Politically connected firms and the effectiveness of International Financial Reporting Standards adoption

Abstract

In response to the ongoing debate about whether IFRS has improved accounting quality, I introduce a new firm-level determinant of effective IFRS adoption: the political connectedness of a firm. Established political connections recognise value from firms, which they reward with shielding from enforcement agencies and/or providing financial resources outside of capital markets. By using the exogenous shock of mandatory IFRS adoption in the EU, I isolate the effect that political connections have on discretionary accounting choices. I find that although accounting quality is ex ante and ex post lower for politically connected firms with top executives in federal roles, there is no incremental difference in the positive effect of IFRS adoption relative to non-connecting firms. This finding suggests that political connections are not fully immune to IFRS effects, and yet the role of political connections is not completely negated by mandated IFRS adoption.