Does Mandatory IFRS Adoption Affect Crash Risk?

We test whether mandatory IFRS adoption affects firm-level "crash risk," defined as the frequency of extreme negative stock returns. We separately analyze nonfinancial firms and financial firms because IFRS is likely to affect their crash risk differently. We find that IFRS adoption decrea...

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Bibliographic Details
Published in:The Accounting review 2015-01, Vol.90 (1), p.265-299
Main Authors: DeFond, Mark L., Hung, Mingyi, Li, Siqi, Li, Yinghua
Format: Article
Language:English
Subjects:
Bank regulation
Banking system
Fair value
Financial information
Frequency
GAAP
International Financial Reporting Standards
Rates of return
Regulation of financial institutions
Risk assessment
Stock returns
Studies
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Summary:We test whether mandatory IFRS adoption affects firm-level "crash risk," defined as the frequency of extreme negative stock returns. We separately analyze nonfinancial firms and financial firms because IFRS is likely to affect their crash risk differently. We find that IFRS adoption decreases crash risk among nonfinancial firms, especially among firms in poor information environments and in countries where IFRS adoption results in larger and more credible changes to local GAAP. In contrast, IFRS adoption has no effect on crash risk for financial firms, on average, but decreases crash risk among firms less affected by IFRS's fair value provisions, and increases crash risk among banks in countries with weak banking regulations. Overall, our results are consistent with the increased transparency from IFRS adoption broadly reducing crash risk among nonfinancial firms, but more selectively among financial firms, and with financial regulations playing a complementary role in implementing IFRS among financial firms.
ISSN:0001-4826
1558-7967
DOI:10.2308/accr-50859