Does Mandatory IFRS Adoption Affect the Credit Ratings of Foreign Firms Cross-Listed in the U.S.?

Abstract

SYNOPSIS: We examine whether the mandatory adoption of International Financial Reporting Standards (IFRS) affects the credit ratings of foreign firms cross-listed in the U.S. Consistent with the influence of accounting information quality on credit ratings that is established in the literature, we find significantly higher credit ratings among these cross-listed firms after IFRS. Furthermore, this effect is more pronounced among those from countries where there is a greater difference between previous domestic standards and IFRS, and from countries that had weaker legal enforcement and investor protection before the transition. Our findings are consistent with IFRS improving the transparency and creditworthiness of foreign firms cross-listed in the U.S. by reducing their information costs and risk for U.S. investors. The evidence implies that IFRS adoption in their home country could benefit firms that are already cross-listed or are seeking to cross-list in the U.S. JEL Classifications: F30; G15; M41.