yang (2015) attribute the increases in
management forecasts to improved reporting quality under IFRS and increased
demand for such information from analysts following IFRS adoption, the causal
relationship between the effects of analyst and management forecasts remains
unknown.

4.3 Effects of IFRS adoption on cross-border capital flows

Proponents of IFRS have consistently claimed that greater financial reporting

quality and improved comparability of financial reports under IFRS lead to more
cross-border flow of capital and better integration of capital markets (e.g.,
European Parliament Regulation 1606/2002). These claims are based on the
premise that foreign investors must devote significant resources to interpret the
domestic GAAP of other countries and that cross-country discrepancies in
accounting rules and practices create significant information barriers, leaving
foreign investors at an informational disadvantage relative to local ones.
Along these lines, Bradshaw et al. (2004) suggest that US institutional investors
prefer non-US firms whose accounting methods conform more closely to US GAAP.
They find that foreign firms exhibiting higher levels (changes) of US GAAP
conformity have higher levels of US institutional ownership. They notably find that
increases in US GAAP conformity precede increases in US investment, indicating
that accounting choice affects investor capital allocation decisions and that diversity

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in accounting choices decreases international investment. However, the recent

findings by Fang et al. (2015) suggest the opposite causality: US institutional
investors drive convergence in accounting practices; i.e., an increase in US
institutional ownership precedes an increase in accounting comparability between
foreign firms and their US industry peers.
Studies focusing directly on IFRS adoption and cross-border capital flows offer
three major arguments for why IFRS adoption may matter to foreign investors. First,
IFRS adoption replaces unfamiliar country-specific reporting standards with a
single set of standards with which foreign investors can familiarize themselves at a
lower cost, and thus, help foreign investors assess foreign firms and markets
(Amiram 2012). Second, IFRS could improve transparency for foreign investors as
it is often perceived as being of a higher quality than many local GAAP. Finally, the
use of harmonized accounting standards may increase the visibility of remote
investments, putting these stocks on investors’ radars.
Covrig et al. (2007) provide early evidence of the role of IAS adoption in investor
allocation decisions. Focusing on a sample of holdings in non-US stocks by 25,000
mutual funds around the world, Covrig et al. (2007) show that stock ownership by
foreign mutual funds increases with the voluntary adoption of IAS. After controlling
for many standard determinants of institutional ownership such as size, analyst
following, inclusion in the market index, cross-listings, choice of auditor, and an
array of financial characteristics, the authors find an almost 50 % increase in foreign
mutual fund ownership for IAS adopters relative to non-IAS adopters. When they
partition the sample into two groups based on firms’ information environment or
visibility, they find IAS-adoption induced changes in foreign mutual fund ownership
to be pronounced for voluntary adopters located in poorer information environments
and with lower visibility, indicating heterogeneity in the adoption effects. As a
firm’s information environment and visibility are likely to be correlated with its
decision to adopt IAS, the last result could also be driven by differences in firms’
incentives to adopt IAS.
Khurana and Michas (2011) extend the preceding analyses to the context of
mandatory IFRS adoption and find that IFRS adoption decreases US investors’
home bias, which is the extent to which investors overweight US stocks in their
portfolios relative to stocks in the country mandating IFRS. Based on a sample of 85
countries, 33 of which mandated IFRS from 2003 through 2007, the authors find
that US home bias decreased for investments in firms domiciled in IFRS-adopting
countries relative to those in firms in countries that did not change their accounting
standards. These results are stronger for IFRS-adopting countries that exhibit larger
differences between IFRS and domestic accounting standards, a stricter rule of law,
and greater incentives to report high quality financial information.
Shima and Gordon (2011) also examine the effect of IFRS adoption on the
investment decisions of US investors but scale their main variable of interest (i.e.,
the dollar investments by US investors in a foreign market) by the GDP of the
foreign country rather than by the weight of the foreign country’s stocks in world-
market capitalization, an approach taken by Khurana and Michas (2011). In contrast
to Khurana and Michas (2011), they find no evidence to suggest that IFRS adoption

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decreased home bias from 2003 through 2006, unless such adoption occurred in a
country with a strong regulatory environment.
Florou and Pope (2012) examine how IFRS adoption affects institutional
ownership by studying the investment allocation decisions of a large sample of
international institutional investors over the 2003–2006 period. They show that the
percentage of institutional ownership and number of institutional investors
increased in countries mandatorily adopting IFRS relative to a control sample of
countries that did not mandate IFRS. Using firm-level data in a difference-in-
differences analysis, they report an average increase in institutional ownership of
1.4 % in the period immediately following the IFRS transition quarter. These
changes in institutional ownership are also more marked for active investors, whose
investment decisions rely on financial statement data relative to passive investors,
corroborating the claim that ownership changes are caused by IFRS. As the authors
do not distinguish between domestic and foreign institutional investors, it is unclear
whether the documented ownership changes are due to IFRS improving reporting
quality and thereby inducing domestic institutions to increase their ownership or to
the harmonization of accounting standards attracting foreign investors.
Yu and Wahid (2014) extend preceding analyses by focusing specifically on
foreign mutual fund holdings around IFRS adoption. They show that foreign mutual
funds also increase their ownership stakes in firms domiciled in IFRS-adopting
countries. They relate these ownership changes to changes in accounting distance
(i.e., differences in accounting standards) between the investee and investor’s
countries. To give a sense of the economic magnitude of this effect, they point out
that, if the differences in accounting standards across the US and South Africa were
eliminated, then the US mutual funds would decrease their underweighting of South
African stocks by approximately 14 %. In an additional analysis, the authors
examine changes in accounting distance driven only by IFRS adoption in the
investor fund’s country, i.e., there are no changes in the accounting standards of the
investee firm. Even in this setting, the authors continue to find that mutual funds
increase their investment weights in the investee firms, indicating that an investor’s
increased familiarity with an investee’s accounting standards encourages cross-
border investments.
DeFond et al. (2011) attempt to more directly identify the specific accounting
attributes that explain the increased attention of international institutional investors
following IFRS adoption. They contend that increases in cross-border investment
following IFRS adoption are driven by improvements in comparability, which
lowers information acquisition costs for global investors. Testing this assertion on a
sample of 14 IFRS-mandating EU countries and 10 non-IFRS countries for the
2003–2007 period (excluding the IFRS transition year), they find that IFRS adoption
results in greater investment by foreign mutual funds for firms experiencing larger
increases in accounting uniformity.35

35
For each industry-country, DeFond et al. (2011) measure accounting uniformity as the number of firms
in that industry and country using IFRS in the post-IFRS-adoption period, divided by the number of firms
in that industry and country using local accounting standards in the pre-IFRS-adoption period.

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Although progress has been made in understanding the effects of IFRS adoption
for institutional investors, very little research has explored the effects of adoption on
the trading patterns of retail investors. This is at least partly due to a lack of
comprehensive data related to retail trades. Bruggemann et al. (2012) attempt to
circumvent this problem by analyzing trading volume in the Open Market of the
Frankfurt Stock Exchange, a trading venue primarily designed to attract small
German investors interested in foreign stocks. Based on difference-in-differences
analysis, they document an increase in trading volume following the EU’s
mandatory IFRS adoption in 2005, suggesting that retail investors benefit from IFRS
reports. However, cross-sectional analysis reveals that these effects are more
pronounced for trading in stocks that have increased media coverage following
IFRS adoption, which raises the possibility that the observed trading effects may not
be directly attributable to IFRS adoption but may reflect investors’ responses to the
greater media coverage.
Although the preceding studies focus on specific subsamples of foreign investors,
such as mutual funds, US investors, institutional investors, and retail investors,
Amiram (2012) shows that the evidence in these studies can be generalized to
country-level foreign portfolio investments (FPI). That is, the tendency of investors
to invest in IFRS countries is observable even when one analyzes data related to all
of the non-controlling equity stakes in a country purchased by foreign entities. He
also finds that it is primarily investors from countries that use IFRS who increase
their investments in other IFRS-adopting countries rather than investors from
countries that do not use IFRS, which implies that the increased cross-border
investments are mainly attributable to investors’ familiarity with IFRS, rather than
to IFRS improving reporting quality or appealing to all foreign investors.
Although most studies of cross-border investments around IFRS adoption focus
exclusively on equity investments, Beneish et al. (2014) study both equity and debt
investments. They find that post-IFRS increases in cross-border investments of
equity, as reflected in country-level FPI data, are mainly driven by US investors.
More interestingly, they find that the effects of IFRS on cross-border debt
investments are stronger and that IFRS adoption attracts new debt investors from a
wider set of countries, including the US and other non-IFRS countries. The authors
conclude that IFRS adoption benefits debt investors more than equity investors.
Overall, there appears to be a consensus in the empirical evidence that IFRS
adoption is associated with increases in cross-border capital flows. Although initial
studies attribute these increases to both improved transparency and comparability
under IFRS, more recent studies point toward greater familiarity of investors with
IFRS as the source of improvement. However, these findings leave some
unanswered questions. What is the causal relationship, following IFRS adoption,
between changes in stock liquidity (discussed in the next subsection) and cross-
border capital flows? What are the effects of larger cross-border capital flows on the
size of equity markets and the economy of IFRS-adopting countries relative to those
of the countries from where the investments flow out? How does IFRS adoption
affect investment risks and returns on cross-border capital flows?

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4.4 Effects of IFRS adoption on market liquidity and cost of capital

Several theoretical models have been developed to understand the link between
information quality and liquidity in addition to cost of capital. Although the
literature is not specifically directed at IFRS adoption, these models provide a basis
for empirical tests of the effects of IFRS adoption on stock liquidity and cost of
capital. Hence, we review the literature in Section 4.4.1. Section 4.4.2 then presents
the empirical evidence for voluntary IFRS adopters, and Sect. 4.4.3 discusses the
evidence for mandatory adopters.

4.4.1 Theoretical predictions of the effects of reporting quality on liquidity and cost
of capital

Two mechanisms are generally employed to link quality of accounting information

with liquidity and cost of capital: estimation risk and information asymmetry, both
of which are often referred to as ‘‘information risk.’’ Estimation risk refers to the
uncertainty associated with investors’ assessments of the parameters of an asset’s
return or payoff distribution, and information asymmetry relates to the risk facing
liquidity traders from potentially trading with better informed investors. Increasing
information (i.e., greater and more precise accounting disclosures) allows for both a
lower estimation risk and convergent opinions on the part of all investors, which
improves risk sharing and thus decreases the cost of capital (e.g., Barry and Brown
1985; Coles and Loewenstein 1988). Barry and Brown (1985) show in a Bayesian
framework that risk-averse investors prefer securities in which more information is
available, as these securities present a lower estimation risk for investors. They
point out that, when such investor preferences are consistent across the market,
equilibrium prices are higher for firms with better information and such a firm’s cost
of capital is lower. This study and subsequent studies conducted along this line (e.g.,
Coles and Loewenstein 1988) show that parameter uncertainty affects investors’
estimations of beta and so are not diversifiable.36
On a related note, information asymmetry between potential buyers and sellers of
shares can introduce adverse selection into the share markets and decrease market
liquidity. In response to the lower liquidity, stock prices decrease to compensate
investors for holding illiquid stocks and lead to an increased cost of capital for the
firm. However, firms can decrease this cost by improving the level or precision of
disclosures, which lowers the degree of information asymmetry between investors
and eventually the cost of capital (e.g., Amihud and Mendelson 1986; Diamond and
Verrecchia 1991; Easley and O’Hara 2004). In addition, Diamond and Verrecchia
(1991) provide an alternative path for relating disclosure levels to cost of capital:
greater disclosures decrease the adverse price effect of the trade, mitigating investor
concerns about taking large stakes in a firm. This increases demand for securities,
which, through improved liquidity, decreases the cost of capital.

36
In an economy where the level of disclosure is the same for all firms, estimation risk can be diversified
away. However, Barry and Brown (1985) show that differential information (i.e., cross-firm differences in
the amount of available information about the firm) affects pricing.

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The preceding models generally derive their results from a single-asset economy
(or multiple assets where the cash flows of firms are uncorrelated). In contrast,
Lambert et al. (2007) develop a model in which the quality of accounting
information can affect the cost of equity capital in an economy with multiple assets
whose payoffs are correlated. Under a CAPM framework with perfect competition,
they show that accounting information quality affects the cost of capital through a
firm’s beta and that, once an appropriately measured beta is controlled for,
accounting quality should not relate to expected returns.37 Studying the interplay
between information asymmetry and cost of capital in a large economy, Hughes
et al. (2007) similarly show that private information signals affect either market risk
premium or factor loadings, depending on whether the private signal relates to
systematic risk factors or idiosyncratic shocks. However, the information asymme-
try arising from private signals about idiosyncratic shocks does not matter directly
to cost of capital. That is, after accounting for betas, the information asymmetry has
no effect on cost of capital.
Armstrong et al. (2011) attempt to reconcile the contradictory theoretical
predictions for the effect of information asymmetry on cost of capital by proposing
that information asymmetry matters for pricing stocks only when markets are
imperfect. They conjecture that, in perfectly competitive markets where individual
traders’ demands do not affect stock prices, information asymmetry is irrelevant for
stock pricing. However, in imperfect security markets, information asymmetry has a
separate effect on cost of capital, beyond any effect through other risk factors. Using
the number of shareholders a firm has as a proxy for the level of competition
surrounding the firm’s shares, the authors provide evidence consistent with their
conjecture related to US stocks.
In one of the very few theoretical studies to directly evaluate the effect of global
harmonization on stock market performance, Barth et al. (1999) present a model
that shows that the effect of accounting harmonization on price information and
trading volume in a market depends on the interaction of two forces: (i) whether the
harmonization improves or worsens the information revealed through financial
statements and (ii) the extent of the net benefits accrued to foreign investors by
becoming more familiar with a firm’s financial reporting standards. The latter force
is assumed to depend on the former, as poorer information quality increases returns
to informed trading. Based on the interaction of these two forces, Barth et al. (1999)
show that the harmonization of better quality accounting standards may not
necessarily improve stock market performance and vice versa.
The preceding theoretical predictions suggest that IFRS adoption will improve
stock liquidity provided it improves reporting quality for stock investors. However,
its effect on cost of capital is ambiguous, especially after controlling for firms’

37
Easley and O’Hara (2004) develop a model in which firms with less public and more private
information face a greater information risk and higher expected returns. They argue that, due to their
information disadvantage relative to informed investors, uninformed investors end up holding suboptimal
portfolios with too many stocks with pending bad news and too few with pending good news. As this risk
cannot be diversified away by holding more stocks, the risk gets priced in equilibrium. However, Lambert
et al. (2007, pp. 396–397) point out that the information effect on stock prices is diversified away when
the number of traders becomes large.

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betas. We now turn our attention to empirical evidence of the linkage between
financial reporting quality, stock market liquidity, and cost of capital.

4.4.2 Empirical evidence based on voluntary IFRS adoption

Early studies of the effects of IFRS adoption on stock markets typically rely on
firms from a handful of European countries that allowed voluntary adoption of IAS.
In fact, many of the studies focus specifically on German firms, as voluntary
adoption was more common among them.
Leuz and Verrecchia (2000) compare proxies for stock liquidity, namely, bid-ask
spread, trading volume, and return volatility, across German firms voluntarily
reporting under either IAS or US GAAP versus those reporting under local German
GAAP. Arguing that IAS and US GAAP have higher quality disclosure
requirements, they predict that firms committing to report under IAS or US GAAP
should have lower information asymmetry and better stock liquidity than those
reporting under German GAAP. Consistent with this prediction, they find that firms
reporting their 1997 financial reports under IAS or US GAAP exhibit lower bid-ask
spreads and higher share turnovers but not different share price volatilities.
Although their analysis is based on the greater disclosure levels required under IAS
or US GAAP, it does not distinguish between the effects of disclosure quality and
those of the quality of recognized financial numbers. Moreover, as it relies on a very
small sample of 14 IAS adopters and seven US GAAP adopters, its generalizability
presents a problem.
In a related study, Leuz (2003) compares the stock liquidity of firms in
Germany’s former New Market that report under IAS with firms from the same
market that adopt US GAAP. The author argues that, except for differences in
accounting regulations, these two groups of firms face identical regulations and
therefore any differences in the information asymmetry or stock liquidity proxies
across these groups should reflect the relative reporting quality of the two
accounting standards. Leuz (2003) finds insignificant differences in the bid-ask
spreads and share turnover between the two groups, indicating that the mere
adoption of either IAS or US GAAP is not sufficient to improve these firms’
reporting quality relative to each other. In a closely related work, Bartov et al.
(2005) study how the value relevance of accounting numbers varies across German
firms reporting under IAS, US GAAP, or German GAAP. Although they find that
firms reporting under US GAAP or IAS have better value relevance, they do not find
any significant difference in value relevance between firms reporting under US
GAAP and IAS. Their findings, along with those of Leuz (2003), indicate minimal
stock market benefits from adopting IFRS relative to US GAAP.
Daske (2006) provides some of the earliest evidence of the link between choice
of accounting standards and cost of capital estimates. Using analyst consensus
forecasts from IBES, Daske (2006) estimates the implied cost of equity capital for a
sample of German firms between 1993 and 2002 and finds no evidence to suggest
that it is lower for firms reporting under IAS or US GAAP than for firms reporting
under German GAAP. In fact, he finds that the cost of equity increases when firms
switch from local GAAP to IAS or US GAAP, which he speculates may reflect the

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effects of the decreased comparability of these firms’ financial reports relative to

those of other German firms. Although this study takes an important step by
connecting accounting standards to cost of capital, its implied cost of capital
estimates are based on analysts’ forecasts, whose properties are affected by choice
of accounting standards (see the discussion in Sect. 4.2). These may add noise to the
analyses surrounding the accounting standard changes.
Recognizing that firms have discretion in how they implement new accounting
standards, Daske et al. (2013) re-examine the observed liquidity and cost of capital
effects around voluntary (and mandatory) adoption. Their analysis incorporates
changes in firm-level reporting incentives and behavior around the time of adoption
to classify firms as either ‘‘serious’’ or ‘‘label’’ adopters.38 ‘‘Serious’’ adopters are
firms that experienced significant changes in incentives around IAS adoption and for
whom adoption forms part of a broader commitment to transparency. ‘‘Label’’
adopters are firms that experienced little or no change in observable incentives
around the time of adoption and thus did not make significant changes to their
reporting policies. Based on an international sample (spanning 30 countries) of
voluntary IAS adopters between 1990 and 2005, the authors fail to find any
noticeable effects on liquidity (measured as the effects of trades and bid-ask spreads
on price) or implied cost of capital estimates for voluntary adopters, relative to
local-GAAP firms and a firm’s own pre-IAS history. However, once they use
concurrent changes in reporting incentives as a condition, they find that ‘‘serious’’
adopters experience improvements in liquidity and declines in cost of capital
relative to ‘‘label’’ adopters. In addition, they find that serious adopters experience a
net increase in Tobin’s Q. They find the same pattern of results surrounding
mandatory IFRS adoption. Daske et al. (2013) provide evidence that simply
adopting IAS/IFRS does not necessarily lead to the purported stock market benefits
unless firm-level reporting incentives are also aligned. Their evidence corroborates
the findings of Ball et al. (2003) and also provides some insight into the nature of the
heterogeneous outcomes previously observed around IAS/IFRS adoption.
Overall, the evidence related to voluntary adoption is mixed. Although some
studies find evidence of reductions in information asymmetry and stock liquidity
(e.g., Leuz and Verrecchia 2000), other studies document little support for the claim
that voluntary IFRS adoption by itself improves liquidity or decreases cost of capital
(Daske 2006; Daske et al. 2013). Although studies of voluntary adoption typically
attempt to control for self-selection using traditional econometric approaches, one
cannot be entirely confident that self-selection biases do not affect these results.

38
Daske et al. (2013) use three proxies to identify major changes in firm-level reporting incentives
related to voluntary (and mandatory) IAS adoption. The first is the primary factor drawn from factor
analysis of a variety of firm attributes, such as size, leverage, profitability, book-to-market ratio,
percentage of closely held shares, and percentage of foreign sales to total sales. The second is the negative
of the ratio of absolute value of accruals to the absolute value of cash flow from operations. The final
proxy is the number of analysts following a firm. The authors then use the changes in these proxies over
six years around IAS to sort firms into ‘‘serious’’ and ‘‘label’’ adopters based on whether the changes are
above or below the median change.

