The Effect of Mandatory IFRS Adoption on Financial Analysts’ Information Environment

Financial disclosures have externalities; a disclosure by one firm can directly alter the cash flows of other firms, and can also can alter investors' beliefs about the distribution of other firms' cash flows and thereby affect their market values (Foster 1980, Foster 1981, Dye 1990). In seeking empirical evidence of such externalities, this study uses mandatory adoption of International Financial Reporting Standards (IFRS) as an exogenous event to examine how the changes in publicly available information of peer firms (mandatory IFRS adopters) impact upon the investment efficiency of other firms (prior voluntary IFRS adopters). We find that the probability of inefficient investment by prior voluntary adopters declines after IFRS adoption is mandated. Further, the probability of over- (under-) investment by voluntary adopters declines, relative to that of efficient investment, after mandatory adoption. Overall, we document positive externalities of mandatory IFRS adoption on the investment efficiency of prior voluntary adopters. However, we observe heterogeneity in these spillover effects at the firm level. Following Daske et al (2013)'s classification, we document that the observed improvements in investment efficiency are limited to 'serious' voluntary adopters. This finding is consistent with the argument that in the absence of effective enforcement mechanisms across all countries, the adoption of IFRS may be a 'cheap-talk game' for some voluntary adopters. Finally, we find that spillover effects are limited to the prior voluntary adopters from countries with large differences between local GAAP and IFRS. This suggests that the externalities of financial disclosures increase with improvements in the comparability of accounting information.

In China, International Financial Reporting Standards (IFRS) have become mandatory for listed firms in 2007. While earlier research on “voluntary” adopters has provided valuable insights on the impact of IFRS disclosure, these results cannot be generalised in a mandatory setting. We expect effects from mandatory IFRS adoption to be different from those documented for voluntary IFRS adopters since the former group is essentially forced to adopt IFRS. The empirical model, relating to stock price synchronicity with adoption of IFRS, and other firm-specific control variables were analysed using both univariate and multivariate techniques. Different types of panel data estimates were used and compared so as to interpret the results with the best-suited parameters for different data sets for different markets. Studying data covering the period from 2001-2013, the present study examines whether mandatory adoption of IFRS reduces Stock Price Synchronicity for Chinese firms. The empirical results show that IFRS adoption improves information environment by the capitalization of firm-specific information into stock prices, thereby reduces the Stock Price synchronicity. The paper further examines if the information impact was homogeneous across industries. This pattern of decrease in stock price synchronicity after adoption of IFRS is different for different industries taken for analysis. Aerospace & Defense, Automobiles Beverages, Metals & Mining, Retailer& Real Estate Operations have reduced synchronicity but other industries such as Biotech, Electric utilities, Electronic, Leisure products, Renewable energy and Telecom have increased synchronicity. For these industries, the low reliance on market wide information makes reasonable economic sense because they have relatively low demand elasticity. Hence, in demand inelastic industries, future price sensitive factors remain constant and so a changed IFRS accounting regime has little marginal impact. This study provides a different methodological approach by concentrating on Industry wide information effects from the mandatory adoption. These findings have important implications that apply not only to China, but also to other emerging and transitional economies such as India where IFRS is yet to be mandated. Moreover it will help regulators, academicians and practitioners to assess the informational benefit of adopting IFRS.

The effect of information shocks on dividend payout and dividend value relevance

This study investigates the effect of a change in financial reporting regulation, the adoption of International Financial Reporting Standards (IFRS), on investment decisions in Europe. It further investigates whether capital investment decisions were influenced by the adverse macroeconomic conditions that took place during the crisis period in the Eurozone in years 2008-2010. Moreover, we control for the fact that the impact of the IFRS adoption may differ depending on a) the timing of the adoption i.e. voluntary versus mandatory adopters and b) the legal enforcement and corruption levels. We provide evidence that financial reporting practices of mandatory versus voluntary adopters cause significant differences in (a) the cost of equity capital, (b) the level of capital investments and (c) the return on invested capital. Our evidence suggest that mandatory adopters improved the level of capital investments and the return on invested capital in the post IFRS period and that the cost of equity capital was reduced. These evidence are more pronounced under the strong legal enforcement environment. For the group of voluntary adopters, we verify also a significant reduction in the cost of equity capital in the post IFRS adoption period. Regarding their investment practices, we document higher level of capital investment relative to mandatory adopters in both the pre and post IFRS period and even after controlling for the legal enforcement environment. We provide evidence that during the crisis period the cost of equity capital was increased for both groups. Nevertheless, our results suggest that both groups keep their investment policy unchanged by not reducing the level of capital investments.

