Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions

This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards....

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Bibliographic Details
Published in:Journal of accounting research 2013-06, Vol.51 (3), p.495-547
Main Authors: DASKE, HOLGER, HAIL, LUZI, LEUZ, CHRISTIAN, VERDI, RODRIGO
Format: Article
Language:English
Subjects:
Accounting standards
Annual reports
Capital costs
Capital market
Cost of capital
Economic capital
Economic conditions
Economic costs
Economic impact
Enterprises
Financial accounting
Generally accepted accounting principles
Incentives
International accounting standards
International Financial Reporting Standards
Liquidity
Prices
Studies
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Summary:This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these predictions, we classify firms into "label" and "serious" adopters using firm-level changes in reporting incentives, actual reporting behavior, and the external reporting environment around the switch to IAS/IFRS. We analyze whether capital-market effects are different across "serious" and "label" firms. While on average liquidity and cost of capital often do not change around voluntary IAS/IFRS adoptions, we find considerable heterogeneity: "Serious" adoptions are associated with an increase in liquidity and a decline in cost of capital, whereas "label" adoptions are not. We obtain similar results when classifying firms around mandatory IFRS adoption. Our findings imply that we have to exercise caution when interpreting capital-market effects around IAS/IFRS adoption as they also reflect changes in reporting incentives or in firms' broader reporting strategies, and not just the standards.
ISSN:0021-8456
1475-679X
DOI:10.1111/1475-679X.12005