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4.4.3 Empirical evidence based on mandatory IFRS adoption

Using firm-year panel data for mandatory IFRS adopters from 26 countries and
covering 2001 through 2005, Daske et al. (2008) examine the effects of mandatory
IFRS adoption on stock liquidity, cost of capital, and Tobin’s Q. Relying on a
benchmark of firms that do not report under IFRS (due to either being domiciled in a
non-adopting country or not being required to mandatorily adopt IFRS in 2005) as
control firms, they find a significant improvement in liquidity for mandatory IFRS
adopters. They also find a significant increase in cost of capital and a significant
decrease in Tobin’s Q. However, when the authors examine the stock market effects
in the 1 year before IFRS adoption, they find that cost of capital decreases by 26
basis points and Tobin’s Q increases by 7 %. They conclude that the IFRS benefits
may be reflected in stock prices as soon as IFRS adoption is anticipated. However,
from a theoretical perspective, it is unclear why investors decrease the premium for
information risk even before the risk is attenuated and despite the significant
uncertainty around IFRS implementation and its effect on reporting quality (as
discussed in Sect. 2.4) in the year before IFRS adoption. It is also unclear why cost
of capital actually increases if information risk decreases upon the IFRS adoption
date. The authors’ findings also leave unanswered the question of why the effects on
cost of capital and Tobin’s Q precede mandatory adoption when uncertainty about
the reporting effects of IFRS remained high (see discussion in Sect. 2.4).
Based on cross-sectional analyses, Daske et al. (2008) document that the
observed stock market benefits occur only in countries with strict enforcement
regimes and in countries where firms have incentives to be transparent. They are
careful to point out that some or all of their results may reflect the effects of a
variety of regulatory and enforcement changes that are instituted along with IFRS
adoption and that mandatory adoption itself may play a limited role in causing the
observed outcomes.
Like Daske et al. (2008), Li (2010) investigates whether mandatory adoption of
IFRS affects cost of equity capital. Based on difference-in-differences analysis of a
set of 1084 EU firms, she concludes that mandatory adopters enjoy a significant
reduction of 47 basis points in their cost of equity, but that no such change occurs
around the IFRS mandate date for a control sample of voluntary adopters.39 A
possible reason for these differences in the main results is that, unlike Daske et al.
(2008), she does not control for time trends. Notwithstanding these differences, she
finds that only firms in countries with strong legal enforcement benefit from
reductions in cost of equity capital. This suggests that the differences in the
countries covered in the sample may explain the differences in main results across
the two studies.
Rather than limiting their focus to IFRS adoption indicators, Platikanova and
Perramon (2012) study how new information revealed through IFRS adoption
(contained in the reconciliation of IFRS to local GAAP) relates to stock liquidity.
They find that, although the reconciliation numbers (relative to industry peers) for

39
Li (2010) measures cost of equity capital as the average implied cost of capital measures estimated
from the four different valuation models.

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shareholders’ equity are not unambiguously related to stock liquidity, those for net
income are significantly negatively related to it. The authors suggest that larger net
income differences reflect greater uncertainty about IFRS adjustments in the
transition year and that this uncertainty lowers stock liquidity.
Christensen et al. (2013) re-evaluate the evidence provided by Daske et al. (2008)
after accounting for enforcement and regulatory changes concurrent with mandatory
IFRS adoption in some EU countries. Based on a survey of regulators, practitioners,
and academics and information from public sources, they classify five European
countries (Finland, Germany, Netherlands, Norway, and the UK) as undergoing
substantive enforcement changes concurrent with mandatory IFRS adoption. They
also compare the liquidity changes surrounding IFRS adoption across four groups of
countries: (i) EU countries with concurrent enforcement changes, (ii) EU countries
without concurrent enforcement changes, (iii) non-EU countries adopting IFRS, and
(iv) countries not adopting IFRS. They document that the effects of IFRS
introduction on stock liquidity are limited to the five European countries undergoing
concurrent changes in enforcement. Moreover, they find similar liquidity improve-
ments for firms that are experiencing changes in enforcement regimes but are not
concurrently changing their accounting standards. Based on these findings, they
conclude that changes in reporting enforcement or other correlated omitted factors
help explain the liquidity changes observed around IFRS adoption and that changes
in accounting standards have had little direct effect on market liquidity. However,
Barth and Israel (2013) contend that the evidence provided by Christensen et al.
(2013) is insufficient to attribute the liquidity changes to enforcement changes alone
and that both IFRS adoption and enforcement changes may be required for firms to
benefit from improved stock liquidity.
In contrast to the preceding studies’ focus on the effects of IFRS adoption on
stock liquidity and cost of capital, Hong et al. (2014) illuminate another capital
market consequence by evaluating the effect of IFRS adoption on the underpricing
of initial public offerings (IPOs). As IPO underpricing is at least partly caused by
information asymmetry between informed and uninformed investors, IFRS adoption
can help decrease IPO underpricing by decreasing information asymmetry. In
addition, the authors point out that IFRS adoption can lower IPO underpricing by
attracting more foreign investors’ attention to the stock. To test their prediction,
they adopt a difference-in-differences research design involving a treatment sample
of 1540 IPO firms from mandatory-IFRS-adopting countries and a propensity-
scored matched sample of IPO firms from non-IFRS-adopting countries. Their
findings suggest that IPO underpricing decreases significantly (38–82 %) for IFRS-
adopting firms. Moreover, they show that IPO firms attract significantly more
foreign proceeds (49–76 %) after mandatory IFRS adoption. Cross-sectional
analyses reveal that the results are limited to countries with strong enforcement
regimes and those that were significantly affected by IFRS adoption (i.e., with large
differences between IFRS and prior local GAAP).
In summary, empirical analyses of stock market benefits generally reveal that
voluntary and mandatory IFRS adoption have increased market liquidity and
decreased the cost of equity capital. However, these benefits have not been
experienced by all firms or within all countries. Rather, they have been concentrated

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in firms that have undergone concurrent changes in firm-level reporting incentives

and in countries that have undergone concurrent changes to enforcement. As we
discuss in detail in Sect. 10, studies focusing on mandatory IFRS adoption are
susceptible to a confounding-events problem, raising concerns about the precise
cause of the observed effects of the IFRS mandate. To address such concerns, more
research is required to obtain a clearer understanding of the links between IFRS
adoption and its effects on stock markets. For instance, current IFRS studies do not
closely tie their empirical analysis of cost of capital to predictions derived from
specific theoretical models. It is necessary to do so, as theoretical predictions of the
effect of information quality on cost of capital are model-dependent (as discussed in
Sect. 4.4.1). Future research should also delve deeper into the precise properties of
IFRS and enforcement that underpin the observed benefits related to liquidity and
cost of capital. Which types of enforcement or which specific IFRS attributes yield
greater stock market benefits?

5 IFRS and corporate decision-making

5.1 Empirical predictions and US-based evidence

There are several reasons to expect changes in accounting standards and the
attendant effect on reporting quality to influence corporate decision-making. Several
studies show that better reporting quality decreases information asymmetry between
insiders and outsiders, which in turn attracts capital to positive net-present-value
projects and increases investment opportunities by lowering investors’ required
returns (e.g., Biddle et al. 2009; Raman et al. 2013; Goodman et al. 2014). Better
financial reporting quality also enhances the effectiveness of corporate governance
mechanisms and thus mitigates managerial excesses, including under- and
overinvestments. Reported accounting numbers are often used in debt covenants,
and so changes to accounting standards can tighten or loosen covenant slack and
affect the funds available for investments and other corporate purposes (Shroff
2015). Furthermore, new accounting standards often require managers to gather
additional information, which can affect managerial decision-making.
Changes in accounting standards can also affect the decision-making of firms
through spillover effects from other firms’ financial reports. For instance, more
transparent reporting by all of the firms in an economy can benefit a firm by
decreasing its uncertainty over the strategies of peer firms. Durnev and Mangen
(2009) posit and show that a competitor’s accounting restatements transfer
information about the general profitability of investment projects to other firms.
Admati and Pfleiderer (2000) also suggest that, in a world where firm values are
correlated, mandating higher disclosure quality enhances welfare, as higher quality
disclosures allow investors to arrive at more accurate valuations for not only the
disclosing firm but also its peers. This is also likely to affect corporate decisions by
influencing capital allocation across firms. A number of US-based studies provide
empirical evidence in support of these spillover effects of reporting quality (e.g.,

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Foster 1981; Freeman and Tse 1992; Durnev and Mangen 2009; Badertscher et al.
2013; Shroff et al. 2014).

5.2 IFRS and corporate investment efficiency

One of the first studies to consider investment efficiency in the IFRS adoption
context is that by Schleicher et al. (2010), who investigate how IFRS adoption
affects investment efficiency in an international setting. They argue that improved
reporting quality under IFRS should improve investment efficiency and that this
improvement should be more pronounced in inside economies (i.e., economies with
small stock markets, highly concentrated ownership, weak outside investor rights,
poor disclosure levels, and weak legal enforcement) than in outside economies, as
the former are more prone to agency problems and financial constraints. Along
similar lines, they suggest that the effects of IFRS should be more noticeable for
smaller firms, which are generally more financially constrained. Measuring
investment efficiency based on the sensitivity of investments to cash flows, the
authors report results that are consistent with these predictions, i.e., reductions in
investment-cash flow sensitivity following IFRS adoption are greater for insider
economies and for smaller firms. Biddle et al. (2013) extend these findings to a
larger sample and adopt a difference-in-differences approach that encompasses both
IFRS-adopting and non-IFRS-adopting countries and show that the conclusions of
Schleicher et al. (2010) are robust.
Chen et al. (2013) examine the effect of IFRS adoption on the cross-border
spillover of investment-related information. They specifically investigate how IFRS
adoption affects the relationship between the investment efficiency of a firm and the
investment performance of its foreign peers based on a sample of over 1000 IFRS-
adopting firms from 17 European countries between 2000 and 2009. They show that
IFRS adoption increases the sensitivity of a firm’s investment efficiency to
performance-related information about its foreign peers but not to information about
its domestic peers. Based on this, they conclude that enhanced cross-border
comparability following IFRS adoption drives the documented results.
Louis and Urcan (2014) examine how mandatory IFRS adoption affects
managerial decisions pertaining to M&A. As accounting reports play a crucial
role in the initial screening and identification of target firms, they argue that
acquirers should be able to better screen targets from other countries with
comparable accounting standards, suggesting that widespread IFRS adoption should
increase cross-border acquisitions. They also point out that the use of identical
accounting standards by both acquirer and target should simplify post-acquisition
integrations. This should also increase the likelihood of IFRS-reporting entities
merging. Consistent with these predictions, they find that the odds of cross-border
acquisitions of listed firms from IFRS-adopting countries significantly increase in
the post-IFRS period relative to corresponding increases for either unlisted firms in
IFRS-adopting countries or listed firms from non-IFRS countries. This effect is not
driven by countries that change their enforcements or regulations concurrently with
IFRS adoption. Rather, it primarily occurs when the acquiring firm is also from an
IFRS-adopting country. Based on these findings, the authors conclude that improved

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comparability rather than changes in reporting quality resulting from IFRS adoption
causes an increase in cross-border M&A.
Francis et al. (2015) also investigate whether differences in accounting standards
across countries affect cross-border M&A. Using cross-border M&A data from 32
countries over 1998 through 2004, they show that the volume of cross-border
transactions is larger between countries with similar accounting standards. They
also report that mandatory IFRS adoption has increased cross-border M&A across
countries that exhibited larger differences in their domestic GAAP in the pre-IFRS
period. However, neither Francis et al. (2015) nor Louis and Urcan (2014) identify
the specific costs that are so large as to dissuade the acquisition of targets reporting
under an alternative accounting standard.
Shroff et al. (2014) examine whether the information environment in which a
subsidiary operates affects its investment decisions using IFRS adoption as an
exogenous shock to firms’ information environment. The authors hypothesize that
more transparent information, such as that presented under IFRS, allows multina-
tional companies to better monitor the investment decisions of their foreign
subsidiaries. Consistent with this, they show that the investment decisions of foreign
subsidiaries in country industries with more transparent information environments
are more responsive to local growth opportunities than foreign subsidiaries in
country industries with less transparent information environments.
Relatedly, Loureiro and Taboada (2015) examine whether and how IFRS
adoption affects the sensitivity of managerial decisions to stock price information,
i.e., whether insiders can ‘‘learn’’ from outsiders. They argue that an improved
information environment such as that under IFRS adoption allows managers to learn
more from investors’ information sets, as reflected in the stock prices. They test this
prediction by following a difference-in-differences approach using both non-
adopters and voluntary adopters as control groups. Based on a sample of over
32,000 firms from 50 countries over 1990 through 2012, they show that relative to
the control sample, IFRS adopters experience an increase in investment-to-price
sensitivity, a stronger relationship between market reactions to M&A announce-
ments and the likelihood of deal completion, and an improvement in post-
acquisition operating and return performance following adoption. The authors
attribute their results to increases in information provided by new foreign investors,
rather than current investors providing more information post adoption.

5.3 IFRS and other corporate decisions

Hail et al. (2014) examine how changes in a firm’s information environment affect
its dividend payout policies. They point out that an improved information
environment such as that under IFRS adoption can either increase or decrease
dividend payouts by improving managerial monitoring and mitigating agency
problems. Although improved monitoring decreases the need for managers to signal
their quality by paying out excess cash, causing lower dividend payouts, it can also
decrease overinvestment and lead managers to distribute excess cash through higher
dividend payouts. The authors test these contradicting predictions based on
difference-in-differences analysis of an international sample of firms covering 49

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countries over 1993 through 2008. Their logit analysis reveals that the propensity to
pay dividends decreases by about 9 % after IFRS adoption, relative to a benchmark
sample of non-adopting firms.
Wang and Welker (2011) examine whether firms strategically time equity
issuances during the transition period leading up to IFRS adoption, when
information asymmetry between management and investors was temporarily high.
They suggest that managers, who had inside knowledge of the negative effects of
IFRS on reported numbers, strategically issued equity before the information was
publicly released. Based on a sample of 2900 non-financial firms from Australia and
Europe, they initially provide evidence of greater information asymmetry between
managers and investors of equity-issuing firms by documenting a stronger
association between abnormal stock returns after IFRS adoption (when the effects
of IFRS were revealed publicly) and the difference in net incomes reported under
local GAAP and IFRS relative to non-issuing firms. They then document a
significantly negative relationship between the earnings differences across IFRS and
local GAAP, the probability of issuing equity, and the amount issued in the 3 years
leading up to IFRS adoption.
Chen et al. (2015a) examine whether mandatory IFRS adoption affects cross-
listing decisions. They point out that IFRS adoption may increase incentives to
cross-list by lowering the costs associated with financial reporting across multiple
jurisdictions and lowering investors’ costs of processing financial reports prepared
under unfamiliar accounting standards. However, IFRS adoption may also decrease
a firm’s need to cross-list by attracting foreign investors and analysts to local
markets. Based on a sample of 1181 cross-listed firms (including 608 from IFRS-
adopting countries), Chen et al. (2015a) find that firms in IFRS-adopting countries
are more likely to cross-list after mandatory adoption than firms reporting under
non-IFRS standards or firms that had voluntarily adopted IFRS earlier. They also
find that adopters tend to cross-list in more countries, in other IFRS-adopting
jurisdictions, and in countries with larger and more liquid security markets. Cross-
sectional tests reveal that the cross-listing effect of mandatory IFRS adoption is
greater for firms domiciled in countries exhibiting larger differences between local
GAAP and IFRS, lower disclosure levels, and less access to external capital before
adoption.
Overall, although initial efforts have been made to better understand the effects
of the IFRS mandate on corporate decisions, this topic offers opportunities for future
research. Have improved cross-border comparability and increased cross-border
information transfers led to the better economic integration of countries? Have they
increased competition in IFRS-adopting countries, especially from foreign firms?
By improving monitoring and efficiency of decisions and lowering costs of capital,
has IFRS adoption increased the economic profitability of firms? Or has it hurt
economic profitability by attracting greater competition, particularly from foreign
firms? Future studies should strive to explain the mechanisms through which these
real effects occur.

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6 IFRS and debt markets

Few studies evaluate the effects of IFRS on debt markets. The arguments related to
the effects of IFRS in the context of equity markets cannot always be directly
extended to debt markets due to the asymmetric payoff function of debtholders. For
instance, although shareholders may care more about the current market value of a
borrower’s assets, debtholders also care about the liquidation value of the assets.
Furthermore, debt is an agreement to repay the principal and interest, not the fair
value. Thus debtholders may not find the fair value reporting of liabilities helpful.
Accounting plays two major roles in debt markets: valuation and contracting. The
valuation role of accounting helps borrowers and lenders to mitigate information
asymmetry by sharing information directly relevant to pricing debt. This role
requires accounting numbers to reflect managers’ private and forward-looking
information, even if it is not immediately verifiable. In contrast, under the
contracting role, financial reports supply auditable financial outcome variables for
use in efficient contracts with the firm. This role requires accounting numbers to be
independently verifiable and enforceable in a court of law. The next two subsections
examine evidence in the literature related to each of these aspects.

6.1 Valuation-related effects of IFRS on the debt market

6.1.1 Effects of IFRS on firms’ capital structure

Based on Myers and Majluf’s (1984) adverse-selection theory, Naranjo et al. (2014)
conjecture that, by reducing information asymmetry and the attendant adverse
selection costs, mandatory IFRS adoption enables firms to easily raise external
funds. Based on Myers’ (1984) pecking order theory, they surmise that IFRS
adopters with high debt capacities choose debt as their primary source of external
financing. Based on a sample of firms covering 41 countries from 2003 through
2012, they find that mandatory IFRS adopters raise more external financing after
adoption and that firms with higher debt capacities issue incrementally more debt
than equity and have higher leverage ratios in the post-adoption than firms with
lower debt capacities. Consistent with the notion that IFRS helps lower information
asymmetry problems, the observed effects are more pronounced for firms with
higher ex-ante levels of information asymmetry.
Florou and Kosi (2015) investigate how IFRS adoption affects a firm’s choice of
the type of debt financing, i.e., public versus private. Compared with public
bondholders, private lenders, such as banks, have access to borrowers’ private
information and superior information-processing abilities and therefore face less of
an adverse selection problem (Bharath et al. 2008). This implies that firms with
better reporting quality should have better access to public debt relative to private
debt. Testing this prediction on a sample of public bond and private loan issuances
made between 2000 and 2007, Florou and Kosi (2015) provide corroborative
evidence. They find that mandatory IFRS adopters are more likely than non-
adopters to issue public bonds rather than private loans. Like the evidence provided

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by Naranjo et al. (2014), their findings support the prediction of Myers and Majluf
(1984) that better information quality increases firms’ reliance on external sources
of financing. Naranjo et al. (2014) and Florou and Kosi (2015) rely on the argument
that IFRS improve reporting quality and lower information asymmetry. However, as
discussed earlier in Sects. 3 and 4, the evidence for this argument is mixed.
IFRS-related studies of external financing patterns raise several questions for
future research. If firms raise more financing through public debt issues following
IFRS adoption, then where does the increased availability of funds come from? Are
the funds from non-IFRS-reporting firms reallocated? Are there changes in the
money supply or multiplier effects at the macroeconomic level? Do the documented
effects of IFRS on external funding differ when the supply of capital is limited?
Although we recognize that efforts to understand the broader macro-level effects of
accounting shocks are not straightforward, these are issues worth pursuing.

6.1.2 Effects of IFRS on the credit relevance of accounting numbers

IFRS studies generally find that the accounting information produced by IFRS is
more value relevant for stock market participants (see Sect. 3). This raises the
natural question of whether the same holds true for debtholders. In other words, do
IFRS numbers better predict a firm’s credit risk than local GAAP numbers? One
may argue that IFRS numbers are more credit relevant, as IFRS require recognition
of more liabilities, such as pension obligations and employee stock options, which
under local GAAP tend to be either optional or not required. Furthermore, the
increased emphasis on the fair value measurement for financial instruments and
fixed assets may result in IFRS numbers reflecting losses in a timelier manner than
historical cost accounting. However, the increased flexibility and managerial
discretion required under a principles-based IFRS regime can compromise the
verifiability and reliability of accounting numbers and therefore make financial
statements less useful for creditors.
Several studies empirically investigate the effects of IFRS on credit relevance.
However, the results tend to be mixed. Florou et al. (2015) and Wu and Zhang
(2014) find that IFRS adoption increases the credit relevance of accounting
numbers, and Kraft and Landsman (2014) find that IFRS adoption decreases credit
relevance. Furthermore, Bhat et al. (2014) find that IFRS adoption has no effect on
credit relevance. These differing conclusions are likely driven by the differences in
the researchers’ definitions of credit relevance and their proxies for credit risk. For
example, Florou et al. (2015) measure credit relevance using R2 values from
regressing S&P credit ratings on accounting variables, and Wu and Zhang (2014)
measure it using the sensitivity of Moody’s credit ratings to the accounting ratios.
Bhat et al. (2014) follow a similar approach to that of Florou et al. (2015) but
replace credit ratings with credit default swap (CDS) spreads in their credit-
relevance regressions. Kraft and Landsman (2014) also rely on CDS spreads to
proxy for credit risk but focus on the residuals from regressing CDS spreads on
accounting ratios rather than on the R2 values, as done by Bhat et al. (2014).
The preceding studies vary in terms of not only their methodological choices but
also their samples. Wu and Zhang (2014) examine both voluntary and mandatory

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IFRS adopters from 19 countries between 1990 and 2007 and include all of the
countries that did not mandate IFRS in their control sample. They find a significant
increase in the credit relevance of accounting numbers for both voluntary and
mandatory adopters but only for firms domiciled in countries with strong rules of
law. In contrast, Florou et al. (2015), Bhat et al. (2014), and Kraft and Landsman
(2014) consider only firms from countries that mandated IFRS in 2005 as their
treatment group and use US firms as their control group. However, even within
these three studies, the number of countries covered by their treatment samples
vary: Florou et al. (2015) include 17 countries from 2000 through 2009, Bhat et al.
(2014) consider 12 from 2003 through 2008, and Kraft and Landsman (2014)
include 12 from 2000 through 2012.
Bhat et al. (2015) provide indirect evidence of the credit relevance of IFRS
numbers by testing how mandatory adoption affects the relationship between the
spread and maturity of CDS instruments. Predicated on the term structure model of
Duffie and Lando (2001), they argue that, if IFRS adoption increases transparency,
then the intercept in the relationship between CDS spread and maturity should
decrease and the slope and concavity should increase. They test this prediction on a
treatment sample of 5943 CDS contracts from IFRS-adopting countries and a
control sample of 20,658 CDS contracts from non-IFRS-adopting firms from 2003
through 2009.40 Their empirical analysis reveals that the treatment firms’ CDS
spreads decrease, especially among CDS contracts with short-term maturities, and
the slope and concavity in the CDS-maturity relationship increase following the
mandatory adoption of IFRS. However, no such changes are observed in the control
sample, suggesting that IFRS adoption increases transparency within the debt
markets.
Overall, the mixed results obtained from these studies preclude drawing strong
inferences about the effects of IFRS on credit assessment. More research is needed
to reconcile them. Future research should also attempt to highlight the precise
mechanisms and pinpoint the specific accounting rules that affect the credit
relevance of IFRS numbers.