National Cultural Dimensions and Adoption of the International Financial Reporting Standard (IFRS) for Small and Medium-Sized Entities (SMEs)

We study whether the mandatory adoption of International Financial Reporting Standards (IFRS) is associated with changes in the sensitivity of CEO turnover to accounting earnings and how the impact of IFRS adoption varies with country-level institutions and firm-level incentives. We find that post-adoption, CEO turnover responds more to a firm’s accounting performance. This increase in turnover-to-earnings sensitivity is concentrated in countries with stronger enforcement of financial reporting and is more prominent for mandatory adopters that have strong firm-level compliance incentives. In addition, we link the change in turnover-to-earnings sensitivity directly to accounting changes due to IFRS adoption and find a stronger IFRS adoption effect when firms report large overall accounting changes and large de-recognition of loss provisions upon IFRS adoption.

Book Reviews

PurposeThe purpose of this paper is to examine the impact of International Financial Reporting Standards (IFRS) adoption on economic growth.Design/methodology/approachUsing data from 2005–2014, the study examined whether the mandatory adoption of IFRS increases economic growth synchronicity in the European Union (EU) context. The study utilizes a sample of 28 countries containing 10-year observations in the EU market where IFRS have been adopted since 2005. The empirical model, relating to economic growth synchronicity with the adoption of IFRS, and other country-specific control variables were analyzed using the dynamic panel data technique.FindingsDifferent specifications of the model results showed that IFRS adoption improves the economic growth and that IFRS adoption matters for developing economies than developed ones. It is, therefore, recommended that authorities in Europe should try to enforce the adoption and implementation of IFRS, especially among the developing economies.Originality/valueThe paper’s investigation of the impact of IFRS on economic growth expands the extant literature. Studies that dealt with IFRS impacts mostly fixate on the accounting benefits of IFRS adoption to institutional investors and fail to capture the commensurate impact of IFRS adoption on macroeconomic indicators. This little attention is because prior researchers suggest IFRS adoption is important in shaping financial reporting characteristics which provide useful information to the prime users of financial reports. Also, separating the study’s countries into developed and developing countries would help delineate the impact of IFRS adoption on economic growth based on the stage of development.

Most of the countries in GCC region (except Saudi Arabia) have adapted IFRS in 1990s except Oman who was the first to adopt in 1986. Therefore, it can be concluded that, Qatar is one of the countries which adopted IFRS since long time ago. However, no serious discussion was there so far to see whether IFRS adoption in emerging economy country like Qatar is feasible or it has been taken as granted. The adoption of IFRS at country level has sparked two contrasting, but not mutually exclusive viewpoints. One view, which favors IFRS adoption, is that IFRS produces better financial reporting since it is superior accounting standards in comparison to domestic accounting standards (Barth 2008). Additionally, convergence to a singular accounting standard ensures greater comparability that helps investors to make their investment decisions. It results improvement of information environment in a country and hence contribute towards lowering the cost of capital (Barth 2008). The opposite view is that, the accounting quality is shaped by political and economic forces (Ball 2006) and therefore Accounting standard solely will not translate into higher quality reporting. The main objective of the study is to assess the suitability of’ International Financial Reporting Standards (IFRS) for emerging market such as Qatar; specifically, the current research explore advantages and disadvantages of IFRS implementation in Qatar.From the prior studies perspective, we found that IFRS is suitable for Qatar for many reasons. First of all, most of the companies in Qatar are characterized by insider dominated ownership structure. Therefore, majority of the shares are owned by the family owners. Also, the influences of institutional investors are in a greater margin in Qatari Stock Market. Moreover, the code of corporate governance in Qatar was just implemented three years back in 2009. As discussed earlier, the law system in Qatar is also very weak in regard to financial reporting. In these circumstances, IFRS can play a big role in Qatar since it is an advanced reporting standard developed and it could ensure that all the information are there for the shareholders and no asymmetric information situation could happen and ensures the rights of individual shareholders. Since Qatar is undergoing major development for the World Cup 2022 and National Vision 2030, it is important for Qatar to attract foreign investors for capital market. IFRS implementation will help Qatar to ensure foreign investors in gaining confidence in Qatari capital market. Furthermore, Qatar has adopted IFRS in 1995 and before that no specific requirement was that which is more established and strictly adopted by the companies. Therefore, Qatar didn't face a lot of issues while the adoption process. However, countries like Australia, Spain who were having their own developed standard faced a lot of issue since they were having their own standard practiced for a period of time.Thus, the current study concluded that IFRS implementation is suitable for the economy of Qatar considering its benefits, Qatari corporate ownership structure and commercial law of Qatar. Although, Qatar is following IFRS without any amendments by considering their own culture, economic environment and corporate governance, however, their implementation was very strong with the existence of big four international audit firm and regulation from Qatar Central Bank and Qatar Financial Market Authority. Furthermore, many of the Qatari companies such as QTEL, QNB are listed in internationally in various stock exchanges because they are following IFRS for their financial report. Finally, we conclude saying that, despite come short coming are there, it is beneficial to adopt IFRS for an emerging country like Qatar.

ABSTRACTThis article examines the association between mandatory International Financial Reporting Standards (IFRS) adoption and corporate choice between public debt and private debt. If IFRS adoption increases the quality of lenders’ information environment provided on financial statements, firms are more likely to access the public debt market. Using a sample of public and private debts financing firms from 2000 to 2014 in Korea, we find that firms that file financial reports under the IFRS are less likely to finance from public debt markets, implying that the mandatory IFRS adoption has exacerbated the information environment of the public debt market in Korea.

