Identifying Consequences of Mandatory IFRS Adoption: The Role of Selection Effects

Abstract

This paper documents potential selection effects inherent in the research designs that are typically used in studies investigating economic or accounting effects of mandatory IFRS adoption. Replicating prior work by Christensen, Hail, and Leuz (2013), we show that one particular selection effect, the IFRS treatment selection effect, which owes to systematic opt outs of firms out of the IFRS mandate, explains prior findings on positive liquidity effects of IFRS adoption. The paper’s implications are twofold. First, we offer a novel explanation how mandatory IFRS adoption and enforcement regulation translate into capital market benefits. Second, we point out limitations of the EU mandatory IFRS adoption setting for testing empirically the effects of mandatory IFRS adoption. We outline research strategies and methodological issues to address those research design and identification challenges.