6.1.3 Effects of IFRS on the cost of debt

Borrowers’ financial reporting quality can affect their costs of debt in several ways.
First, Sengupta (1998) argues that lenders and underwriters demand lower risk
premiums associated with the potential withholding of adverse private information
for firms with better disclosure quality. Second, as discussed in Sect. 4.4.1, several
theories predict that poor reporting quality increases priced information risk and
thus a firm’s cost of capital, including the cost of debt.41 Finally, Zhang (2008)

40
In Duffie and Lando’s (2001) model, the transparency of the accounting system is specifically
characterized as the variance of the noise in asset values, which directly affects creditors’ ability to
estimate the probability of default. Bhat et al. (2015) empirically measure transparency using analyst
forecast dispersion and error.
41
For US stocks, Francis et al. (2005) and Bharath, Sunder, and Sunder (2008) provide evidence of a
negative relationship between reporting quality and the cost of debt using accrual quality as a proxy for
reporting quality.

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argues that timely loss recognition (or conditional conservatism) in financial reports
better protects lenders’ interests by triggering debt covenants early upon signs of
financial distress and thus effectively restricts borrowers’ ability to distribute assets
as dividends or otherwise squander assets. Consequently, she conjectures that
investors are willing to accept a lower rate of return for lending to firms that report
losses in a timelier manner.
Based on the assumption that, from a debt holder’s perspective, financial reports
under IFRS are of a higher quality than those prepared under local GAAP, Kim et al.
(2011) suggest that IFRS adoption decreases the ex-ante information risk faced by
lenders and ex-post monitoring and re-contracting costs. They also note that IFRS
adoption can improve the coordination between lenders and borrowers in relation to
capital investment decisions. Based on these potential benefits, Kim et al. (2011)
contend that voluntary IFRS adopters should face a lower cost of debt and test this
prediction on a sample of syndicated loans issued between 1997 and 2005 across 40
countries. They find that IFRS adopters pay lower interest rates, have loans with
longer maturities, raise larger loan amounts, are less likely to have restrictive
covenants, and attract more foreign lenders than non-IFRS adopters. However, only
the results for lower interest rates and larger loan amounts are robust to controls for
the endogeneity biases arising from firms self-selecting to adopt IFRS.
In contrast to the preceding findings for voluntary adopters, (Chen et al. 2015b)
study the effects of mandatory IFRS adoption on the properties of syndicated loans.
They argue that mandating IFRS can either increase or decrease information
asymmetry between lenders and borrowers, depending on whether debtholders view
the IFRS as being of better quality than the local GAAP. Based on analysis of
syndicated bank loans issued between 2000 and 2011 by firms from 31 countries
that mandatorily adopted IFRS, they find that interest rates increased by 24 basis
points and loan maturities decreased by 1 month for IFRS adopters relative to the
corresponding changes for non-adopters. They also find that the borrowers
experiencing greater effects from IFRS adoption (measured as a score of the total
number of restated financial statement items in the transition year or as the inverse
of the change in variance of abnormal accruals from the pre- to post-adoption
periods) faced higher interest rates and larger declines in loan maturity. These
results help better link their findings to IFRS adoption.
Extending the analysis to compare the effects of IFRS on public bond terms with
those on private loan terms, Florou and Kosi (2015) find that interest rates are lower
for public bonds issued after mandatory IFRS adoption but not for private loans.
They attribute this finding to IFRS adoption improving the quality of the public
information, which bondholders rely on more, as, unlike banks and other private
lenders, they do not have private channels of communication with borrowers.
Overall, like the evidence for the effects of IFRS on the credit relevance of
accounting numbers, the evidence for the effects of IFRS on debt contract terms is
mixed. There are several potential explanations for the differences in the
conclusions derived by these studies. First, analysis of voluntary adopters is open
to endogeneity concerns and the effects on mandatory adopters may be affected by
contaminating events. Second, even within the studies focusing on mandatory IFRS
adoption, there are differences across the sample selection choices. Although both

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Florou and Kosi (2015) and Chen et al. (2015b) use DealScan as their data source
for the private loan sample, the former have a shorter sample period and a more
restricted sample selection process.42 As a result, Florou and Kosi (2015) may have
less powerful tests to explain the lack of significant increases in interest rates
observed for private loan contracts. It is equally possible that the more homogenous
sample of firms and greater number of control variables used by Florou and Kosi
(2015) yield cleaner results.43 Finally, the average effects observed in the various
studies may be affected by specific countries included in the samples. Although no
evidence exists in the debt markets, it is not unreasonable to expect enforcement and
adoption incentives to cause cross-country variations in IFRS effects.
By focusing on firms that issue debt to measure the cost of debt, the preceding
studies are implicitly conditioned on the decision to issue debt. However, as we
discuss in Sect. 6.1.1, IFRS may affect firms’ decisions to issue debt and to issue
public versus private debt. Thus, ideally speaking, the decision to issue debt, the
type of debt (public or private), and the debt features should be modeled together
and simultaneously estimated. That task poses significant econometric challenges.
Following an argument similar to that seen in the preceding studies, i.e., that
IFRS improve the transparency and creditworthiness of borrowers, Chan et al.
(2013) predict that IFRS adoption should yield higher credit ratings, as investors and
credit analysts account for improved reporting quality when forming their credit
ratings. Using a sample of foreign firms cross-listed in the US that mandatorily
adopted IFRS in 2005, Chan et al. (2013) find a significant increase in the sample
firms’ credit ratings after adoption relative to their US-domiciled counterparts and
relative to a control sample of foreign firms cross-listed in the US but not subject to
the IFRS mandate. Although their findings corroborate those of Kim et al. (2011),
focusing on firms that voluntarily cross-list in the US introduces its own self-
selection biases, as these firms face unique incentives and are unlikely to represent
the population.
Donelson et al. (2015) survey a sample of commercial banks in terms of their use
of accounting information in making lending decisions. Although their survey
mainly relates to US banks lending to private companies, their findings may
illuminate how accounting choices and standards affect debt market decisions more
generally. Their evidence indicates that lenders are much more likely to require
more collateral and guarantees from borrowers with poor reporting quality rather
than increasing interest rates. This finding contradicts the effects of interest rates
documented in relation to IFRS adoption. Similar surveys conducted in countries
that have adopted IFRS may provide further insights into the relevance of IFRS for
lending decisions.

42
Florou and Kosi (2015) limit their sample period to years before 2008 to avoid the financial crisis
period. Chen et al. (2015b) end their sample period in 2011. In addition, Florou and Kosi (2015) limit
their sample to senior term loans, revolvers, and 364-day facilities.
43
In Florou and Kosi’s (2015) study, the indicator variable for mandatory IFRS adoption has a positive
but insignificant coefficient in most of their regressions on the cost of private loans. Florou and Kosi’s
(2015) sample has 8628 observations versus the 11,238 observations included by Chen et al. (2015b) for
the same period, i.e., 2000–2007. In addition, Florou and Kosi’s (2015) regression models include
variables measuring default risk, such as O-score and distance to default, which load significantly.

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Lamoreaux et al. (2015) provide evidence of the role of IFRS in lending by the
World Bank to developing economies in the form of international development aid.
The authors point out that the World Bank relies on audited financial statements to
monitor the projects funded through its loans and claim that higher accounting
quality in a country can help decrease monitoring costs. Using a sample of 258
country-year observations from 42 countries between 1999 and 2008, the authors
find that the World Bank lends more to countries where fewer differences exist
between local GAAP and IAS (e.g., Bae et al. 2008) and those that mandate IFRS,
indicating that accounting quality plays a role in the allocation of international aid
loans. However, accounting quality fails to play a role in the allocation decision for
countries that are more closely aligned with US geopolitical interests.

6.2 Effects of IFRS on contractibility in the debt markets

As an accounting system provides timely and verifiable performance measures that

indicate the underlying creditworthiness of borrowers, accounting numbers are often
used in debt covenants to restrict managerial actions that harm debtholders and act
as tripwires that give lenders an option to renegotiate debt terms following a decline
in a borrowers’ economic performance (Smith and Warner 1979). In fact, based on
the finding that little new information is released upon earnings announcements to
market participants, Ball and Shivakumar (2008) conclude that a major role of
accounting numbers must be their use in contracts, such as debt settlement and
compensation contracts (Watts and Zimmerman 1986) and in disciplining prior
information released by managers (Gigler and Hemmer 1998; Ball 2001; Ball et al.
2012). However, the extent to which accounting numbers matter for inclusion in
debt covenants ultimately depends on the ability of accounting numbers to
accurately predict changes in a borrower’s credit risks, particularly before the
material deterioration of its creditworthiness.
The literature provides good reasons to expect IFRS adoption to either increase
or decrease the use of accounting numbers in debt covenants. Ball et al. (2015)
argue that the increased managerial flexibility available under principles-based
IFRS as well as greater emphasis on fair-value accounting decreases the relevance
of IFRS numbers for use in debt contracts.44 In contrast, Demerjian (2012) presents
a model that suggests that IFRS adoption, by improving financial transparency,
would lower the need for all types (both accounting and non-accounting-based) of
debt covenants. In his model, covenants are tripwires for renegotiations and are
needed for borrowers and lenders to initially contract on limited and potentially
asymmetric information.

44
Ball et al. (2015) provide the following reasons for why fair value emphasis lowers the relevance of
IFRS numbers for inclusion in debt contracts. First, fair value gains and losses from shocks to the cash
flows of assets are transitory, making current-period earnings a poorer predictor of future debt service
capacity. Second, fair value gains and losses include shocks to the expected returns of assets. To the
extent that these shocks are expected to reverse before debt maturity, they are irrelevant for debt
contracting. Third, as debt contracts require repayment of the principal and interest and not the fair value
of the debt, the IFRS option to fair value certain financial liabilities lowers the contracting value.

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Kim et al. (2011) study changes in covenant usage around voluntary IFRS
adoptions and document that IFRS adopters are less likely to have restrictive
covenants. They attribute this to the greater transparency accorded by IFRS
reporting, as implied by Demerjian (2012), and conclude that a lower likelihood of
restrictive covenants is an important benefit of IFRS adoption. Chen et al. (2015b)
study covenant usage changes after mandatory IFRS adoption and, like Kim et al.
(2011), document declines in covenant usage after adoption. However, in contrast to
Kim et al. (2011), they attribute the decline in covenant usage to IFRS worsening
the accounting quality of at least some firms.
The studies by Kim et al. (2011) and Chen et al. (2015b) are subject to a common
data problem: they treat debt contracts without covenant information as having zero
covenants. However, as covenant-free loans are rare, particularly in Europe before
2010, the covenant-free observations are more likely to represent cases where data
vendors have not collected pertinent information (Ball et al. 2015). Therefore it is
probably inappropriate to treat observations with missing covenant information as
covenant-free, as done in these studies.
Ball et al. (2015) also study the effect of mandatory IFRS adoption on covenant
usage in debt contracts. However, in contrast to Kim et al. (2011) and Chen et al.
(2015b), they consider accounting- and non-accounting-based covenants separately
and study whether IFRS adoption leads to a substitution effect between the two.
Moreover, they study the effects of IFRS on covenants for both public bonds and
private loans. Using a sample of new loans and bonds issued between 2001 and
2010 in 22 IFRS-adopting countries and 21 non-IFRS-adopting countries, Ball et al.
(2015) document a significant decline in the usage of accounting covenants in both
loan and bond contracts following IFRS adoption. At the same time, they find that
firms increase their reliance on non-accounting covenants. This latter result is not
consistent with the argument that IFRS improve financial transparency. The authors
conclude that their results support IFRS decreasing the contractibility of accounting.
Although the findings of Ball et al. (2015) provide evidence of how IFRS
adoption may affect covenant usage, it is unclear whether their results identify
permanent changes in borrowers and lenders’ use of accounting numbers for debt
contracts or whether these are temporary effects observed while borrowers and
lenders adapt to new accounting standards. Moreover, as IFRS adoption changes
financial reporting in many ways simultaneously, the authors cannot trace the
decline in accounting covenant usage to individual IFRS attributes, although their
cross-sectional results for banks are consistent with the observation that fair-value
accounting plays a role in the decreased reliance on accounting covenants.
Christensen et al. (2009) study the consequences of IFRS adoption for debt
covenant violations. They argue that IFRS adoption can mechanically trip debt
covenants by changing how earnings are calculated. Relying on the magnitude of
IFRS reconciliations as a proxy for mechanical covenant violations and assuming
that these covenant violations transfer wealth from shareholders to debt holders,
they predict that stock market reactions relate positively to IFRS reconciliation
numbers, i.e., the difference between net income based on IFRS and that based on
domestic GAAP. They test this prediction on a sample of 137 UK firms by
analyzing the stock market reactions to announcements of IFRS reconciliation

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numbers in the year before mandatory IFRS adoption in the UK. Consistent with
their predictions, they document a significantly positive relationship between IFRS
reconciliation numbers and earnings announcement returns. This relationship is also
pronounced for firms that are more likely to violate covenants or face greater costs
of covenant violation, such as small firms, firms with lower interest coverage ratios,
and firms with longer asset maturities. Horton and Serafeim (2010) also report a
positive association between IFRS reconciliation numbers and earnings announce-
ment returns and document that this relationship is primarily driven by adjustments
pertaining to goodwill and deferred taxes.
Research related to the effects of IFRS on accounting contractibility is nascent.
The relationship between IFRS accounting attributes and the use of IFRS numbers
in debt contracts and other contracts (such as supplier or customer contracts)
requires more research. The lack of comprehensive and detailed contract data,
including covenant data, in a cross-country setting is an obstacle for such research.
Although companies in the US are required to file their debt contracts with the SEC,
such requirements are not common elsewhere, especially for private contracts and
loans. As a result, data vendors must rely on private sources or surveys to gather
contractual information in an international context. Consistent with this, Ball et al.
(2015) note that only 10 % of international debt issues have at least one (accounting
or non-accounting) recorded covenant and that this probably represents the failure
or inability of vendors to collect covenant information rather than the debt being
covenant free. Language barriers also make it harder for researchers to compile a
meaningfully sized international dataset with detailed contract information. Such
data limitations restrict researchers’ ability to address basic contracting issues, such
as the ability to contract around specific attributes of IFRS.
Further research is also needed to explore several other issues surrounding the
use of IFRS numbers in debt contracting, including whether and how public bond
and syndicated loan contracts differ in their use of IFRS numbers, whether lenders
use more credit-rating-based performance-pricing provisions when accounting
systems are weak, and how the use of IFRS numbers in debt contracts is affected by
the quality of enforcement in a country. However, the effect of reporting
enforcement for contractibility in debt markets may not be straightforward. Strong
enforcement may mitigate the opportunistic use of flexibility in reporting and thus
increase the usefulness of accounting. However, it may also require borrowers to
implement fair value accounting, and to the extent that fair values are less relevant
for debt contracting, stronger enforcement may actually decrease the use of
accounting-based covenants.
Another promising area for research is to examine how debt market character-
istics affect firms’ choice of accounting policies under IFRS. IFRS is often
considered as a principles-based standard that give managers discretion over both
their accounting choices and implementation of specific standards. This increased
flexibility may allow managers to opportunistically manage earnings to obtain better
debt contracting terms or avoid covenant violations. Several studies document such
behavior in the US (e.g., Beatty and Weber 2003; Altamuro et al. 2005). However,
similar evidence in the IFRS context is largely unavailable. One exception is
Christensen and Nikolaev (2013), who examine how firms’ reliance on debt

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financing affects their choice between historical cost accounting and fair value
accounting under IFRS, i.e., the cost or revaluation model under IAS 16. They argue
that debtholders may prefer either the historical cost model (due to its greater degree
of verifiability) or the revaluation model (for the purpose of obtaining the current
values of collateral assets) and document the very limited use of the revaluation
model for long-term assets by UK and German firms.

7 Effects of IFRS on stewardship and corporate governance

Many view the stewardship role in mitigating agency-principal conflicts as a key

objective of financial reporting, in addition to the objective of providing information
useful for decision making. A notable change in the IFRS framework is its exclusion
of the stewardship role as an explicit goal of financial reporting, along with the
claim that decision usefulness subsumes the stewardship role.
Although decision usefulness could be broadly defined to include stewardship, a
number of authors argue that the overlap between these objectives is incomplete and
that the investment-related roles and stewardship roles for financial statements differ
in terms of their needs for specific reporting attributes (Gjesdal 1981). For example,
Bushman and Indjejikian (1993) demonstrate that, when managers must be provided
with different incentives for different activities, the inability to contract on activity-
level outcomes makes biased aggregate accounting information desirable for
compensation contracts. The bias enables varying weightings across individual
activities in the compensation contracts. Further focusing on timely recognition of
gains and losses, Shivakumar (2013) reviews a variety of reasons why the timely
recognition of losses, but not gains, is more beneficial from the contracting and
stewardship perspectives, even though timely recognition of both gains and losses is
useful from a valuation perspective.45
We discuss several studies that investigate the effect of IFRS adoption on
stewardship and compensation. In the following subsection, we discuss studies that
focus on how IFRS adoption influences the use of accounting numbers in
compensation contracts that are aimed at mitigating manager-shareholder incentive
conflicts. Section 7.2 discusses studies pertaining to the influence of IFRS on the
effectiveness of managerial monitoring. As there are significant gaps in the IFRS
literature pertaining to the stewardship role of financial numbers, we dedicate a
separate subsection (Sect. 7.3) to discussing these gaps, which future research must
fill.

45
Timely loss recognition removes incentives for managers to continue loss-making projects and invest
in new unprofitable projects, particularly when the negative consequences of such projects will be
unknown to outsiders for long periods. However, such concerns do not arise for managers continuing
profit-making projects. Furthermore, conditionally conservative reporting can aid outside directors by
attenuating managerial biases to report favorably. Finally, timely recognition of gains involves greater
managerial subjectivity and lower verifiability, which lowers demand for contracting and stewardship
purposes.

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7.1 Effects of IFRS on executive compensation

7.1.1 Empirical predictions of the effect of reporting quality on executive

compensation

A large literature examines the role of accounting in aligning the incentives of

managers and shareholders by studying the use of accounting numbers in executive
compensation plans.46 There are a variety of ways that IFRS matter for
compensation plans.
First, as IFRS improve earnings comparability across peer firms, as discussed in
Sect. 3.3, IFRS adoption makes accounting-based relative performance evaluation
(RPE) more efficient. Second, as IFRS earnings are more value relevant and reflect
economic gains and losses in a timelier manner than local GAAP earnings due to
their fair value emphasis, IFRS may induce firms to increase their reliance on
earnings for compensation purposes. If compensation committees consider
accounting earnings under IFRS as a better measure of underlying economic
performance, then we would expect them to optimally increase the weight placed on
accounting earnings in determining executive compensation and turnover. Such a
finding would be consistent with the arguments of Holmstrom (1979) and Banker
and Datar (1989), who suggest that the weight placed on a performance signal
should increase with its precision and sensitivity to an agent’s effort. This view has
found empirical support in the US, where Banker et al. (2009) show that
compensation contracts place more weight on earnings when earnings are more
value relevant. Furthermore, Bushman et al. (2004) find that executive compen-
sation packages in the US include a higher proportion of equity-based incentives
when the timeliness of the earnings is lower.
However, several features of IFRS also make accounting-based performance
measures less efficient to address stewardship issues. First, the greater discretion
afforded to managers under principles-based IFRS can raise concerns about the
independent verifiability of the reported numbers, an important attribute of
accounting numbers for their use in stewardship and contracting. On a related
point, IFRS offer a greater choice of accounting policies, which increases the
potential for manipulation of reported numbers. These concerns can lead boards to
rely less on accounting numbers in compensation contracts.47 Such concerns may
also affect equity-based executive compensation, as stock prices may also be
affected by such manipulation. Studies document evidence consistent with
opportunistic earnings management to enhance equity compensation in the US
context (e.g., Bergstresser and Philippon 2006; Burns and Kedia 2006).
Second, the greater use of fair values under IFRS lowers the distinction between
the role of earnings and that of share prices in compensation contracts. Although
stock price has many advantages as an incentive measure, it does not provide a
46
See studies by Bushman and Smith (2001), Armstrong et al. (2010b), and Shivakumar (2013) for
reviews.
47
For example, Indjejikian and Matejka (2009) find a decrease in the reliance of CFO bonus contracts on
financial performance after SOX and attribute this finding to firms’ wanting to decrease CFOs’ incentives
to misreport.

