Why Do Private Firms Adopt IFRS?

Abstract

Do private firms voluntarily adopt IFRS? If so, why? Answer to these questions have been very limited so far, mainly due to the absence of financial data on private firms. In this paper, I exploit the German setting where the financial statements of private firms are comprehensively available. I estimate multi-period logit regressions on the choice between national GAAP and IFRS for the consolidated (or group) financial statements of 3,365 German private firms with more than 14,000 firm-years in the period 1998 to 2009. My results suggest that the expected net benefits of IFRS adoption vary substantially across the group of private firms, depending on their external financing needs, governance system, and organizational and informational complexity. Specifically, I find that private firms are more likely to switch to IFRS if they have more growth opportunities, are more leveraged, are younger, are externally rated, seek to raise external capital by issuing public bonds or equity, are registered as a stock corporation, are characterized by private equity involvement, have more international sales and operations, belong to high-tech industries and have a Big Five auditor. These insights should be of great interest to regulators in the current debate about the future of financial reporting in private firms.