Does Mandatory IFRS Adoption Affect Crash Risk?

Abstract

We examine the impact of mandatory IFRS adoption on firm-level “crash risk,” defined as the frequency of extreme negative stock returns. An important feature of our study is that we separately analyze industrial firms and firms in finance-related industries. This is important because IFRS adoption is likely to affect industrial firms through different mechanisms than financial firms, and as a result may affect crash risk differently. We find that for companies in poor information environments, crash risk decreases among industrial firms and increases among financial firms after the IFRS mandate. We also find that crash risk decreases relatively more among industrial firms where IFRS results in more credible changes to local GAAP, and that crash risk increases relatively more among banks with less restrictive regulations. In addition, we find that earnings volatility declines after IFRS adoption for industrial firms but increases for financial firms. Overall, our findings are consistent with mandatory IFRS adoption decreasing crash risk among industrial firms by improving reporting quality, and increasing crash risk among financial firms by inducing greater volatility and affording more opportunities for manipulation.