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sufficiently precise signal of managerial effort and ability. For instance, Paul (1992)
analytically shows that stock-based compensation contracts assign the greatest
weight to projects that are the noisiest indicators of managerial effort, if stock
market investors observe information about all of the projects in a firm with equal
precision. This occurs because the projects most affected by noise are likely to
produce extreme values and affect share prices the most. Moreover, share prices are
affected by a variety of factors that are beyond a manager’s control, such as investor
sentiment and macroeconomic factors.48 Sloan (1993) emphasizes this point by
noting that accounting data can be incrementally useful to stock price in
compensation contracts, as it can identify the component of stock price that is
under a manager’s control. Supporting these points, Bushman and Indjejikian (1993)
analytically show that the information content of earnings influences the optimal
design of contracts that compensate managers based on earnings and share prices.
The findings of these studies, when combined with the effect of IFRS on earnings
(making them closer to stock price measures of performance), suggest that earnings
numbers under IFRS lose some of their advantage relative to stock prices for use in
compensation contracts.

7.1.2 Empirical evidence of the effects of IFRS on compensation contracts

Ozkan et al. (2012) examine the effect of mandatory IFRS adoption on the usage of
accounting-based performance measures in executive compensation contracts. They
focus on two aspects: pay performance sensitivity (PPS) and RPE. They base their
study on a sample of 892 public firms covering 15 continental European countries
that mandatorily adopted IFRS in 2005. They restrict their focus to these countries,
arguing that firms in these countries are more comparable and thus more likely to
use RPE in compensation contracts. They conjecture that, if compensation
committees consider earnings as higher quality after IFRS adoption, then one
should observe an increase in the weight placed on accounting earnings in
compensation contracts, as reflected in PPS. In addition, if mandatory IFRS
adoption increases the cross-country comparability of earnings, there should be an
increase in the use of foreign peers as benchmarks in accounting-based RPE.
Analyzing the cash compensation received by top executives from these firms from
2002 through 2008, Ozkan et al. (2012) document a weak increase in the use of
accounting-based PPS and a significant increase in the use of accounting-based
performance of foreign peers for RPE after IFRS adoption. At the same time, they
find no change in the use of stock-return-based PPS or RPE for stock-based
compensation. They also link the increase in accounting-based RPE to greater
earnings comparability by documenting that the effect is stronger among firms with
greater foreign sales and those with fewer comparable domestic peers.
Although Ozkan et al. (2012) infer the effects of IFRS by evaluating the
sensitivity of executive compensation to accounting numbers, Voulgaris et al.
48
Although Paul (1992) predicts that the valuation role of earnings is independent of the managerial-
incentive contracting role of earnings, Bushman, Engel, and Smith (2006) and Banker et al. (2009) extend
the analysis and show empirically that earnings can play a role in both valuation and compensation
contracts simultaneously.

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(2014) directly examine contractual terms to identify whether long-term incentive-

based executive pay is based on accounting targets, stock return targets, or both.
Thus, although prior studies can comment only on the informational relevance of
accounting numbers from a compensation perspective, Voulgaris et al. (2014) can
clearly identify the changes caused by IFRS to the use of accounting numbers to
measure managerial performance. However, this approach is limited; the authors do
not observe the levels at which performance targets are set or how compensation
committees combine various performance measures in arriving at executive
compensation, so they cannot evaluate how IFRS adoption affects the amount of
compensation. For instance, although they can identify the use of earnings numbers
in a compensation contract, they cannot distinguish between a contract in which
most of a CEO’s bonus is tied to earnings and one in which very little of the bonus is
tied to earnings.
In contrast to Ozkan et al. (2012), Voulgaris et al. (2014) find a decrease in the
usage of earnings-based performance measures after mandatory IFRS adoption for a
sample of UK CEO compensation contracts. In line with our earlier discussions,
they attribute these findings to the greater fair value orientation of IFRS relative to
local UK GAAP. Consistent with this, they show that the post-IFRS decline in the
use of accounting numbers is greater in financial industries, where fair value
accounting typically has a larger effect on reported earnings numbers.
Although the difference in research methodologies between Ozkan et al. (2012)
and Voulgaris et al. (2014) is one reason for the differences in their results, there are
indications that sample difference may partly reconcile the findings. Based on cross-
country analysis, Ozkan et al. (2012) find that their results hold only for countries
whose prior domestic GAAP differed substantially from IFRS. In contrast, for
countries such as the UK where the differences between local GAAP and IFRS are
relatively small, the relationship is negative, though insignificant. The focus of
Voulgaris et al. (2014) on a more homogenous sample may explain the significantly
negative effects of IFRS on the use of accounting-based performance measures
observed in UK compensation contracts. However, one limitation of the latter study
is that it does not have a control sample. Hence its results may be driven by
contaminated events, such as the more equity-intensive pay structures adopted by
European firms in the 2000s (Fernandes et al. 2012).

7.2 Effects of IFRS on the role of accounting in managerial monitoring

A relatively large number of US-based studies evaluate the role of accounting

numbers in the efficient monitoring of managers. For instance, Engel et al. (2003)
show that boards of directors rely on both earnings and stock prices to monitor
managerial performance, suggesting a role for reporting quality in effective
corporate governance. To the extent that IFRS adoption has improved corporate
transparency and information asymmetry, one may expect managerial monitoring
practices to use accounting numbers to become more effective and corporate
governance mechanisms to increase their reliance on financial reports in the post-
IFRS-adoption period.

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Marra and Mazzola (2014) and Marra et al. (2011) study the effect of IFRS
adoption on boards’ effectiveness in constraining earnings management. Marra et al.
(2011) examine a sample of 222 Italian firms that mandatorily adopted IFRS in 2005
and find that the relationship between board characteristics—such as, board
independence and the presence of an audit committee—and earnings management
became more negative in the post-adoption (2005–2006) period relative to the pre-
adoption period (2003–2004). They interpret their findings to indicate that IFRS
facilitate board monitoring. However, in a follow-up study, Marra and Mazzola
(2014) point out that the findings of Marra et al. (2011) are driven by a temporarily
higher level of attention that boards paid to accounting issues at the time of
transitioning to IFRS. Consistent with this argument, they show that the negative
association between board independence and earnings management was strongest in
2005, the adoption year, and then gradually decreased in later years (2006 and 2007).
Using the voting premium associated with dual-class shares as a proxy for the
effectiveness of managerial monitoring, Hong (2013) examines whether mandatory
IFRS adoption changes the voting premium. She argues that the voting premium is
lowered when corporate transparency is improved, as greater transparency improves
managerial monitoring and lowers the benefits of voting control. Comparing a
sample of 133 firms in IFRS-adopting countries that have dual-class shares with
firms from non-adopting countries that have dual-class shares, she documents a
significant decrease in voting premiums for firms in IFRS-adopting countries after
mandatory adoption. The study’s reliance on a difference-in-differences method-
ology helps it to more clearly attribute the observed changes to the IFRS adoption
date. However, the study’s small sample limits it from conducting more focused
analysis to rule out alternative explanations based on concurrent corporate
governance reforms within the EU.
Managerial monitoring also occurs through the market for external takeovers.
Reporting quality affects the effectiveness of this corporate governance mechanism,
as financial statements are a key source of information for making takeover-related
decisions (Raman et al. 2013). Consistent with this view, Francis et al. (2015) and
Louis and Urcan (2014) show that the mandatory adoption of IFRS has increased
cross-border M&A between countries with lower degrees of similarity in their
domestic GAAP during the pre-IFRS period.
Focusing on CEO turnover as an outcome variable of managerial monitoring, Wu
and Zhang (2009) examine how the voluntary adoption of IAS and US GAAP
affects the use of accounting-based measures in turnover. Based on the assertion
that earnings informativeness is higher under US GAAP and IAS than under
domestic GAAP in EU countries, they argue that IAS/US GAAP adoption should
increase the reliance of internal performance evaluation on accounting earnings and
consequently increase the sensitivity of CEO turnover to earnings. Using a sample
of continental European firms that voluntarily adopted either IAS or US GAAP
between 1988 and 2004, in addition to hand-collected data related to CEO turnover,
they find evidence consistent with the preceding prediction.49 Due to the

49
In addition, Wu and Zhang (2009) examine the sensitivity of employee layoffs to accounting earnings
after voluntary IAS adoption and find results consistent with those for CEO turnover.

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endogenous feature of firms’ voluntary adoption decision, the authors are careful not
to make any causal claim about the relationship between IAS/US GAAP adoption
and changes in earnings performance sensitivity. As the study pools voluntary IAS
and US GAAP adopters together, it is difficult to judge whether the results are
mainly driven by IAS adoption, US GAAP adoption, or both.
Wu and Zhang (2011) study the relevance of accounting earnings in RPE for
CEO turnover decisions after mandatory IFRS adoption. They find that mandatory
IFRS adoption in continental Europe has led to an increased reliance on foreign
peers’ earnings for CEO turnover decisions. This evidence corroborates the
argument of Ozkan et al. (2012) that IFRS improve cross-country comparisons of
accounting earnings for relative performance evaluation.
In contrast to the preceding studies, which focus on how IFRS adoption affects
corporate governance, Verriest et al. (2013) take the opposite tack and examine the
effect of corporate governance on the firm-level enforcement of IFRS adoption.
They find that firms with stronger governance provide more transparent restate-
ments from local GAAP to IFRS, achieve better compliance, and are less likely to
opportunistically delay the adoption of IAS 39. This study’s findings of firm-level
heterogeneity in the enforcement of IFRS adoption are useful for researchers to
extend their reporting enforcement proxies to the firm level, rather than rely only on
country-level enforcement indices. Along similar lines, focusing on the audit
committee as a corporate governance mechanism, Chen and Zhang (2010) examine
how the incentives of audit committee members affect reported IFRS numbers.
Based on a sample of 103 Chinese B-share companies from 1999 to 2004, they
document that the incentives of audit committees, along with regulatory enforce-
ment, are the key drivers narrowing the differences between financial numbers
reported under Chinese GAAP and those reported under Chinese equivalents of
IFRS.

7.3 Limitations and suggestions for future research

A major limitation of IFRS studies focusing on stewardship is that they do not

pinpoint the mechanisms through which IFRS adoption affects stewardship or
identify the specific accounting attributes that drive these changes. Another
common problem associated with IFRS studies focused on stewardship is their
inability to find a substitution effect among accounting- and non-accounting-based
performance measures. Theories suggest that an improvement in the ‘‘signal-to-
noise’’ ratio of earnings after IFRS adoption should lead to a greater relative
weighting of earnings in managerial monitoring and compensation. If so, one should
equally observe a corresponding shift away from other performance measures, such
as market-based performance measures, emphasized in the pre-IFRS period. Such a
shift has been documented by empirical studies conducted in the US. For example,
Lambert and Larcker (1987) and Engel et al. (2003) document a substitution
between accounting- and market-based performance measures. The lack of such
evidence surrounding IFRS adoption raises questions about whether the observed
effects can be attributed to the adoption of IFRS themselves.

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Several interesting questions remain unanswered as to the effects of IFRS on

compensation contracts and corporate governance. Do firms modify compensation
contracts to undo any effects of IFRS? If so, which IFRS attributes are often
adjusted? How do frequent changes to standards under IFRS affect the stewardship
role of accounting numbers?
Studies must evaluate whether and how optimal governance structures have been
affected by IFRS adoption. Bushman et al. (2004) argue that, when a firm’s
accounting system fails to capture economic transactions in a timely manner, the
firm opts for costlier monitoring mechanisms, such as hiring more outside and
reputed directors. Bushman et al. (2004) also surmise that the optimal level of
ownership concentration and stock ownership by inside directors is higher and the
timeliness of earnings is lower when the decreased transparency of financial reports
exacerbates agency problems. The need to mitigate the agency problems shifts the
optimal ownership structure toward greater stock holdings by owner-managers.
These issues remain unexplored in the IFRS context.
Finally, firms in different legal regimes rely on different corporate governance
models. Those in common-law countries such as the US and UK use a shareholder
governance model and rely on public disclosure to resolve agency problems. In
contrast, firms in code-law countries such as Germany and Italy use a stakeholder
governance model, and information asymmetry is often resolved through private
communications. To the extent that IAS/IFRS can be viewed as having a stronger
common-law orientation or a stronger shareholder focus, it would be interesting to
explore whether mandating IFRS rules within code-law countries leads to shifts in
firms’ corporate governance structure toward a shareholder-governance model.

8 Effects of IFRS on audit verification

Recognizing the importance of enforcement, the ‘‘IAS Regulation’’ introducing

mandatory IFRS reporting in the EU (EC Regulation 1606/2002) explicitly states
that ‘‘a proper and rigorous enforcement regime is key to underpinning investors’
confidence in financial markets’’ and requires that countries take appropriate
measures to ensure compliance. To facilitate a uniform enforcement of IFRS in the
EU member states, the Committee of European Securities Regulators issued a
standard in 2003 addressing a common approach to the enforcement of standards of
financial information in Europe. The standard contains 21 high-level principles of
enforcement that member states should adopt in enforcing IFRS. In response, many
EU countries implemented significant changes to their enforcement regimes and
regulatory institutions.50 Turning specifically to the audit function, the International
Auditing and Assurance Standards Board (IAASB) issued additional guidance for
the auditing of IFRS financial statements in 2003. In this section, we review the
evidence related to the effectiveness of these regulations with a particular focus on
the audit function in mandatory IFRS adoption.

50
Christensen et al. (2013, Appendix A) provide a detailed discussion of enforcement changes within the
EU.

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8.1 Empirical predictions of the effects of IFRS on audit verification

Researchers suggest that a decreased emphasis on verifiability as a key concept in

the development of IFRS has led to less specific and less prescriptive guidance and
hence increased subjectivity in accounting measurement (Jamal et al. 2010), which
consequently increase audit risks. Furthermore, studies point out that principles-
based IFRS standards can exacerbate litigation risks for auditors, as they are no
longer able to rely on compliance with specific guidelines or established rules as a
valid defense (Diehl 2010). The reliance on fair value measurement under IFRS also
increases the effort required of auditors, especially in the verification of fair values
of assets that do not have active markets, such as specialized receivables or privately
placed loans. Finally, the greater discretion available to managers under IFRS also
increases the effort required on behalf of auditors to verify IFRS-based financial
statements.
The increased disclosure requirements of IFRS relative to many domestic GAAP
also significantly affect the audit function, as auditors must now sign off on more
financial information including management’s subjective forecasts and assessments
of assets and liabilities. For instance, the increased reporting requirements for
transactions designated as accounting hedges call for companies to undertake and
document detailed tests of hedge effectiveness. Furthermore, the IFRS provisions
relating to share-based payments require substantial disclosure as to the nature and
method of executive compensation plans, along with detailed information about the
inputs of fair value calculations. As a result of these additional disclosures, IFRS
adoption has increased the length of annual reports by up to 60 % (Webb 2006).
The general uncertainty around the introduction of IFRS may also play a
contributing role in the increased compliance and audit costs faced by firms. Uncer-
tainty about the implementation and effects of IFRS is likely to increase investor
scrutiny of financial statements following IFRS adoption, resulting in an increase in
the likelihood of costly litigation and regulatory interventions. Such concerns lead
auditors to protect their reputation capital by increasing their auditing effort,
reassessing client risk, or both (e.g., Clarkson et al. 2003; Francis and Krishnan
1999), which are likely to manifest through increased audit fees.

8.2 Empirical evidence of the effects of IFRS on audit function

Based on a survey of 60 managers from Australia’s top 200 corporations, Jones and
Higgins (2006) report that companies viewed their external auditors as the most
involved party in the IFRS adoption process. Some of the respondents noted that
auditors ‘‘would be instrumental—we don’t have a big team, so they’ll be pretty
heavily involved’’ (Jones and Higgins 2006, p. 640). Other managers exhibited
skepticism at the role of the external auditor in the process, saying that their external
auditors would not be used extensively in the transition. The expected involvement
of external auditors was greater among larger firms (top 25 % of the market
capitalization), although empirical analysis of the audit fees under IFRS adoption,
which we discuss later, suggests otherwise (e.g., De George et al. 2013).

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Kim et al. (2012b) examine the effect of the IFRS mandate on audit pricing. They
argue that because IFRS is comprehensive, fair value oriented, and principles based,
it requires more complex estimates and judgments by preparers and auditors,
increasing the level of uncertainty and risk of misstatement. Accordingly, they
predict that IFRS increase audit fees and that, all else remaining equal, this effect
should be stronger in countries with more robust legal regimes, as auditors face
higher legal liabilities in these countries. The authors empirically test these
predictions using a broad sample of EU firms from 11 IFRS-adopting countries as
treatment firms and firms in three non-adopting OECD countries (Japan, Canada,
and the US) as a control group. They report evidence of an IFRS-related audit fee
premium that rises in reporting complexity and decreases in reporting quality and in
strength of a country’s legal regime. However, their use of Japan, the US, and
Canada as a control sample may affect their findings, as these countries have
different enforcement structures and firms with significantly different reporting
incentives compared with EU countries. They also do not consider changes in
regulations and enforcements that have concurrently occurred with IFRS adoption
in some EU countries. Although they attempt to overcome this contamination
concern by using information from a survey capturing the adequacy of firms’
implementation of audit and accounting practices, their analysis does not account
for concurrent regulatory changes.51 Thus any observed fee increases may simply be
in response to increased regulatory and investor scrutiny, rather than auditing IFRS
numbers per se.
Focusing on a single country, De George et al. (2013) examine the costs of audit
verification for a sample of 907 listed Australian firms, which cover approximately
80 % of the total market capitalization on the Australian Stock Exchange. Using a
traditional audit-fee determinants model, the authors find an economy-wide increase
in the mean level of audit costs of approximately 23 % in the IFRS transition year,
relative to pre-IFRS years, that declines to an increase of 8 % in later years. In
addition, when they examine annual fee changes, they estimate an abnormal IFRS-
related increase in audit fees in excess of 8 % that is incremental to the normal
yearly fee increases observed in the pre-IFRS period. They also find that smaller
client firms incur disproportionately more IFRS-related audit costs relative to larger
client firms. Finally, using a self-constructed measure of IFRS audit complexity
based on a survey of senior audit managers and partners, they document that audit
fees are increasing along with the complexity of IFRS audits. As in any study of
mandatory IFRS adoption, confounding events remain a concern.
Based on a sample of New Zealand firms, Griffin et al. (2009) examine the effect
of the transition to IFRS on audit verification costs. They implement a standard
audit-fee determinants model augmented with temporal indicator variables

51
They specifically calculate a country-level measure of concurrent reforms using data from the Annual
Executive Opinion Survey conducted by the Institute for Management Development. Although the
primary purpose of the survey is to provide quantifiable measurements of management practices, labor
relations, and corruption, the survey explicitly asks respondents to evaluate the extent to which auditing
and accounting practices are implemented in their firms adequately and the extent to which corporate
boards supervise company management effectively. The authors measure the changes in these scores
from the pre-IFRS to post-IFRS periods.

