Increase in Leverage Driven by International Financial Reporting Standards Adoption

Pâmela Amado Tristão,Igor Bernardi Sonza

doi:10.1590/1982-7849rac2021200157.en

Abstract

ABSTRACT Context: adoption of International Financial Reporting Standards (IFRS) in Brazil has improved corporate governance practices and information available to investors, providing greater transparency. Despite its mandatory effect, companies listed in B3 tiers (Novo Mercado and Level 2) were already accustomed to using it, allowing a comparison with firms affected by the law. Objective: analyze the influence of IFRS adoption on the capital structure of publicly traded Brazilian companies by comparing firms that only began to adhere to it by the new law (Regular and Level 1) with firms that adopted IFRS before it went into effect (Novo Mercado and Level 2). Method: we performed a quasi-experimental design via difference-in-difference (DID) estimator to compare leverage levels of firms segmented in treatment and control groups before and after IFRS. Conclusions: we found that the treatment group companies had higher market leverage after IFRS adoption, influenced by the greater information disclosure and, consequently, reduction of investors’ perception of risk. In addition, the differences between groups in DID analysis were influenced by the greater effect on market leverage for treated companies and on net indebtedness for the control ones. Furthermore, we confirmed the pecking order theory assumptions for most of the covariates.

Highlights

Decision-making related to firms’ long-term financing began with Modigliani and Miller (1958) (M&M) in 1958, who stated that capital structure was irrelevant in terms of companies’ value in a perfect capital market context
This study examines the effect of International Financial Reporting Standards (IFRS) adoption on the capital structure of publicly traded Brazilian companies by comparing companies that adhered to these standards following their mandatory establishment by law (Regular level and Level 1) with firms that already adhered to IFRS before the law (Novo Mercado and Level 2 tiers)
Our preliminary results showed an increase in market leverage (TML and LTML) for companies affected by the mandatory IFRS, confirming our first hypothesis and suggesting that an increase in transparency of accounting information brought about by IFRS led to a reduction of asymmetric information between investors, shareholders, and stakeholders

Summary

Introduction

Decision-making related to firms’ long-term financing began with Modigliani and Miller (1958) (M&M) in 1958, who stated that capital structure was irrelevant in terms of companies’ value in a perfect capital market context. Other studies identified factors that influenced companies’ use of equity or third party capital to finance their projects, such as trade off and pecking order theories (Myers & Majluf, 1984; Myers, 1984) The assumptions of these theories take into consideration the origin of funds, as well as costs related to their use, which inform the market about their financing policy, and make them susceptible to shareholder and stakeholder evaluations, influenced by the probability of income from investment and expropriation risk. In the Brazilian stock market, publicly traded companies faced a noticeable change at the end of the 2000s: the mandatory adoption of International Financial Reporting Standards (IFRS) established by Law No 11,638, in 2007. While this adoption began in 2008, it was only complete in 2010. The adaptations involved were expected to provide higher predictive capacity of accounting information and improve aspects associated with information disclosure by implementing more demanding accounting and market-oriented principles (Moura & Coelho, 2016), providing more effective enforcement of regulatory bodies, investor protection, corporate governance, and earning management (Silva & Nardi, 2017)

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