Why Do Japanese Firms Voluntarily Adopt IFRS?

Abstract

The purpose of this research is to empirically examine firms’ incentives for accounting standards choice. Using a Japanese setting with multiple accounting standards options of equal quality, we first explore the association between Japanese firms’ IFRS adoption and network effects. We divide firms’ network into direct and indirect components and measure the size using four proxies. Three dependent variables capture different stages of IFRS adoption by groups of firms, that is, earlier adopters (adopted and announced) and potential adopters. Using panel data on Japanese listed firms between 2007 and 2017, multiperiod logit regressions are conducted. The results support the hypothesis that network effects are related to the adoption of IFRS. In addition, we obtain new insight into firms’ incentives to adopt IFRS, by analyzing the differences between earlier and potential adopters. While the factors examined in prior studies become weak for potential adopters over time, network effects remain significant for both earlier and potential adopters. This result suggests that network effects give firms stronger incentives to adopt IFRS than other incentive factors such as corporate governance and differences between accounting standards.