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corresponding to the IFRS mandate for 653 firm-year observations over 2002
through 2007. After controlling for company size, complexity, and risk, they find a
reliable increase in audit fees around the transition to IFRS (2004–2006). They also
find a general decrease in non-audit fees over their sample period, although they do
not find that this change is related to the IFRS mandate.
Shifting away from audit fees, Nobes and Zeff (2008) explore the heterogeneity
of auditors’ statements related to IFRS compliance. Examining the audit reports of
all companies in the main stock indices of Australia, France, Germany, Spain, and
the UK for the 2005–2006 fiscal period, they find a ‘‘widespread failure to assert
compliance with IFRS when compliance has probably been achieved.’’ In particular,
the audit reports of firms domiciled in France and Spain uniformly refer to
compliance with EU IFRS only, i.e., ‘‘IFRS as adopted by the EU.’’ However, for
some firms in the UK and Germany, audit reports assert dual compliance to both
local standards and ‘‘IFRS as issued by the IASB.’’ Even more dissimilar, audit
reports of Australian firms refer only to compliance with ‘‘Accounting Standards in
Australia,’’ even though these standards are based closely and in some instances
exactly on IFRS. Nobes and Zeff (2008) argue that these differences in auditors’
statements about firm-level IFRS compliance may create problems for investor
confidence and comparability. They call for uniformity in audit report language to
assert compliance with IFRS.
Loyeung et al. (2011) attempt to link IFRS adoption errors to audit quality for a
sample of 184 Australian firms (from S&P/ASX 500) for which IFRS-compliant
earnings turned out to be either overstated or understated. They report that these
accounting errors were caused by 19 different accounting standards, indicating a
broad difficulty in implementing IFRS. They also find that these transition errors
were positively associated with IFRS-related changes in audit fees and bid-ask
spreads but negatively related to the tenure of CEOs and CFOs who were qualified
accountants.
Overall, the evidence suggests that IFRS adoption has generally increased the
audit fees of firms. But, at the same time, there is need for more research on how
auditors affect IFRS reports. Future research must also focus on linking the audit
literature better to the other observed effects of IFRS. To what extent does the
greater auditor effort, as observed in the IFRS-related audit premium, translate into
higher reporting quality and help attain benefits for capital market participants?
Future research can also examine whether the integration of capital markets
increases after IFRS adoption and whether greater arm’s length transactions are
changing the nature of the audit function. What are the implications of increased
comparability of financial reporting for auditor judgments and decisions?

9 Specific attributes of IFRS

This section is devoted to studies that focus on a single or small number of specific
attributes of the IFRS reporting requirements. Focusing on specific attributes of
IFRS permits a more detailed understanding of the potential mechanisms through
which IFRS matter and a better understanding of the measurement and

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implementation of a specific standard. However, the difficulty in isolating economic

consequences attributable to specific standards when the entire accounting regime
has shifted presents a major limitation of this setting. Moreover, the small samples
typically examined in these studies limit the generalizability of their results to a
broader set of companies and countries. Section 9.1 reviews the studies that
investigate the effects of fair value accounting. Section 9.2 discusses studies of
other attributes of IFRS.

9.1 Studies of the fair value attribute of IFRS

The recent financial crisis has pulled fair value accounting into the spotlight. Under
US GAAP, fair value accounting is mainly limited to the measurement of financial
assets and liabilities with unrealized gains and losses reflected in that period’s
earnings or other comprehensive income (FAS 115) and fair values disclosed in
footnotes (FAS 117). Proponents of fair value accounting argue that the fair values
of assets and liabilities improve transparency by reflecting current market conditions
and providing timely information for decision-making. Opponents argue that in
many cases fair value provides noisy information, especially for assets and
liabilities that are held to maturity or in thinly traded markets.52
Relative to US GAAP, IAS/IFRS allow a greater use of fair value accounting. In
particular, fair value measurements are incorporated into valuing various assets
other than financial assets and liabilities. For example, under IFRS, firms may
choose to measure their property, plant, and equipment (PP&E) (IAS 16),
intangibles (IAS 38), and investment property assets (IAS 40) at fair value.
Although biological assets must be recognized at fair value (IAS 41), firms are
required to recognize the cost of employee stock options using fair values as at the
grant date (IFRS 2).53 In addition, IAS 36 (Impairment of Assets) allows firms to
reverse previous impairment losses. The equivalent accounting treatments allowable
under US GAAP are much more restrictive in their use of fair value accounting, if
they are permitted at all. To this end, IAS/IFRS-adopting jurisdictions provide
researchers with a better opportunity to examine the implications and consequences
of fair value accounting.
To provide evidence of the effects of the fair value accounting rules mandated by
IFRS, researchers rely on two alternative approaches. Under the first approach,
studies evaluate cross-sectional differences in the effects of IFRS across banks and
non-banks to infer the role of fair value accounting in causing the observed effects.
This approach is justified because, although IFRS require fair value accounting for a
variety of asset classes, they tend to be most relevant for the recognition of financial
assets and liabilities (Laux and Leuz 2009), and banks tend to recognize significant
amounts of financial assets and liabilities. The second approach directly relies on the
52
See Barth (2006), Laux and Leuz (2009), and Ball et al. (2015) for detailed discussions about fair
value accounting.
53
Elad (2004) provides a discussion of the implementation of IAS 41 and offers a detailed comparison of
US GAAP and IFRS in terms of the measurement of agricultural assets. Giner and Arce (2012) and
McAnally, McGuire, and Weaver (2010) provide useful background information about the adoption of
IFRS 2 and its comparison with SFAS 123 under US GAAP.

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extent of firms’ fair value measurements, typically for a small hand-collected

sample, through a review of financial statements and policy notes. We discuss the
specific findings from these two empirical strategies below.
Studies by Armstrong et al. (2010a) and Ball et al. (2015) are two of the many
that evaluate differences in IFRS effects across banks and non-banks. However, they
reach different conclusions about the effects of fair value for different sets of
investors. From the stock market investors’ perspective, Armstrong et al. (2010a)
conjecture that the emphasis of IFRS on fair value accounting leads to an
improvement in information quality. Consistent with this premise, they document
more positive stock market reactions to IFRS adoption announcements for banks
than non-banks. However, turning to debt markets, Ball et al. (2015) examine the
relevance of accounting numbers for use in debt contracts and argue that fair values
are not useful for contracting. (See footnote 42 for further discussion.) Consistent
with their arguments, they find an incrementally lower usage of accounting-based
covenants among debt issued by banks relative to non-banks in the post-IFRS
period.
DeFond et al. (2015) examine how the fair value consequences of IAS 39 affect
the stock price crash risk for financial firms. They observe that, on the one hand, fair
value may allow firms to better reflect their underlying economics in financial
reports, improving their reporting transparency and thus lowering their crash risk.
While, on the other, fair value may increase measurement errors in reported values
of risky assets or encourage managers to invest more in risky projects (by
amplifying the upside) and thus increase the crash risk. Analyzing financial and
non-financial firms separately, the authors find an increase in crash risk only among
financial firms in countries with weak banking regulations and a decline in crash risk
among non-financial firms. Their results highlight the importance of regulatory
quality in determining IFRS outcomes.
Given the cross-sectional nature of these studies, inferences can only be
summarized as documenting evidence consistent with an increased use of fair value
accounting after IFRS adoption rather than a direct inference that fair value
accounting affects information quality, contractibility of accounting numbers, or
crash risk.
An alternative approach that partly mitigates this problem involves relying on
exposures to fair value rules by directly measuring them from financial reports. One
prominent example is the fair value measurements of investment property assets in
the real estate industry, where firms’ operating assets are mainly investment
properties. IAS 40 (Investment Property) allows firms to choose between historical
cost and fair value models to account for investment properties.54 However, if a firm
chooses the historical cost model, it must disclose the fair values of its investment
properties in footnotes. This setting has two advantages. First, there is a large cross-
country variation in the valuation models for investment property assets allowable
under domestic GAAP. This allows researchers to explore cross-sectional variations

54
See Quagli and Avallone (2010) for a detailed discussion of IAS 40. The authors also provide
empirical evidence that a firm’s decision to adopt fair value accounting for investment properties under
IAS 40 is a function of information asymmetry, contractual efficiency, and managerial opportunism.

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in the adoption effect. For example, only the historical cost model is allowed under
domestic GAAP in France and Germany, only the fair value model is allowed under
domestic GAAP in the UK and Denmark, and both models are allowed under
domestic GAAP in Belgium and the Netherlands.55 As firms in all of these countries
have converged to IFRS, one can exploit the heterogeneity in the fair value changes
that occur as a result of IFRS adoption. Second, as the amount of fair value
information is the same whether firms choose the fair value or historical cost model
under the IFRS regime, this allows researchers to analyze firms’ accounting choices
between recognition and disclosure while holding the information environment
constant.
Goncharov et al. (2014) examine the effect of fair value reporting (through both
recognition and disclosure) on audit fees. Using a sample of 172 European real
estate firms during 2001–2008, they adopt a difference-in-differences design and
find that the firms that previously used the amortized cost model under local GAAP
exhibited greater declines in audit fees when forced to adopt fair value accounting
under IFRS relative to the firms that were already using the fair value model under
local GAAP. The authors interview real estate audit partners, who suggest that the
higher audit fees initially observed for firms using an amortized cost model
stemmed from the greater audit effort required for impairments. They empirically
corroborate these interview responses in the data. In addition, cross-sectional
analyses reveal that audit fees under IFRS reporting are (1) negatively associated
with firms’ exposure to fair valued assets, (2) positively associated with the
complexity of the fair value measurement, and (3) higher for fair value recognition
than for fair value disclosure.
Muller, Riedl, and Sellhorn (2011) evaluate the effects of the increased disclosure
of fair values required under IFRS on the degree of information asymmetry faced by
investors. Using a sample of 121 European real estate firms during 2003–2007, they
find that firms that did not voluntarily disclose fair values before mandatory IFRS
adoption experienced larger improvements in information asymmetry, i.e., larger
declines in their bid-ask spreads, upon IFRS adoption.
Turning to the recognition of fair values, Liang and Riedl (2014) contrast real
estate firms in the UK with those in the US. Before IFRS adoption, UK GAAP
required firms to recognize their investment property assets at fair value on their
balance sheets and report unrealized fair value changes in a revaluation reserve.
However, under IFRS, these firms recognize unrealized fair value changes in net
income while continuing to recognize investment property assets at fair value on the
balance sheets.56 In contrast, US firms can use only the historical cost model to
account for investment property assets. Liang and Riedl (2014) exploit this
difference in accounting standards between the UK and US to investigate the effect
of fair value accounting on analysts’ forecasts. They conjecture that the recognition
of fair value in balance sheets aids analysts by revealing managers’ private

55
See Appendix 1 of Goncharov et al. (2014) for a full list of countries in relation to this issue.
56
In theory, firms can choose between the fair value and historical cost model under IFRS. However, in
practice, all of Liang and Riedl’s (2014) sample firms use the fair value model. They attribute this to the
UK’s legacy of using the fair value model for investment property assets under domestic UK GAAP.

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information about underlying asset values and that the recognition of fair value
changes in net income makes earnings more difficult for analysts to predict.
Consistent with this conjecture, they find that analysts’ forecast accuracy for net
asset value (balance sheet based) is higher for UK firms (over a period combining
both the pre- and post-IFRS-adoption periods) than for US firms and that the
forecast accuracy for earnings is higher for US firms than for UK firms reporting
under IFRS. They also find that the former result is attenuated during the financial
crisis period when asset values are impaired, causing the numbers reported under
the fair value model to converge toward those reported under the historical cost
model. Their analysis reveals that analysts’ forecast accuracy for earnings is lower
for UK firms than for US firms in pre-IFRS-adoption period, although this is not
predicted by their conjectures. This result indicates that omitted correlated variables
may affect analysis.
Israeli (2015) uses a sample of 86 real estate firms from France, Germany, Italy,
and Spain, where the fair value model for investment property assets was not
permitted in pre-IFRS domestic GAAP, and examines their choices between fair
value disclosure and recognition of investment property assets under IFRS during
2005–2010. The author conjectures that managers opportunistically chose fair value
recognition to extract contractual benefits, i.e., to avoid debt covenant violations by
reporting higher book values of equity and assets and to receive higher earnings-
based compensation by reporting a higher net income. Consistent with this
conjecture, he finds that firms with higher leverage (used as a measure for firms’
proximity to debt covenant violation) and more ownership dispersion (used as an
inverse measure for shareholder monitoring) were more likely to adopt the
recognition regime. However, this conjecture is based on the assumption that fair
value recognition leads to higher asset values and earnings, which need not be the
case in practice.
Muller et al. (2015) study the stock market implications of fair value disclosure
versus fair value recognition of investment property assets for a sample of 245 EU
real estate firms over the 2003–2010 period. They document that equity prices have
a lower association with disclosed fair values than they do with recognized fair
values and conclude based on additional analyses that the discount for disclosures
arises partly from the lower reliability of disclosed numbers and partly from the
greater costs involved in processing disclosed numbers relative to recognized
amounts. The authors also evaluate the role of external appraisals in minimizing the
stock price discount associated with disclosed fair values and finds that fair values
based on external appraisals help to decrease the discount. Their findings contrast
with those of Goncharov et al. (2014), who find that the effect of fair values on audit
fees is unaffected by the use of external appraisals.
Christensen and Nikolaev (2013) also examine firms’ accounting choices but
expand on prior studies by including analyses of IAS 16 and IAS 38, which allow
firms to choose between the historical cost and fair value models when measuring
their PP&E and intangible assets, respectively.57 They argue that firms choose fair

57
Stolowy, Haller, and Klockhaus (2001) provide a detailed comparison of IAS 38 and French and
German GAAP.

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value accounting only when reliable fair value estimates are available at a low cost
and when the estimates convey information about operating performance. Consis-
tent with their argument, they find that few firms opt to use the fair value model to
measure their PP&E and intangible assets and that real estate firms especially tend
to choose the fair value model to measure their investment property much more
frequently. Their results do not rule out the possibility that firms’ choice of fair
value accounting is driven by factors related to overall IFRS adoption, rather than
exclusively by the benefits and costs of fair value accounting on its own. Consistent
with this concern, Christensen and Nikolaev (2013) observe in their sample that
44 % of UK firms switched to the historical cost model from the fair value model
for PP&E upon mandatory IFRS adoption, although these firms had the option to
report under the historical cost model, even in the pre-IFRS period. If firms’ choice
of fair value reporting was independent of IFRS adoption, then these firms should
have chosen the historical cost model, even in the pre-IFRS period.
In the midst of the financial crisis, the EU called on the IASB to achieve a ‘‘level
playing field’’ with US GAAP and allow entities to reclassify financial assets. This
would have allowed banks to use reclassification to switch away from fair value
accounting for assets that decreased in value during the financial crisis and avoid
recognizing unrealized losses. The IASB responded by introducing an amendment
to IAS 39 in 2008 that allowed firms to retrospectively use a non-fair-value method
for non-derivative financial assets, provided the firm had the ability and intention to
hold such assets for the foreseeable future and had not yet issued its financial
statements at the time of the amendment. Lim et al. (2013) evaluate the effects of
this reclassification option for a sample of 98 banks covering 21 IFRS-adopting
countries and find that the reclassification choice decreased analysts’ ability to
forecast earnings in the initial year of amendment adoption (2008–2009) but not in
subsequent years when the economic environment was less volatile.
Panaretou et al. (2013) examine the effect of using hedge accounting under IFRS
on information asymmetry. They observe that UK GAAP has less strict require-
ments for hedge designation than IFRS and that, unlike IFRS, UK GAAP permits
historical cost accounting for certain hedging instruments. Based on these
differences, they predict that IFRS adoption enhances the quality of information
provided by firms as to their derivative instruments and corporate risk management
practices, which should lower information asymmetry. Using a sample of UK non-
financial firms for the 2003–2008 period, they provide evidence consistent with their
predictions. They show that firms that applied hedge accounting under IFRS had
lower analyst forecast errors and dispersion relative to firms without hedge
accounting.
He et al. (2012) use a Chinese setting to examine the unintended consequences of
implementing fair-value accounting in an emerging economy. Although China has
not officially adopted IFRS, Chinese public firms switched accounting standards in
2007 to standards substantially similar to IFRS. He et al. (2012) study earnings
management around the switch in accounting standards and report that Chinese
firms manage earnings more to offset losses reported under fair value accounting or
through strategic reporting of fair value gains and losses in the post-adoption period.
They point to specific institutional details in China, such as close relationships

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between debtors and creditors and political connections, that make such manipu-
lations feasible. However, one limitation of their study involves the generalizability
of their results to other countries, as Chinese firms face ownership structures,
regulation forces, and capital and business environments that are drastically
different from those of firms elsewhere.
One significant departure of IFRS from almost all domestic GAAP is the
requirement of fair value biological assets (IAS 41). IAS 41 requires firms to
recognize changes in the fair values of biological assets as revenues or expenses in
income statements each year. Although this was a substantial change in accounting
for biological assets, its effects receive little attention from researchers. Very few
studies directly evaluate the effects of this standard. Huffman (2014) studies the
value relevance of fair value accounting for biological assets and concludes that
book value of equity and earnings are more value relevant for consumable
biological assets (i.e., agricultural products such as crops or timber that realize value
on a standalone basis and whose value to the firm is linked to what may be
exchanged for the asset in the marketplace) measured at fair value and bearer
biological assets (i.e., self-regenerating assets such as orchards or oil palm
plantations that are used in combination with other assets in the ongoing operations
of the firm) measured based on historical costs.58 However, using a larger sample,
Goncalves and Lopes (2015) find that fair values are value relevant for both
consumable and bearer biological assets but do not reconcile their results with those
of Huffman (2014). Focusing on Australia, South Africa, and France, Elad (2004)
provides a commentary related to the fair value rules for agricultural assets
embodied in IAS 41.

9.2 Studies focusing on the non-fair-value attributes of IFRS

Hamberg et al. (2011) examine the adoption of IFRS 3 (Business Combinations) on

financial reporting among a sample of Swedish firms. Relative to prior Swedish
GAAP, IFRS 3 abandons the amortization of capitalized goodwill and instead
requires regular testing of goodwill for impairment. They find that firms recognize
smaller goodwill impairments under IFRS compared with the combined value of
goodwill amortization and write-downs under Swedish GAAP, causing reported
earnings to be higher after IFRS adoption. Furthermore, by comparing the returns of
goodwill-intensive firms with those of firms with low levels of goodwill, they find
that the stock market reacts positively to these higher earnings under IFRS. Their
results suggest that stock market participants seem to find that the impairment
model of goodwill better reflects underlying economic activities compared with the
previous amortization cost model. Chalmers et al. (2011b) substantiate this view for
a sample of Australian firms.
Focusing on recognition rules for intangible assets, Cheung, Evans, and Wright
(2008) report that IFRS rules for intangible assets (IAS 38/AASB 138) are more

58
Effective January 1, 2016, IFRS require firms to account for bearer biological assets such as property,
plant, and equipment.

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stringent than previous Australian GAAP rules and that firms have consequently had
to de-recognize a significant portion of intangible assets following IFRS adoption.
Hsu and Pourjalali (2015) examine the effect of adopting IAS 27 (Consolidated
and Separate Financial Statements) on stock markets’ ability to predict earnings.
The authors argue that compared with local GAAP, IAS 27 decreases managers’
flexibility to hide losses and risks in unconsolidated investees, as it gives fewer
choices to managers in terms of which investee-entities to consolidate. Using a
sample of Taiwanese firms, the study shows that the adoption of IAS 27 led to an
increase in forward earnings response coefficients (the proxy for the stock market’s
ability to forecast earnings) for firms that were forced under IFRS to consolidate at
least one investee entity.
Finally, Gebhardt and Novothy-Farkas (2011) examine the effect of IAS 39
adoption on income smoothing and timely loss recognition among European banks.
IAS 39 requires banks to recognize only ‘‘incurred’’ losses on balance sheets as
opposed to recognizing ‘‘expected’’ losses in prior local GAAP. This incurred loss
approach decreases the scope of judgment and discretion in determining the loan
loss provision relative to the expected loss approach used in local GAAP. The
authors find that the more restrictive IAS 39 impairment rules significantly decrease
the income smoothing behavior and timely loss recognition of European banks.

10 Empirical research design of IFRS studies

In this section, we synthesize the research design choices of IFRS studies with an
aim to understanding the general trends in publications and research methodologies.
This section is intended to be descriptive rather than normative, partly because there
are no clear prescriptions for many of the econometric choices involved in IFRS
studies. Such choices (e.g., the level at which standard errors must be clustered or
what types of fixed effects to include) depend on econometric assumptions related to
the unobserved properties of relevant variables. There are also no econometric tests
known to us that adequately justify or refute these assumptions. Although one can
make a conservative selection of research methods, such an approach comes at the
cost of a loss of power in the tests and so is not necessarily preferable. Simulation-
based evidence also suggests that seemingly conservative choices can sneak biases
into analyses (e.g., Petersen 2009).
Many IFRS studies currently discuss the sensitivity of their results to research
choices. However, the discussions tend to be brief and limited in terms of the effect
on the final inference. Very few studies tabulate results from these sensitivity
checks. Tabulating such results (at least in an Internet appendix) may help other
researchers obtain a deeper understanding of the drivers of the reported results, aid
in the replication of results, and reconcile the differences in results across studies.
As this section primarily focuses on documenting the empirical choices made by
IFRS studies, we keep explanations and discussions of various econometric issues to
a minimum and instead restrict our discussions to how studies address these
econometric issues. As our analysis is intended to give an overview of trends in
research choices rather than an exhaustive examination of all of the research

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methods adopted in the literature, we limit our focus to the same set of papers
identified for this review from Contemporary Accounting Research, Journal of
Accounting and Economics, Journal of Accounting Research, Review of Accounting
Studies, and The Accounting Review from 1999 through 2015. We exclude
discussion papers, opinion pieces, theory papers, experiments, and surveys. Our
final sample consists of 64 published articles. A majority of these studies consider
IFRS/IAS adoption as the primary research objective or use it as the primary
research setting. For these studies, our analysis focuses only on their main research
designs. A few studies use the IFRS adoption setting not as part of their main
analysis but as part of their robustness analysis. For these studies, our analysis
focuses on their research design as it pertains to IFRS/IAS adoption.

