Corporate Governance and Stock Prices of Japanese Firms Adopting International Financial Reporting Standards: Early Evidence

Abstract

Two issues are investigated herein, using Japanese data: (1) the relationship between corporate governance and voluntary adoption of International Financial Reporting Standards (IFRS), and (2) market reactions to announcements of such an adoption of IFRS. Prior studies suggest that the economic benefits of IFRS adoption are limited to countries with strong enforcement of laws and regulations, generating concerns as to whether IFRS adoption would bring the intended benefits in Japan. Based on a probit model, we find that the probability of voluntary IFRS adoption is higher for the firms that are younger, larger, less leveraged, audited by a Big 4 audit firm, and have a higher foreign shareholders ratio. This result is consistent with the notion that firms that have greater incentives to provide more information tend to choose voluntary adoption of IFRS. In addition, an event study shows that stock prices of the firms that announce their adoption of IFRS tend to increase compared to other firms that have a similar probability of IFRS adoption, except for the firms switching from the U.S. GAAP to IFRS. Our results show that voluntary IFRS adoption is positively evaluated in Japan in that the country has transformed its economic and business environment over the past few decades.