Causes and Consequences of a Voluntary Turn Away from IFRS to Local GAAP

Abstract

This paper examines whether current IFRS are too extensive (i.e., costs exceed benefits) for small and mid-cap companies (SMCs). We analyze determinants and consequences of a turn away from IFRS, thereby exploiting a unique feature of the Swiss setting in which listed firms are allowed to switch from IFRS to Swiss GAAP, all else equal. We predict that small firms with high insider ownership are more likely to switch because of a lower demand for public accounting (IFRS) information. To the extent that the supply of information as required by IFRS exceeds the switching firms’ demand for information, we do not predict adverse capital-market effects after a switch. Consistent with predictions, we find that (a) small firms with higher insider ownership and fewer foreign investor holdings are more likely to switch, (b) switching firms substantially reduce their disclosures, and (c) only firms with more dispersed ownership experience a decrease in liquidity after they switch. Overall, our findings are important for standard setters and securities regulators in shaping the (future) reporting requirements for listed firms.