Mandatory IFRS Adoption, Accounting Quality, and Investment Efficiency: Evidence from China

Abstract

This paper investigates changes in accounting quality (AQ) and corporate investment efficiency around the mandatory adoption of International Financial Reporting Standards (IFRS) in China in 2007. We find that Chinese firms experience an overall decline in both AQ (measured by accrual characteristics) and investment efficiency post-IFRS relative to pre-IFRS. There are both similarities and differences in how IFRS impacts investment behaviour between state-owned enterprises (SOEs) and non-SOEs which are confronted with distinct agency problems. Specifically, both under- and over-investment problems are aggravated among SOEs, whereas among non-SOEs only under-investment worsens, not over-investment. We also find that for both SOEs and non-SOEs, declines in investment efficiencies are concentrated on firms with more severe AQ drops. We rationalise these findings in the context of the various agency problems faced by Chinese firms, and infer that mandatory IFRS adoption has led to deteriorating reporting quality and real investment efficiency in China’s transitional economy.