Do earnings reported under IFRS tell us more about future earnings and cash flows?

Informativeness vs. Opportunism: Evidence from the Choice of GAAP for Parent Company Accounts of IFRS Adopters in the United Kingdom

This study investigates the impact of mandatory International Financial Reporting Standards (IFRS) adoption on the value relevance of financial reports in 13 European countries by comparing the earnings–returns relation pre- and post-IFRS mandatory adoption in 2005. It shows that the financial reporting convergence enhances the contemporaneous association between earnings and returns, consistent with investors' expecting net information quality benefits from the IFRS adoption. While the reduction of price leading return effects documented in Ali and Hwang (2000) is more pronounced for a country with less discrepancy between local generally accepted accounting principles and IFRS, the legal system and aggregate earnings management within that country do not significantly deteriorate the positive value-relevance reaction to mandatory IFRS adoption in Europe.

The focus of the study was on examining International Financial Reporting Standard (IFRS) Adoption and The Value Relevance of Accounting Information in Selected Africa Countries: A Comparative Analysis of Nigeria and South Africa. The focus on cross country analysis in the subject of IFRS adoption and value relevance is growing quite slowly. However. Cross country empirical studies for countries in Africa continent is largely non-existent or at best difficult to find. This study address this gap by adopting a cross-country approach using Nigeria and South Africa. The study employed a longitudinal research design. The population and the sample of the study comprised the top companies in each country by way of market capitalization for the countries in the study, namely: Nigeria and South Africa as at December, 2019. The convenience sampling technique was used in the study to select listed firms across the two countries. Secondary data sourced from corporate annual reports of the sampled quoted firms got from the Nigerian Exchange Group (NGX) and Johannesburg Stock Exchange (JSE) were used for the study. The study made use of panel data regression and the results revealed that for South-Africa, Earnings Per Share (EPS) and EPS*IFRS were both positive respectively, and also statistically significant. Book Value Per Share (BVPS) and BVPS*IFRS were both positive respectively, and also statistically significant. Dividends Per Share (DPS) and DPS*IFRS were both positive respectively, and were also statistically significant. Intangible Assets (INTA) was not value relevant in the pre-IFRS period given the absence of the statistical significance of the variable, but show some evidence of weak incremental relevance from IFRS adoption as the interaction between INTA*IFRS was significant. Cash Flow Per Share (CFPS) was positive and significant; and furthermore, the interaction of CFPS*IFRS was also positive and statistically significant. For Nigeria, EPS and EPS*IFRS are both positive respectively, with EPS statistically significant. BVPS and BVPS*IFRS are both positive respectively, with only BVPS statistically significant. Furthermore, DPS and DPS*IFRS are both positive respectively, and statistically significant. INTA and INTA*IFRS are both insignificant respectively. Finally, CFPS is positive, though not significant; but the interaction of CFPS*IFRS is positive and significant. It therefore implies that, EPS*IFRS, BVPS*IFRS, DPS*IFRS, INTA*IFRS, CFPS*IFRS shows whether EPS, BVPS, DPS, INTA, CFPS reflects a stronger statistical significance in explaining share price when interacted with IFRS adoption (post) than without it (pre) in the two selected Countries( Nigeria and South Africa) . The study concluded that, there is the need for capital markets in developing countries to become more efficient and for companies and accounting regulatory institutions to ensure timely and quality disclosures of accounting information. It recommended that stock exchanges in developing markets should put a frame-work in place that measure the rate of compliance of each listed firm’s annual report with IFRS demands to enable the sanctioning of firms that recorded below the expected compliance level. The study also recommended amongst others, that financial reporting councils and accounting standards setting bodies globally should support the effort to ensure improved compliance with IFRS as a matter of policy.

The adoption of International Financial Reporting Standards (IFRSs) in different countries of the world have become a contemporary issue particularly with regard to the reliability of financial reports. The conceptual and empirical examination of the IFRS adoption and financial reporting quality across different sectors and countries. The study established that some studies used positive approach and some used positive paradigm. Studies used either of primary or secondary source of data, while some used mixed approach. The study found that IFRS adoption are determined by comparing the parameters concerned between pre and post IFRS regimes in given jurisdictions. The review concept and empirical evidences of IFRS adoption and financial reporting quality from many countries reveals that economic consequences of IFRS adoption significantly differ across jurisdictions though its impact has been reported to be positive in majority of studies. Also, few studies report indifferent and negative effects of IFRS adoption on financial reporting quality. The study found that it is argued that IFRS is more financial position focused. It is also observed that the impact of mandatory adoption of IFRS tends to be greater disputed than that caused by voluntary IFRS adoption. In addition, IFRS adoption are found to supersede many other domestic financial reporting standards such as Statement of Accounting Standard (SAS) in Nigeria.