10.1 Sample distribution

Table 1 lists the number of studies published by each journal and their years of
publication. There has been a gradual increase in the number of publications,
especially after 2007, probably due to the EU’s mandatory IFRS adoption in 2005.
Table 2 lists the number of publications by author country, which is determined by
the location of an author’s affiliation. We count the total number of articles with at
least one co-author affiliation located in that country as shown on the publication.
This table shows a wide geographic distribution. Although US researchers continue
to dominate, over 50 % (i.e., 35 out of 64) of the studies have at least one co-author
with an affiliation outside the US. We suspect that no other research topic is likely to
have such a large fraction of non-US researchers in studies published in the selected

Table 1 Number of
Publication year CAR JAE JAR RAST TAR Total
publications by year
1999 0 1 0 0 0 1
2000 0 0 1 0 0 1
2001 0 0 1 0 0 1
2002 0 0 0 0 1 1
2003 0 0 1 0 0 1
This table lists the number of
articles on IFRS-adoption- 2004 0 0 0 0 0 0
related topics published in five 2005 0 0 0 0 0 0
accounting journals, 2006 0 0 0 0 0 0
Contemporary Accounting
Research (CAR), Journal of 2007 0 0 1 1 0 2
Accounting and Economics 2008 1 0 2 0 1 4
(JAE), Journal of Accounting 2009 0 0 1 0 1 2
Research (JAR), Review of
2010 0 0 0 1 2 3
Accounting Studies (RAST), and
The Accounting Review (TAR), 2011 0 1 3 1 0 5
between 1999 and 2015. The list 2012 1 3 1 1 3 9
only includes studies that use an
2013 5 1 1 1 5 13
empirical archive research
methodology and excludes 2014 0 0 2 1 5 8
studies on tax-related topics. 2015 1 1 2 3 6 13
Journals are listed in Total 8 7 16 9 24 64
alphabetical order

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Table 2 Number of publications by co-author affiliation country

Co-author affiliation country CAR JAE JAR RAST TAR Total

Australia 0 0 0 0 1 1
Austria 0 0 0 1 0 1
Canada 0 0 3 0 3 6
China 1 0 0 1 0 2
Germany 0 0 2 2 1 5
Greece 1 0 0 0 0 1
Hong Kong 1 0 4 2 6 13
Israel 0 0 0 1 0 1
Netherlands 0 0 0 0 2 2
New Zealand 0 0 0 0 1 1
Portugal 0 0 1 0 0 1
Singapore 0 0 0 0 1 1
Taiwan 1 0 0 0 0 1
United Kingdom 2 0 4 3 3 12
United States 6 7 13 4 16 46

This table lists the number of articles included in Table 1 by the geographic location of the co-author
affiliation. We count the total number of articles with at least one co-author affiliation located in a
particular country as listed in the publication

five journals. Researchers from the EU and Hong Kong dominate the list of non-US
researchers publishing IFRS-related works. It is likely that these researchers have
been stimulated by IFRS adoption in their home countries and have benefited from
their proximity to country-specific information about the effects of IFRS.

10.2 Data sources

IFRS studies rely primarily on WorldScope as their primary source of firms’

financial information and Datastream as their source of stock market information.
Of these 64 studies, 47 use Datastream/WorldScope (Table 3). Some of the studies
also use Compustat Global for firm-level information, and many of the studies use
both Datastream/WorldScope and Compustat Global. Although WorldScope has a
larger coverage, especially for emerging markets in early years, its data were
unavailable in a user-friendly format for researchers until recently. Compustat
Global has been available longer through Wharton Research Data Service (WRDS),
and this has allowed researchers easier access to the dataset and made it easier to
merge with other WRDS databases. Some early studies rely on Bloomberg as their
data source for firm-level information (e.g., Ashbaugh and Pincus 2001; Ashbaugh
and Olsson 2002).
Although it is not yet widely used by researchers, FactSet is a database for firm-
level accounting information available through WRDS. FactSet purchased WorldS-
cope in April 2008 and thus acquired its firm-level accounting information for over

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Table 3 Most commonly used data sources

Data sources No. of publications

Datastream/worldscope 47
IBES 29
Hand-collected 20
Compustat global 12
Thomson ownership databases 9
Bloomberg 4
SDC 4
DealScan 4

This table lists the most common data sources used by the 64 studies included in Table 1. Each study may
use multiple data sources. The Thomson Ownership databases include the Thomson Reuters CDA/
Spectrum database, Thomson Financial Securities Mutual Fund database, and Thomson Financial
Ownership database

43,000 firms globally starting from 1980. Since May 2010, FactSet has started
collecting firm-level accounting information by itself.
Some of the studies, particularly those analyzing US GAAP-IFRS reconcilia-
tions, use hand-collected data. Such information is extracted from either the
financial statements of global firms or the SEC’s Form 20-F filings of firms cross-
listed in the US.

10.3 Multi- versus single-country settings

Most IFRS/IAS studies use an international sample of firms for their treatment
samples. Of the 64 studies analyzed here, 18 use a single-country treatment sample,
and one uses a two-country setting.59 Of these 19 studies, the UK (seven studies)
and Germany (four studies) are the most frequently examined countries.
A major advantage of using a multi-country setting is that the results can
typically be generalized to a wider variety of firms and a wider set of institutional
and enforcement factors. Such studies also can conduct cross-country analysis of the
role of country characteristics in influencing IFRS outcomes. The samples used in
multi-country analysis are also typically larger, yielding greater power of tests.
However, studies focusing on a single IFRS-adopting country have their own
advantages. Single-country settings allow researchers to focus on a more
homogenous sample of firms with broadly comparable ownership structures and
capital market incentives. They also hold legal and regulatory factors constant and
enable researchers to delve deeper into analysis of institutional details, adopt better
identification strategies, and better control for potential confounding events.

59
Of the studies adopting a single-country research design, five focus on firms cross-listed in the US, and
one uses firms cross-listed in the UK. We count these studies as using the US or UK as a single treatment
country.

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We discuss the unique features of a few individual countries that have been
favored in single-country settings as follows.

10.3.1 Studies focusing on German firms

Germany is a unique case in that before mandatory IFRS adoption in 2005 German
firms were reporting under a variety of accounting standards, including German
GAAP, IAS, and US GAAP. This allows comparisons across firms that are largely
similar except for their choices of accounting standards. This approach can help
isolate the effects of accounting standards from the effects of legal, regulatory, and
political factors. However, these samples generally suffer from self-selection
problems associated with firms voluntarily choosing a specific accounting standard
or include a nonrandom sample of firms, such as high-tech firms listed on the New
Market.
Another feature of the German setting is its stakeholder-oriented accounting
system, which overlaps significantly with the country’s tax rules. German GAAP
also allows only historical cost accounting. Examples of studies that use the German
setting include those by Bartov et al. (2005), Christensen et al. (2015), Daske
(2006), Hung and Subramanyam (2007), Leuz (2003), and Van Tendeloo and
Vanstraelen (2005).

10.3.2 Studies focusing on UK firms

As the UK did not allow early adoption of IFRS, the setting allows researchers to
clearly study the effects of mandatory IFRS adoption without contamination based
on the influence of early voluntary adopters. Furthermore, outside of the US, the UK
has the largest set of actively traded stocks, for which a relatively long history of
accounting and stock market data are available. This makes it possible for a single
IFRS-adopting country to produce a relatively large sample. Finally, the UK
provides accounting data that are electronically readable for the largest sample of
private firms.60 Examples of studies that have used the UK setting are those by
Brochet et al. (2013), Christensen and Nikolaev (2013), Liang and Riedl (2014), and
Panaretou et al. (2013).

10.3.3 Studies focusing on Australia

Australia required all of its firms without exception to adopt IFRS for financial
periods beginning on or after January 1, 2005. Thus, unlike many other
jurisdictions, there was no staggered adoption. Although voluntary adoption was
permitted, very few firms (\1 %) chose to do so. A distinct feature of Australia’s
adoption of IFRS is that all corporations in the country, both listed and unlisted,
must report under IFRS. This removes incentives for Australian firms to delist to

60
Horton and Serafeim (2010) provide a detailed discussion of the effects of IFRS relative to local UK
GAAP for key accounting areas, i.e., leases, employee benefits, share-based payments, deferred taxes,
goodwill and intangibles, and financial instruments.

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report under an alternative accounting standard. It also makes it a particularly

interesting setting to test the effects of IFRS on private firms and the overall
economy. Examples of studies that have used the Australian setting are those by
Chalmers et al. (2011a, b), Cheung et al. (2008), De George et al. (2013), Jones and
Higgins (2006), and Lai et al. (2013).

10.3.4 Studies focusing on cross-listed firms

Since 1982, the SEC has required foreign firms cross-listed in the US stock markets
to reconcile their financial statement numbers based in local GAAP to US GAAP.
Such reconciliations provide researchers with the opportunity to compare reported
financial statement numbers across two different accounting regimes for the same
firm and year. However, in November 2007, the SEC voted to allow foreign
companies to file financial statements based on IFRS without having to reconcile the
data to US GAAP, i.e., eliminate 20-F reconciliations. IFRS studies also investigate
cross-listing in other countries, especially in the Stock Exchange Automated
Quotations system of the International Equity Market of London, which allows
firms to report under either IAS or US GAAP. This setting allows for the
comparison of accounting standards for firms from a single equity market.
The cross-listing setting presents a drawback: although these firms are traded in
the same equity markets, they are incorporated in different countries and are
therefore likely to face different domestic regulatory forces and reporting
incentives. Another limitation of this type of research is the potential bias that
arises from firms self-selecting to cross-list their shares.

10.4 Empirical methodology

In this subsection, we review the empirical methods adopted in our selected 64 IFRS
studies. Although some studies rely on cross-sectional comparisons across firms
reporting under IFRS and those reporting under other standards to investigate the
properties of IFRS financial reports, IFRS studies and especially those evaluating
the effects of IFRS adoption rely predominantly on a difference-in-differences
approach. This approach compares changes in specific attributes around the event
date for a treatment sample relative to a control sample. We review the crucial
methodological elements involved in the empirical analysis approach of IFRS
studies in general. Although many of the issues discussed are relevant to both cross-
sectional and difference-in-differences analyses, we pay special attention to the
latter approach in Sect. 10.4.4, given its predominance in the IFRS literature.

10.4.1 Event selection

10.4.1.1 Voluntary adoption and endogeneity concerns A key issue associated

with voluntary adoption studies is the potential endogeneity that arises from firms
self-selecting to adopt IAS/IFRS. That is, the unobserved factors driving firms to
voluntarily adopt IAS/IFRS may drive the observed changes in the attributes
examined, rather than the IAS/IFRS adoption itself. Studies use a variety of

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techniques to address this concern, the most prominent one being the use of a two-
stage Heckman-type treatment effect model. In practice, this approach is often not
entirely satisfactory to rule out self-selection concerns due to the absence of valid
instrument variables in the first-stage regression that can be excluded from the
second-stage regression with appropriate economic justifications (Larcker and
Rusticus 2010).
However, a few studies go beyond relying solely on the Heckman approach. For
instance, Kim and Shi (2012) show that documented differences across voluntary
adopters and non-adopters exist only after IFRS adoption and not before, indicating
that the observed changes for voluntary adopters are likely to be attributable to the
adoption itself. They also confirm that their results are driven only by changes
occurring to treatment firms rather than by changes occurring in control firms.
Furthermore, they present their results using the propensity-score matching and two-
stage least squares approaches as alternative econometric techniques to address self-
selection biases. Finally, they provide cross-sectional evidence that pre-adoption
divergence between local GAAP and IFRS relates to the changes observed around
IFRS adoption. Although none of these approaches can entirely rule out self-
selection biases on its own, the robustness of the results to various econometric
checks increases confidence that the documented changes around IFRS are unlikely
to be driven by omitted correlated variables or unobserved factors that drive firms to
voluntarily adopt IFRS.
Christensen (2012) raises an interesting point in the context of voluntary IFRS
adoption. As several studies document significant benefits arising from voluntary
IFRS adoption, he asks why so very few firms voluntarily adopt IFRS. Almost all of
the firms that voluntarily adopted IFRS in the pre-2000 period were located in the
EU, and, as the EC had outlined its strategy to eventually mandate IFRS,
Christensen (2012) argues that these adoptions were not truly voluntary. He rules
out the possibility that it was the high cost of voluntary IFRS adoption that
discouraged firms. Although the costs of IFRS compliance are likely to be low in
weak enforcement countries, there is little evidence of voluntary IFRS adoption in
such countries. Christensen (2012) concludes that the benefits observed from
voluntary IFRS adoption must be driven by endogeneity problems or correlated
omitted variables, suggesting that the controls for these biases in current studies are
insufficient. Consistent with the concerns of Christensen (2012), Daske et al. (2013)
find that the change in disclosure incentives for adopting firms drives the
documented capital market benefits following voluntary IAS adoption.

10.4.1.2 Mandatory adoption and contamination concerns Mandatory IFRS

adoption is less subject to the endogeneity criticism, as adoption is performed at
the country level and is beyond the choice of individual firms. From this
perspective, mandatory adoption is naturally a preferred event for researchers.
However, this setting presents its own empirical issues. First, as most countries
mandated IFRS between 2005 and 2008, the IFRS adoption dates are clustered in
time, raising contamination concerns from events that are entirely unrelated to IFRS
adoption. Second, changes in regulation or enforcement bundled with IFRS

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adoption, such as the EU regulation that requires member states to introduce

relevant enforcement and compliance mechanisms along with mandatory IFRS
adoption, can also confound the direct effects of IFRS adoption.
Christensen et al. (2013) illustrate the contamination concerns in the context of
liquidity changes documented by prior studies around mandatory IFRS adoption in
the EU. They find that previously observed improvements in liquidity are actually
isolated within five EU countries that substantially changed their enforcement of
financial reporting around the time IFRS became mandatory. They find no evidence
of liquidity improvements surrounding the IFRS mandate in countries without
concurrent changes in enforcement. Moreover, in additional analysis of voluntary
adopters only, they continue to find significant liquidity improvements around the
mandate event in countries with concurrent changes in enforcement. Given that
these firms had already voluntarily adopted IFRS before the mandate, the findings
suggest that liquidity improvements occurred absent a change in reporting
standards. The authors conclude that changes in financial reporting enforcement
play a crucial role in explaining liquidity changes around IFRS adoption and that
IFRS adoption itself is unlikely to be a primary source of capital market benefits.
Although the findings of Christensen et al. (2013) underscore the importance of
addressing confounding effects, Barth and Israel (2013) point out that the evidence
presented by Christensen et al. (2013) is insufficient to completely rule out the
effects of IFRS adoption. They specifically note the following, referring to
Christensen et al. as ‘‘CHL.’’
Importantly, the specifications in CHL Tables 3, 4, and 5 do not distinguish
effects of changes in enforcement from effects of IFRS adoption. Although the
findings in these tables allow CHL to rule out an effect of IFRS on liquidity for
countries that did not adopt concurrent changes in enforcement, the findings
do not rule out an effect of IFRS for countries that did adopt concurrent
changes in enforcement. In other words, the findings in CHL Tables 3, 4, and
5 do not tell us the effect of changes in enforcement by themselves and, thus,
we cannot compare the liquidity of IFRS adopters with changes in
enforcement to that of non-adopters with changes in enforcement … This
comparison is necessary if one is to rule out an effect of IFRS.61
Recent research has aimed to address concerns about the confounding effects of
mandatory IFRS adoption by checking the robustness of results to (i) focusing only
on IFRS-adopting countries that did not concurrently change their regulation or
enforcement practices, (ii) using countries outside the EU that adopted IFRS at
different periods (such as Canada), and (iii) relating the effects of IFRS to cross-

61
Christensen et al. (2013) present a test in Table 6 of their study to separately identify the liquidity
effects arising exclusively from enforcement changes. They investigate liquidity changes for Japanese
firms around 2004, when Japan changed its enforcement practices without changing its accounting
standards. Although their analysis provides some evidence that supports the enforcement changes
affecting stock liquidity, it is unclear whether these results can be generalized to other contexts or
countries, as Japan saw large changes in the functioning of its banks and capital markets between 2001
and 2007, when regulators introduced new laws aimed at decreasing non-performing loans on banks’
balance sheets.

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A review of the IFRS adoption literature 973

sectional differences between IFRS and domestic GAAP. The logic behind the last
set of analyses is that, if IFRS adoption produces certain benefits, these benefits
should be larger in countries where IFRS adoption has a larger effect on reporting
standards.
Overall, the debate over whether the observed changes in financial reporting
outcomes and capital market benefits are due to the IFRS mandate or changes in
enforcement may never be settled empirically. Results in extant literature may need
interpretation assuming that IFRS adoption represents the entirety of the changes to
the financial reporting system, including the application of new accounting
standards and the changes in enforcement and litigation.
In addition to the contamination concern, Ramanna and Sletten (2014) show that
mandatory IFRS adoption at the country level is not always entirely exogenous.
They find that a country’s decision to adopt IFRS is an endogenous choice
determined by the country’s perceived network benefits. That is, a country is likely
to adopt IFRS if the other countries with which it has close economic ties have
already adopted IFRS.

10.4.1.3 Type of IFRS adoption investigated To provide some insights into

researchers’ choice of adoption event to study, Fig. 1 plots the number of articles
classified by adoption type and publication year. Before the large-scale mandatory
adoption of IFRS in 2005, studies had little choice in exploring the adoption event, a
point emphasized given that almost all studies until 2008 focused on voluntary IFRS
adoption. In contrast, since 2008, only a handful of published studies focus
exclusively on voluntary adoption. Many studies after 2008 examine both voluntary
and mandatory IFRS adopters. We surmise that the trend toward using both as
alternative subsamples is at least partly driven by the econometric concerns related
to each of these adoption types. Based on the presumption that econometric biases
are independent for mandatory and voluntary adopters, researchers interpret a
consistent set of results for both subsamples, providing greater confidence in the
inferences drawn about the role of IFRS.

10.4.2 Identification of event date

A key issue in any event study is the accurate identification of the event date. For
studies of mandatory IFRS adoption, the event date is relatively straightforward, as
it is publicly released by the regulators in each country. However, even in this case,
care is needed to identify the event date, as adoption dates may be staggered.
Table 4 lists the country-level adoption dates with notable exceptions and carve-
outs. When the EU initially mandated IFRS, firms that had their equity securities
traded in major stock exchanges had to adopt IFRS for fiscal periods beginning on
or after Jan. 1, 2005. However, companies that had only publicly traded debt
securities or reported under US GAAP could delay adoption of IFRS to 2007 if the
country allowed it. Moreover, some countries, such as Austria, Belgium, and
Germany, allowed early adoption of IFRS, and other countries, such as France,
Spain, and the UK, prohibited early adoption. Examining the actual adoption and

123
974 E. T. De George et al.

Number of publications by adoption type

Mandatory Only Mandatory&Voluntary Voluntary Only
14

12

10

0
1999- 2008 2009 2010 2011 2012 2013 2014 2015
2007

Percentage of publications by adoption type

Mandatory Only Mandatory&Voluntary Voluntary Only
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1999- 2008 2009 2010 2011 2012 2013 2014 2015
2007

Fig. 1 Number of publications by adoption type. This figure plots the publications as listed in Table 1 by
adoption type. ‘‘Voluntary Only’’ includes studies focusing on voluntary IAS adoption only. ‘‘Mandatory
Only’’ includes studies focusing on mandatory IFRS adoption only. ‘‘Mandatory & Voluntary’’ includes
studies focusing on mandatory IFRS adoption but using voluntary adoption as an alternative benchmark
group. We first count the number of publications under each adoption type. We then divide this number
by the total number of publications in that year to get the percentage

123
A review of the IFRS adoption literature 975

Table 4 IFRS adoption dates by country between 2001 and 2013

Country Current IFRS mandated First IFRS Notes on country-level adoption
GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

IFRS adopting countries

Albania IFRSa 01-Jan-08 31-Dec-08 Requirement that all listed, large
unlisted, and financial institutions
prepare their legal entity and
consolidated reports under IFRS
Argentina IFRSa 01-Jan-12 31-Dec-12 Requirement that all entities whose
securities are listed and are
regulated by the CNV adopt IFRS
as adopted by IASB. Voluntary
adoption allowable from Jan. 1,
2011. Exception: Banks and
Insurance Companies. On Feb. 12,
2014, the BCRA issued
Communication A5541
announcing a plan to converge the
BCRA accounting standards for
banks with IFRS. The converged
standards will become mandatory
on Jan. 1, 2018
Australia IFRS 01-Jan-05 31-Dec-05 Requirement that all listed and
unlisted (private) firms adopt
IFRS. Given IFRS need to be
incorporated into Australian law
they are issued as ‘‘Australian
Accounting Standards’’ although
entities effectively adopt IFRS
word-for-word. Note that virtually
no voluntary adoption was
allowable in Australia before the
mandate. Researchers should also
be aware that as the majority of
Australian companies report June
30 year-ends (over 85 % of listed
firms). The first date at which the
majority of annual IFRS
compliant financial statements
were issued is the fiscal period
ending Jun. 30, 2006
Austria IFRSc 01-Jan-05 31-Dec-05 In addition to the requirements of
the EU IFRS mandate (i.e.,
mandatory adoption for
consolidated accounts of entities
listed on EU regulated markets),
Austria allowed voluntary IFRS
adoption for firms not listed on
regulated exchanges. In Austria,
the two regulated exchanges are
Wiener Boerse AG Amtlicher
Handel and the Wiener Boerse AG
Geregelter Freiverkehr

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976 E. T. De George et al.

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

Bahamas IFRSa 01-Jan-06 31-Dec-06

c
Belgium IFRS 01-Jan-05 31-Dec-05 In addition to the requirements of
the EU IFRS mandate, Belgium
required IFRS reporting for all
listed and unlisted banks from Jan.
1, 2006, and all listed and unlisted
insurance companies from Jan. 1,
2012. In addition, from Jan. 1,
2007, IFRS was required for
separate company financial
statements of REITs
Bosnia and Local IFRSb 01-Jan-05 31-Dec-05 IFRS adopted locally, i.e. translated
Herzegovina into local language by the national
standard setting body. Note that a
legal requirement was adopted in
June 2005 that required all public
and private firms to adopt IFRS
Brazil IFRSb and 01-Jan-10 31-Dec-10 The IFRS mandate required listed
CPC firms to prepare financial
statements under both IFRS and
local GAAP (CPC). Note that
unconsolidated (separate)
financial statements still report
under Brazilian GAAP (BR
GAAP). However, BR GAAP
have been fully converged with
IFRS since 2010. Therefore both
listed and private firms follow
IFRS given the local GAAP
convergence. Exception: carve-
out of revaluation requirements
from IAS 16, as these are not
permitted under Brazilian
corporate law
Bulgaria IFRSc 01-Jan-03 31-Dec-03 Exception: Banks had already
adopted IFRS in 1997
Canada IFRS (and 01-Jan-11 31-Dec-11 Exceptions: Investment companies,
U.S. life insurance companies, and
GAAP) entities subject to rate regulation
do not follow IFRS. U.S. GAAP is
still acceptable for US issuers

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A review of the IFRS adoption literature 977

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

Chile IFRS (and 01-Jan-09 31-Dec-09 Staggered IFRS adoption: Major

SBIF) listed open corporations
(i.e., [500 shareholders) were
required to prepare IFRS
statements for financial periods
beginning on or after Jan. 1, 2009,
with smaller listed open
corporations (i.e., \500
shareholders) to adopt IFRS from
Jan. 1, 2010. All other entities
were then permitted, but not
required, to prepare IFRS financial
statements from Jan. 1, 2011
Costa Rica IFRSa 01-Jan-01 31-Dec-01 Adopted for both listed and unlisted
firms. Exception: Banks, financial
institutions, and government
bodies do not follow IFRS
Cyprus IFRSc 01-Jan-03 31-Dec-03 Before 2003, Cyprus had adopted
IAS (international standards that
pre-date current IFRS
requirements) from 1981 onward
Czech IFRSc 01-Jan-05 31-Dec-05 In addition to the requirements of
Republic the EU IFRS mandate, firms listed
on nonregulated (non-EU) markets
and those with only public debt
adopted IFRS from 2007 (i.e.,
delayed adoption)
Denmark IFRSc 01-Jan-05 31-Dec-05
Ecuador IFRSa 01-Jan-10 31-Dec-10 Exception: Financial institutions
not subject to IFRS
El Salvador IFRSa 01-Jan-11 31-Dec-11 Exception: Banks, insurance, and
other regulated financial
institutions are not subject to
IFRS. However, regulators require
that these entities provide a
summary of the differences
between regulatory GAAP and
IFRS. Note that IFRS is required
for separate company financial
statements of listed firms and that
unlisted firms are required to
apply IFRS to SMEs
Estonia IFRSc 01-Jan-05 31-Dec-05
Finland IFRSc 01-Jan-05 31-Dec-05 Exception: Firms listed on OMX
First North (nonregulated non-EU
market) not subject to IFRS

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978 E. T. De George et al.

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

France IFRSc 01-Jan-05 31-Dec-05 IFRS is also permitted for

consolidated statements of private
firms
Georgia IFRSc 01-Jan-00 31-Dec-00 IFRS was adopted locally, i.e.,
translated into the local language
by the national standard setting
body
Germany IFRSc 01-Jan-05 31-Dec-05 Following EU IFRS requirements,
IFRS is required only for
consolidated accounts of firms
with debt or equity listed in
regulated markets. German GAAP
is permitted for separate financial
statements. At the time of writing,
Germany as no current plans to
adopt IFRS for SMEs. Voluntary
adoption was allowed from 1998
(IAS)
Ghana IFRSa 01-Jan-07 31-Dec-07
Greece IFRSc 01-Jan-05 31-Dec-05 Extended EU adoption requirement
to stand-alone accounts too, i.e.,
IFRS required for separate
unconsolidated financial
statements
Greenland IFRSc 01-Jan-05 31-Dec-05
Hong Kong HKFRSb 01-Jan-05 31-Dec-05 Full convergence between local
standards (HKFRS) and IFRS.
However some additional
disclosures were added. The
transitional processes also differed
relative to other countries
Hungary IFRSc 01-Jan-05 31-Dec-05 IFRS also permitted (voluntary) for
consolidated statements of
unlisted/private companies
Iceland IFRSc 01-Jan-07 31-Dec-07 Permitted (voluntary) from 2005,
with mandatory adoption
occurring from 2007 onward
Ireland IFRSc 01-Jan-05 31-Dec-05 Irish GAAP and U.S. GAAP
allowed for certain entities (i.e.,
U.S. issuers and parent entities not
listed on EU-regulated markets)
Israel IFRSa 01-Jan-08 31-Dec-08 Note that IFRS had been permitted
(voluntary) since Jan. 1, 2006.
Exception: Banks report under
US GAAP

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A review of the IFRS adoption literature 979

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

Italy IFRSc 01-Jan-05 31-Dec-05

a
Jamaica IFRS 01-Jul-02 30-Jun-03 IFRS requirement extends beyond
listed firms to nonlisted firms
Latvia IFRSc 01-Jan-05 31-Dec-05
Lithuania IFRSc 01-Jan-05 31-Dec-05
Luxembourg IFRSc 01-Jan-05 31-Dec-05
Macedonia Macedonian 01-Jan-10 31-Dec-10 Exceptions: IFRS 9 to IFRS 13 are
IFRSb not included in local harmonized
GAAP, and there is no current
timetable on their inclusion
Malaysia MFRSb 01-Jan-12 31-Dec-12 For the most part, Malaysian FRS
are identical to IFRS. Exception:
‘‘Transitioning Entities’’ were not
required to adopt until 2014.
These are, in general, entities
covered by IAS 41 (agriculture)
and real-estate entities
Malta IFRSc 01-May-05 30-Apr-06
Mexico IFRSa 01-Jan-12 31-Dec-12 Voluntary adoption allowed from
Jan. 1, 2008, onward
Montenegro IFRSa 01-Jan-05 31-Dec-05 Exceptions: Banks follow other
specific regulations prescribed by
the Central Bank of Montenegro
that differ from IFRS (e.g. specific
rules about loan loss provisions)
Netherlands IFRSc 01-Jan-05 31-Dec-05
New Zealand NZ-IFRSb 01-Jan-07 31-Dec-07 Fully converged to IFRS with some
additional disclosure
requirements. Exception: Tier 2
firms, i.e., those with no public
accountability apply a reduced
disclosure version of NZ-IFRS.
Note that voluntary adoption was
allowed from Jan. 1, 2005
Norway IFRSc 01-Jan-05 31-Dec-05 In addition to the EU IFRS mandate
requiring adoption from 2005,
Norway required IFRS adoption
for standalone entities (i.e.,
unconsolidated reports) from 2011
onward

123
980 E. T. De George et al.

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

Pakistan IFRSa 01-Jan-09 31-Dec-09 All IFRS are required to be

approved by the ICAP and
Pakistani SEC (SECP). Thus it is
common for delays to arise in
adopting new standards. The
SECP and the Institute of
Chartered Accountants of Pakistan
(ICAP) have agreed, in principle,
to take urgent necessary steps so
as to ensure full compliance with
IFRS, as far as the financial
statements of the listed companies
(other than banks and financial
institutions) are concerned for the
year ending Dec. 31, 2009
Philippines PFRSa 01-Jan-05 31-Dec-05 PFRS are based on IFRS as issued
by the IASB. However, some
notable differences exist
Poland IFRSc 01-Jan-05 31-Dec-05
c
Portugal IFRS 01-Jan-05 31-Dec-05
Qatar IFRSa 01-Jan-02 31-Dec-02 IAS adopted since 1995. IFRS
mandate required for consolidated
and standalone/separate financial
statements. Note that all listed
companies are usually registered
as limited liability companies in
Qatar (joint stock company), and
as such these companies are
required to follow Commercial
Law No. 5 of 2002. As such,
financial statements should be
prepared in accordance with IFRS.
Exception: Some financial
institutions (mainly Islamic
financial institutions) listed on the
Qatar Exchange are allowed to file
financial statements prepared
under Financial Accounting
Standards (FAS) issued by the
Accounting and Auditing
Organization for Islamic Financial
Institutions (AAOIFI). Otherwise,
they should follow IFRS where
AAOIFI guidance is not available

123
A review of the IFRS adoption literature 981

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

Romania IFRSc 01-Jan-05 31-Dec-05

a
Russian IFRS 01-Jan-12 31-Dec-12 Formally adopted IFRS beginning in
Federation 2012 for all publicly traded
entities. Note that banks delayed
adoption and were required to
report under IFRS from 2007
Serbia Serbian 01-Jan-04 31-Dec-04 Almost fully converged with only
IFRSb some minor differences that have
yet to be updated
Singapore IFRS and 01-Jan-03 31-Dec-03 Singapore closely models its
Sing-FRSb Financial Reporting Standards
(FRS) according to IFRS. Before a
standard is enacted, consultations
with the IASB are made to ensure
consistency of core principles.
IFRS as issued by the IASB is
permitted if (i) the company is
also listed in another stock
exchange outside of Singapore
and that exchange requires IFRS
financial statements or (ii) an
exemption is granted by the
authority. Other listed companies
are required to apply Singapore
FRS (substantially converged)
Slovak IFRSc 01-Jan-05 31-Dec-05
Republic
Slovenia IFRSc 01-Jan-05 31-Dec-05
South Africa IFRSa 01-Jan-03 31-Dec-03 Since 2003, standard setters have
issued IFRS as local SA GAAP
without amendment, required by
all firms (listed and unlisted).
From Jan. 1, 2005, however, the
Johannesburg stock exchange
required all firms to use IFRS
directly, as opposed to issued local
SA GAAP
South Korea IFRSa 01-Jan-11 31-Dec-11 Voluntary adoption allowed since
2008. Exception: Financial
institutions
Spain IFRSc 01-Jan-05 31-Dec-05
Sweden IFRSc 01-Jan-05 31-Dec-05 Exception: Local GAAP allowed
for public firms in unregulated
(non-EU) markets

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982 E. T. De George et al.

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

Switzerland IFRSc or US 01-Jan-05 31-Dec-05 Firms listed on ‘‘Main Standard’’

GAAP (i.e., attracting international
investment) must use IFRS or U.S.
GAAP. Firms listed on ‘‘Domestic
Standard’’ (i.e., seeking capital
only from Swiss domestic) use
IFRS, U.S. GAAP, or Swiss
GAAP. As of 2013, 138 of 266
firms use IFRS; 27 of 266 firms
use U.S. GAAP; and 47 of 266
firms use Swiss GAAP
Taiwan T-IFRSb 01-Jan-13 31-Dec-13 Firms currently follow T-IFRS,
which is the 2010 version of IFRS
as issued by the IASB
Turkey IFRSc 01-Jan-08 31-Dec-08 Note that a number of firms
(voluntarily) followed the EU
directive and issued IFRS
statements from Jan. 1, 2005
UK IFRSc 01-Jan-05 31-Dec-05 Stocks listed on the AIM exchange
delayed adoption until 2007
Ukraine IFRSa and 01-Jan-12 31-Dec-12 Public firms and all banks and
local GAAP insurance companies required to
adopt IFRS from Jan. 1, 2012
United Arab IFRSa 01-Jan-03 31-Dec-03
Emirates
Uruguay IFRSa 01-Jan-09 31-Dec-09 Exception: Banks and other
financial institutions follow local
GAAP (issued by CBU)
Venezuela IFRSa 01-Jan-05 31-Dec-05
Non-adopting
countries:
Belarus Belarusian N/A Not Exception: Banks and selected
GAAP mandatory state-owned companies are
required to prepare IFRS financial
statements in addition to their
local Belarusian GAAP statements
Bolivia Bolivian N/A Not
GAAP mandatory

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A review of the IFRS adoption literature 983

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

China Chinese N/A Not Chinese Accounting Standards

Accounting mandatory (CAS) that have been mandatory
Standards since Jan. 1, 2007, have
substantively converged with
IFRS to the degree that IFRS
principles form the base of CAS.
However, enough differences exist
(e.g., impairment of assets, related
party disclosure provisions, and
certain fair value provisions) that
most studies do not see China as
an IFRS adopter
Colombia Colombian N/A Not Mandatory adoption to occur from
GAAP mandatory Jan. 1, 2015
Egypt Egyptian N/A Not Partial convergence occurred in
GAAP mandatory 2007 with no timeline for further
amendments
India Indian GAAP N/A Not Listed companies have the option of
mandatory using IFRS or Indian GAAP,
although in practice most Indian
companies choose Indian GAAP.
Plans are underway to converge to
IFRS, called ‘‘Ind IAS,’’ but
potentially with many carve-outs
Indonesia Indonesian N/A Not IFRS is neither required nor
GAAP mandatory permitted. However, as of Jan. 1,
2012, the Indonesian GAAP is
actually based on IFRS principles
Japan Japanese N/A Not Voluntary adoption for qualifying
GAAP mandatory entities allowed for fiscal periods
ending Mar. 31, 2010
Morocco IFRS N/A Not IFRS only required for banks and
mandatory permitted (voluntarily) for all
other entities
Paraguay Paraguay N/A Not
GAAP mandatory
Saudi Arabia SOCPA local N/A Not Exception: Only banks are required
GAAP mandatory to report under IFRS
Thailand Thai GAAP N/A Not Thai GAAP has slowly been
mandatory converging to IFRS in two stages
(2011 and 2015). Currently, TFRS
is based on IFRS as issued at Jan.
1, 2009

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984 E. T. De George et al.

Table 4 continued

Country Current IFRS mandated First IFRS Notes on country-level adoption

GAAP for fiscal annual report (where relevant).
periods dates (FPE)
beginning:

United States US GAAP N/A Not

mandatory
Vietnam Viet GAAP N/A Not Vietnamese GAAP is based on now
mandatory out-of-date IAS (not current
IFRS). Exception: Only state-
owned banks are required to use
IFRS

This table presents the adoption dates by country for a broad sample of countries from 2001 through 2013.
We report the date at which local regulators required the use of IFRS and the fiscal period end date at
which the first annual reports were prepared in accordance with the IFRS mandate (based on the majority
of firms’ year-ends in a given country). We obtain information about IFRS adoption dates from multiple
sources: PWC IFRS adoption reports (April 2013); the IASPlus website maintained by Deloitte; the IASB
website; Adoptifrs.org, maintained by academics; and the websites of multiple local exchanges around
the globe. Note that in the instances where the majority of firms within a country follow a non-December
year-end (e.g., Australia), we try to take that into account in the dates used in the ‘‘First IFRS annual
report dates’’ column
a
IFRS as issued by the IASB, translated into the local language where applicable
b
Local equivalents to IFRS—effectively equates to adherence to IFRS as issued by the IASB, with
additional disclosures or specific carve-outs
c
IFRS as adopted by the EU

compliance rate after the EU’s official mandate in 2005, Pownall and Wieczynska
(2012) find that as much as 35 % of the firms did not adopt IFRS in 2005. Consistent
with staggered adoption, they show that this figure subsequently dropped to 20 % by
2007 and further to 17.8 % by 2009.62
The correct identification of IFRS adoption dates is more challenging for firms
that voluntarily adopt IFRS. Most studies identify adoption dates through time-
series comparisons of accounting standards listed in either the WorldScope (data
field 07536) or Compustat Global (variable name ASTD) databases. However,
Daske et al. (2013, see Appendix) point out significant differences in the coding of
accounting standards across these two databases. When they classify accounting
standards into three broad categories (IAS-IFRS, US GAAP, or local GAAP) and
compare the coding of reporting standards across the two databases, they find
classification differences for about 5 % of the firm-year observations covered by
both databases. However, when attention is restricted to the subsample of firm-year
observations coded as IFRS followers by either database, this value jumps to nearly
30 %. Even more worryingly, when they compare the accounting standards reported
in these two databases against corresponding data hand-collected from annual
reports, they find classification differences in about 25 % of the observations for
WorldScope and about 40 % for Compustat Global. Although Daske et al. (2013)
62
For details about the options available to EU member states in relation to mandatory IFRS adoption,
see Table 1 of Pownall and Wieczynska (2012).

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A review of the IFRS adoption literature 985

check the data for annual reports that are electronically downloadable from
Thomson Reuters, their hand-collected sample covers only about 15 % of the firm-
years covered by WorldScope and Compustat Global. Given the large discrepancies
in reporting accounting standards observed in this subsample, further research is
required to clearly understand these classification differences. Until such time,
researchers should be better off using the data that Daske et al. (2013) make
available online and acknowledging this data limitation.

10.4.3 Selection of event window

Researchers have chosen a variety of event windows, such as a fixed number of

years around the event date or the entire sample period for which data are available.
For example, DeFond et al. (2011) and Hong et al. (2014) use 2003–2004 as the pre-
adoption period and 2006–2007 as the post-adoption period and exclude the
adoption year, 2005. The former examine the effect of IFRS adoption on
institutional ownership, and the latter examine the effect of IFRS adoption on
IPOs. Meanwhile, Chen et al. (2013) use a sample period between 2000 and 2009 to
examine the cross-border spillover effects of the EU’s mandatory adoption of IFRS
in 2005 on the investment efficiency of firms. Although their sample includes
10 years in total, they do not determine from the data whether the effects of IFRS
occur immediately after adoption or take time to be observed.
In general, a lack of consistency in empirical choices across IFRS studies makes
it difficult to compare their results. Although a short window around the adoption
date has the advantage of mitigating contamination concerns, such an approach may
be affected by transitory changes (e.g., from learning) that occur around IFRS
adoption and suffer from a lack of power in tests when a sufficient number of
observations is unavailable in the short window. Studies should ideally focus on
both short and long event windows to show whether observed effects are persistent
or temporary and provide useful evidence related to inter-temporal trends. (See
Table 4 of Hail et al. 2014 as an example.) This approach would also help
researchers better link evidence across various studies.

10.4.4 Estimation of the difference-in-differences model

A typical approach used to measure the effects of IFRS adoption is to estimate a

difference-in-differences model, such as the following:
DV ¼ b1 IFRS þ b2 Post þ b3 Post  IFRS þ Controls þ e; ð1Þ
where DV is the outcome variable of interest, IFRS is an indicator variable that takes
the value of 1 for IFRS-adopting firms (treatment firms) and 0 for control firms, and
Post is an indicator variable that takes the value of 1 for fiscal periods after the IFRS
adoption date. b3, which captures the difference-in-differences effect, is the main
coefficient of interest. In the absence of control variables in Eq. (1), b3 can be
interpreted as the change in DV for treatment firms relative to the change in DV for

123
986 E. T. De George et al.

the control group. We discuss a few of the issues that frequently arise when esti-
mating the preceding equation as follows.

10.4.4.1 Sample of control or non-treated firms Studies of mandatory IFRS

adoption often choose one of two sets of firms as the control (or non-treated) group:
(i) firms reporting under local GAAP (including US GAAP) from non-IFRS-
mandating countries or (ii) voluntary adopters from countries that subsequently
mandated IFRS. In contrast, studies of voluntary adoption use firms from the same
country as the treatment sample and firms that do not report under IFRS as the
control group.
Almost all IFRS studies present a major concern about the comparability of firms
in the treated and non-treated groups. Control and treatment groups should ideally
be formed by randomly allocating firms to the two groups, so that the two groups do
not differ in any dimension other than the treatment effect on average. However,
this is unlikely to be the case in almost all studies. A key assumption of the
difference-in-differences model is that the average change in outcome is the same
for both the non-treated firms and counterfactually for treated firms if they have not
received the treatment. As such, whether observable or unobservable, the
differences in characteristics across treatment and control groups in the pre-IFRS-
adoption period always present a concern for the inferences drawn from Eq. (1).
In fact, the preceding concerns simply increase in severity as more and more
countries mandate IFRS, leaving fewer countries and fewer firms for inclusion in the
control group. As Table 4 indicates, only four major economies (namely, the US,
Japan, China, and India) remained non-IFRS adopters at the end of 2013. However,
IFRS have affected the local reporting of even these countries. For example, the
Chinese Accounting Standards that have been mandatory since Jan. 1, 2007, have
substantially converged with IFRS. US GAAP have been influenced through the
Norwalk Agreement signed in September 2002 to achieve convergence between US
GAAP and IFRS. Both India and Japan currently allow voluntary IFRS adoption. A
related concern about using firms from non-IFRS-adopting countries as control
firms is the potential convergence of local GAAP with IFRS in anticipation of
mandatory adoption. For instance, some of the countries included in control groups
in studies of mandatory IFRS adoption subsequently adopted IFRS, e.g., Canada
adopted IFRS in 2011 but also allowed early adoption of IFRS. A Canadian firm
might have started to prepare for this transition before actual adoption, contam-
inating its role as a control.
Studies attempt to account for observable differences across treated and non-
treated firms by including additional factors linearly into Eq. (1). However, the
success of this approach depends on whether the control variables are correctly
measured and specified in the model. Another approach that is adopted to deal with
observable differences is the matched-firm approach, in which each treatment firm
is matched to a control firm (or a set of control firms) along certain dimensions such
as industry, size, or propensity score. The matched firm is particularly relevant if
one believes that the true relationship between control and outcome variables is
non-linear. After proper control or matching, one should observe no differences

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between the treatment and control groups in the pre-IFRS-adoption period, i.e., an
insignificant b1. However, as DeFond et al. (2016) point out, any conclusions drawn
from propensity-score matching (PSM) analysis may be very sensitive to the design
choice, including the number of control firms matched to each treatment firm, the
non-linear terms included in the propensity score construction, and whether the
matching is done with or without replacement. They suggest an alternative matching
procedure, i.e., coarsened exact matching, which matches control and treatment
firms based on ranges rather than the exact covariate values. Even if the preceding
approaches satisfactorily control for observable differences across treated and non-
treated groups, concerns remain in relation to unobserved differences across treated
and non-treated firms.
Considering all of the advantages and shortcomings of each control group, a
relatively parsimonious approach would involve presenting the results using three
different samples of firms for the control group, including (i) all non-adopting firms
from non-IFRS-adopting countries, (ii) propensity-score-matched firms from non-
IFRS-adopting countries, and (iii) voluntary adopters preferably from IFRS-
adopting countries. DeFond et al. (2015) provide an example of such an approach
and nicely summarize the pros and cons of each control group as follows.
Each of the three benchmarks has its advantages and limitations. Voluntary
adopters share economic and regulatory commonality with mandatory
adopters, but they are often regarded as a non-random group subject to
potential self-selection bias. Non-IFRS adopters or PSM non-IFRS adopters,
on the other hand, control for contemporaneous effects that are unrelated to
the introduction of IFRS, but are potentially influenced by unspecified cross-
country differences. In addition, while PSM non-IFRS adopters reduce
differences between treatment and control firms, the theoretical underpinning
of our PSM model is limited because we should be using country-level factors
to model the choice of mandatory IFRS adoption in order to derive our
propensity scores. However, because we need to match at the firm level, we
necessarily use firm-level determinants.

Because of the limitations of the benchmark groups, we draw our conclusions

based on the results of all three benchmarks in our primary analysis. For
parsimony, we present our subsequent partitioning and sensitivity analysis
using just one of our benchmarks, the non-IFRS adopters. Besides having the
largest sample size, this benchmark avoids the self-selection bias with the
voluntary adopters, and the limited theoretical underpinning with the PSM
non-IFRS adopters.
Yet another concern related to difference-in-difference models is that estimated
outcomes can reflect the effects of either IFRS adoption or contaminated events for
the control sample. Unlike the ideal setting, in which treatment firms differ from
control firms only in terms of the treatment received, IFRS settings do not rule out
the possibility that control firms are affected by contamination events that influence
the outcome variables. In such a case, the estimated difference-in-differences

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988 E. T. De George et al.

coefficient may appear statistically significant even though the IFRS adoption itself
has no significant effect on the treatment firms. Thus, in the context of Eq. (1), a
significant value of b3 may be interpreted to indicate a significant IFRS adoption
effect for treated firms or alternatively that effects from a contamination event on
the control firms are irrelevant for the treated firms. A few studies (e.g., Kim and Shi
2012; Ball et al. 2015) attempt to mitigate this concern by documenting that
inferences are insensitive to dropping control firms from analyses.63
Furthermore, IFRS adoption may cause sample attrition or enlargement. Such
changes cause the firms included in the sample in the pre-IFRS period to differ from
those included in the post-IFRS period. If IFRS adoption relates to the sample
changes in the sense that IFRS adoption affects the probability of sample attrition/
enlargement, then the coefficient estimates from the difference-in-differences model
are biased. For example, in the context of external financing, IFRS adoption may
improve financial transparency and thereby increase investors’ willingness to invest
in publicly traded securities. This would incentivize more firms to raise external
financing in the post-IFRS period, potentially biasing the difference-in-differences
estimates obtained from a sample of firms issuing debt or equity around IFRS
adoption. Similar concerns arise when IFRS adoption causes sample attrition by
affecting the probability of liquidation or acquisition. One approach that studies use
to test the sensitivity of results to this sample bias is to focus on a constant sample of
firms, i.e., include only firms for which outcome variables are available in both the
pre- and post-IFRS periods. However, requiring firms to be present in both the pre-
and post-IFRS periods may introduce its own data snooping biases, such as
survivorship bias.

10.4.4.2 Inclusion of fixed effects To control for firm-specific determinants of the

outcome variable of interest, some studies include firm fixed effects in Eq. (1).
These fixed effects essentially ensure that the estimated difference-in-differences
coefficient does not reflect differences in time-invariant characteristics across
control and treatment firms. Studies alternatively include country fixed effects to
control for unobservable country characteristics, industry fixed effects to control for
unobservable industry characteristics, or both. In addition, IFRS studies also
typically include period fixed effects (e.g., year or quarter) to control for
unobservable time effects.
Figure 2 plots the percentage of the 64 publications using different dimensions of
fixed effects in their main analysis. Before 2008, when most studies focused on
voluntary IFRS adoption, fixed effects were rarely used in main analyses. Only
14 % of the studies published before 2008 use fixed effects models. In contrast, all
of the studies published in 2015 include at least one dimension of fixed effects. In all
of the periods, firm fixed effects appear to be the least frequently used relative to
either country or industry fixed effects. Only four of the sixty-four studies, including
those by Daske et al. (2008); Horton et al. (2013); Chen et al. (2013); and Lang and
63
Although insignificant values for b1 and b2 in Eq. (1) would provide some comfort that IFRS-adopting
and control firms are comparable and that IFRS adoption does not affect control samples, the values for
these coefficients are not often reported separately, as they are subsumed by the inclusion of fixed effects
in the difference-in-differences model.

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A review of the IFRS adoption literature 989

Number of publications with fixed effects

Industry Country Time Firm No F.E.
10
9
8
7
6
5
4
3
2
1
0

Percentage of publications with fixed effects

Industry Country Time Firm No F.E.
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Fig. 2 Number of publications using fixed effects models. This figure plots the publications as listed in
Table 1, including the fixed effects in their main regression models. We first count the number of
publications with industry, country, time, or firm fixed effects. We then divide this number by the total
number of publications in that year to obtain the percentage. Time fixed effects include year, quarter, or
month fixed effects. A paper may use a model with multiple fixed effects, i.e., country and year fixed
effects, or with fixed effects in multiple dimensions, i.e., country-year fixed effects. In both cases, each
paper is included in the country and time categories

Stice-Lawrence (2015), include firm fixed effects in their main regression models.
This is perhaps due to the large loss in degrees of freedom that results when firm
fixed effects are included, which lowers the power of tests.

10.4.4.3 Clustering standard errors Figure 3 plots the percentage of the 64

publications, using different choices for standard error clustering. No IFRS study

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990 E. T. De George et al.

Number of publications with clustering

Industry Country Time Firm No Cluster
8

0
1999-2007 2008 2009 2010 2011 2012 2013 2014 2015

Percentage of publications with clustering

Industry Country Time Firm No Cluster
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Fig. 3 Number of publications using clustered standard errors. This figure plots the publications as listed
in Table 1 using clustered standard errors in their main empirical models. We first count the number of
publications with standard errors clustered by industry, country, time, or firm. We then divide this number
by the total number of publications in that year to obtain the percentage. Time includes year, quarter, or
month. A paper may use a model in which standard errors are clustered in two ways, i.e., by country and
year, or in which standard errors are clustered in one way but in two dimensions, i.e., clustering by
country-year. In both cases, each paper is included in the country and time categories

conducted before 2008 used clustered standard errors in their main analyses.
However, this changed with the publication of Petersen (2009), who shows that
clustering of standard errors often results in better estimates of standard errors than a

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A review of the IFRS adoption literature 991

variety of alternative approaches, such as the Fama–MacBeth and Newey-West

approaches. In theory, the level at which observations are clustered for the
computation of standard errors is a choice that should depend on the covariance-
variance matrix of the residuals. However, as the covariance-variance matrix is
unobservable, researchers have to make relatively ad-hoc choices at the clustering
level.
As the majority of these studies conduct cross-country analyses, they suggest that
standard errors should ideally be clustered at the country level to address within-
country correlations in residuals. This preference to cluster at the country level is
clearly noticeable in Fig. 3, which shows a significant increase in the number of
publications using country-level clustering in recent years. However, country-level
clustering substantially limits the degrees of freedom to estimate standard errors.
Moreover, Petersen (2009) shows that the estimates of clustered standard errors may
be biased if the number of clusters is lower than 40. Thus the choice of clustering at
the country level may yield biased standard errors unless there are enough countries
in the sample.
Researchers relying on small samples may consider clustering using bootstrapped
standard errors (Cameron, Gelbach, and Miller 2008; Gow, Ormazabal, and Taylor
2010). Given the lack of clear theoretical guidance at the clustering level and the
advantages and disadvantages to clustering at different levels, it seems prudent to at
least discuss the sensitivity of inferences to various clustering choices.

10.4.4.4 Measurement of control variables As discussed earlier, IFRS studies

often include control variables in Eq. (1) to account for heterogeneity in
characteristics across treated and non-treated firms. These variables are often based
on reported financial statements (such as total assets, book value of equity, book
leverage, earnings), which themselves are altered by IFRS adoption. This may alter
the quality of control variables between the pre- and post-IFRS periods and thereby
influence the conclusions drawn from Eq. (1). Although few studies explicitly
discuss this concern, it seems reasonable to allow the coefficients of the accounting-
based control variables in Eq. (1) to vary between the pre- and post-adoption
periods and to test the sensitivity of results to including controls from only the pre-
IFRS periods. The latter approach would be problematic if the sample character-
istics were to significantly change between before and after adoption. In such cases,
a post-IFRS sample should ideally be restricted to the period immediately following
IFRS adoption to mitigate the problem.

10.5 Cross-sectional variation in the effects of IFRS

To corroborate an identification strategy and attribute observed changes in outcomes

to IFRS adoption, studies conduct cross-sectional tests that relate observed changes
in outcomes to differences in accounting standards between IFRS and local GAAP.
These tests are predicated on the notion that if observed changes in the dependent
variable are caused by IFRS adoption, then the changes should be related to the
degree to which IFRS adoption alters the country’s accounting standards. These

123
992 E. T. De George et al.

tests typically use the Bae et al. (2008) index to measure the difference between
local GAAP and IFRS.
However, the Bae et al. (2008) index is a noisy measure of differences in
accounting standards. First, it is based on Nobes’s (2001) GAAP survey, which
compares local GAAP and IAS as of 2001. However, since 2001, the local GAAP in
a variety of countries and IAS/IFRS have evolved, including in the years before the
EU’s large-scale adoption of IFRS in 2005. For example, after the 2002 EU vote to
adopt IFRS, several EU countries started modifying their domestic standards to both
ease the transition to IFRS and make financial statements more comparable across
listed firms mandated to report under IFRS and large unlisted firms using domestic
GAAP. Therefore this measure may be a noisy measure of differences in accounting
standards after 2001. Second, the GAAP survey ignores the differences that arise
from alternative accounting choices available under one set of standards but not the
other. If IAS allows multiple accounting choices but domestic rules allow only one
of those alternatives or provide more detailed or restrictive standards, then these
differences are not captured in the GAAP survey and consequently not captured in
the Bae et al. (2008) index. Finally, the index is calculated as a simple aggregation
of the differences in 21 accounting rules that deal with the measurement,
recognition, and disclosure of financial numbers. However, not all of these
accounting rules are necessarily relevant in every context examined by IFRS
studies. Thus studies that are primarily focused on accounting recognition, for
instance, may find disclosure differences reflected in the index to add noise.
Some studies examine an alternative cross-sectional prediction for the effects of
IFRS: the effects should be stronger in countries with greater enforcement of IFRS
rules. This logic follows from the work of Ball et al. (2003) and holds that
accounting standards per se play a limited role in affecting firms’ financial reporting
practices unless combined with proper enforcement. Studies generally confirm this
relationship using the rule-of-law or security regulation indices (e.g., Byard et al.
2011; Daske et al. 2008) to measure the strength of enforcement. However, Ball
et al. (2015), who study changes in debt covenants around IFRS adoption, are an
exception and do not find evidence to support the observation that enforcement is
related to the effects of IFRS. They interpret their finding as evidence that the
limitations of IFRS for debt contracting, such as those resulting from the fair
valuing of liabilities and the inclusion of transitory shocks in earnings, are not
resolved by stronger enforcement.
Most of the IFRS studies that evaluate the cross-sectional differences caused by
enforcement tend to interact or partition their samples on the legal enforcement
variable based on La Porta et al. (1998) (e.g., Daske et al. 2008; Li 2010). This
enforcement measure captures the efficiency of the judicial system, rule of law, and
corruption. These measures notably appear to neglect any dimension of financial
reporting enforcement or auditing characteristics. Therefore it is unclear whether
these enforcement variables are capturing enforcement and the incentives related to
financial reporting outcomes. Another common measure of enforcement is the rule-
of-law index compiled by Kaufmann et al. (2007). Their measure is based on the
views of private and public sector experts, citizens, and firms; the extent to which
they have confidence in and abide by the rules of society; and the likelihood of

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crime and violence. Although a dimension of this measure covers contract

enforcement and property rights, it does not directly measure financial reporting
regulatory strength or capital market protections. It is unclear whether this construct
reflects the enforcement that many studies purport to capture. However, it has been
shown to yield the strongest differential in IFRS benefits, adopted in studies such as
those by Daske et al. (2008), DeFond et al. (2011), and Li (2010).
Several studies use output measures of enforcement/implementation based on
earnings quality scores before and after IFRS adoption. For instance, DeFond et al.
(2011) measure credibility of implementation as an earnings quality score, using
outcomes to measure credibility that implicitly account for audit quality (given
these are reported numbers). De George (2015) also calculates country-level
changes in reporting quality scores as the post-IFRS-adoption earnings quality less
the pre-adoption period score as a measure of the strength of implementation.
Kim et al. (2012b) calculate country-level measures of regulatory reforms using
data from the Annual Executive Opinion Survey conducted by the Institute for
Management Development. Although its primary purpose is to provide quantifiable
measures of management practices, labor relations, and corruption, the survey
explicitly asks respondents to evaluate the extent to which auditing and accounting
practices are implemented in their firms adequately and the extent to which
corporate boards supervise company management effectively. The authors measure
changes in regulatory levels using the changes in these scores from the pre- to post-
IFRS periods.
Brown et al. (2014) argue that the current enforcement index used by the IFRS
literature is deficient for capturing compliance with accounting standards. They
instead propose an index measuring the quality of auditors’ working environment
and the degree of accounting enforcement by independent enforcement bodies.
They use data from the International Federation of Accounts, World Bank, and
national securities regulators and calculate three new indices for 51 countries for
2002, 2005, and 2008. Testing these new enforcement indices in the context of
analyst forecasts, the authors find that they have incremental power over the rule-of-
law index in explaining analyst forecast errors and dispersion. They conclude that
their enforcement indices are better at capturing accounting enforcement than the
traditionally used legal enforcement indices.
Overall, although a variety of approaches are used to reflect the impact of IFRS
adoption and changes in enforcement, no one measure dominates. The extent to
which the broad rule-of-law proxies considered by La Porta et al. (1998) and
Kaufmann et al. (2007) are relevant to understanding the enforcement of financial
reports remains unclear. The evidence provided by Brown et al. (2014) suggests that
these proxies are unlikely to sufficiently capture reporting enforcement. There are
also concerns surrounding the current proxies for the accounting effects of IFRS
adoption. Attempts to identify accounting-specific enforcement proxies and
measures of the effects of IFRS on financial reports should provide a fruitful
direction for future studies.

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11 Conclusion

Since the large-scale mandatory adoption of IFRS over 10 years ago, a number of
research studies have evaluated the effects of IFRS adoption. The early studies
understandably focus on the direct effects of IFRS on reporting quality. In contrast
to the findings reported based on voluntary IFRS adopters, studies of mandatory
adopters provide, at best, mixed evidence that adoption improves the quality of
accounting reports. However, this conclusion changes when one focuses on capital-
market-based proxies of reporting quality or the capital market outcomes of IFRS
adoption, such as stock liquidity, trading volume, or price reactions to earnings
announcements. There is strong evidence that capital market outcomes and proxies
for reporting quality improve after IFRS adoption, at least for some countries.
However, researchers do not agree on whether the observed outcomes are
attributable to IFRS adoption itself or to other institutional changes that occur
concurrently with IFRS adoption.
Although the evidence based on direct measures is mixed as to whether IFRS
adoption increases comparability, studies based on capital market effects of
comparability generally show that adoption improves comparability across coun-
tries. There is also convincing evidence that IFRS adoption has triggered greater
interest from foreign investors and foreign analysts, although whether such
increased interest is of any benefit to domestic firms is unclear. Given that an oft-
repeated objective of IFRS adoption by regulators has been the achievement of
financial reporting comparability, researchers have begun paying more attention to
better understanding and measuring comparability. That said, simply harmonizing
accounting standards does not appear to achieve full comparability in financial
reporting.
Research into the effects of IFRS adoption on contracting, stewardship, decision-
making, and auditing is still in its infancy. Very few studies conducted in these areas
have been published, and even when one considers the evidence in working papers,
there is no clear understanding of how IFRS matter to contracting or stewardship or
how audit verification interacts with the use of IFRS numbers in contracts. For
instance, although almost all of the debt contracting studies document a decline in
accounting-based covenants following IFRS adoption, they offer contradictory
interpretations. Some studies argue that the decline is caused by improved
transparency under IFRS, whereas others suggest that it is a result of IFRS numbers
being less relevant for use in contracts. More research is required to determine the
causal mechanisms underlying the link between IFRS numbers and their use for
stewardship and contracting. Nevertheless, the observed differences in IFRS
outcomes for stock and debt markets highlight the multidimensional effect of IFRS
adoption on firms. An accounting standard that is developed to enhance the
valuation role of accounting may not be optimal for stewardship or debt contracting
purposes. A fruitful avenue for future research is to evaluate whether and how each
attribute of IFRS affects valuation, stewardship, and contracting roles differently.
One major obstacle to a proper cross-study comparison of IFRS results is the
varied empirical choices made by researchers. Although some of these differences

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are driven by the nature of the questions examined, IFRS studies could do more to
provide results that are based on a more consistent set of empirical methods.
Discussions and online appendices related to the sensitivity of results to alternative
empirical choices would be a step forward. Many IFRS studies are also hindered by
a lack of reliable international data. Although some of these problems are
institutional and cultural and require changes in the laws of many countries, we
expect that some of these concerns will decrease over time as better computing
techniques for data collection become available.
Finally, although IFRS is now required for listed firms in many countries, several
countries permit or even require private companies also to adopt them. The need of
private firms for financial reports differs vastly from that of listed firms, raising
questions about whether requiring private firms to report under a relatively complex
set of accounting standards passes the cost-benefit test. Overall, although the
literature is making progress, research conducted across a variety of dimensions is
required before researchers can claim to have a decent understanding of the
mechanisms based on which IFRS affect the various facets of a business.

Acknowledgments We thank Mary Barth, Ulf Bruggeman, Elizabeth Gordon, Martin Glaum, Luzi Hail
(discussant), Sudarshan Jayaraman, Bjorn Jorgensen, Alon Kalay, Peter Pope, Karthik Ramanna, Nemit
Shroff, Brian Singleton-Green, Stephen Taylor, Rodrigo Verdi, Martin Walker, Holly Yang, Stephen
Zeff, participants at the 2015 Review of Accounting Studies Conference, and an anonymous reviewer for
their comments and suggestions. We also thank Han-Up Park for research assistance.

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