JURNAL IFRS

Working Paper No. 12
Mandatory IFRS Reporting Around the World:
Early Evidence on the Economic Consequences
Holger Daske
University of Mannheim
Luzi Hail
The Wharton School, University of Pennsylvania
Christian Leuz
The Graduate School of Business, University of Chicago
Rodrigo Verdi
Sloan School of Management, MIT
Initiative on Global Markets
The University of Chicago, Graduate School of Business
“Providing thought leadership on financial markets, international business and public policy”

Mandatory IFRS Reporting Around the World:
Early Evidence on the Economic Consequences*
Holger Daske
University of Mannheim
Luzi Hail
The Wharton School, University of Pennsylvania
Christian Leuz
The Graduate School of Business, University of Chicago
Rodrigo Verdi
Sloan School of Management, MIT
August 2008
(Forthcoming in the Journal of Accounting Research)
Abstract
This paper examines the economic consequences of mandatory IFRS reporting around the world. We analyze
the effects on market liquidity, cost of capital and Tobin’s q in 26 countries using a large sample of firms that
are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the
introduction of IFRS. We also document a decrease in firms’ cost of capital and an increase in equity
valuations, but only if we account for the possibility that the effects occur prior to the official adoption date.
Partitioning our sample, we find that the capital-market benefits occur only in countries where firms have
incentives to be transparent and where legal enforcement is strong, underscoring the central importance of
firms’ reporting incentives and countries’ enforcement regimes for the quality of financial reporting.
Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for
firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become
mandatory. While the former result is likely due to self-selection, the latter result cautions us to attribute the
capital-market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting
countries have made concurrent efforts to improve enforcement and governance regimes, which likely play
into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in
magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects.
JEL classification: G14, G15, G30, K22, M41, M42
Key Words: Regulation, International accounting, IAS, U.S. GAAP, Disclosure, Market liquidity,
Cost of equity, Enforcement, Security markets
* We appreciate the helpful comments of Ray Ball, Phil Berger, Hans Christensen, John Core, Ray Donnelly, Günther
Gebhardt, Bob Holthausen, Andrew Karolyi, Steve Matsunaga, Jim Mc Keown, Martin Wallmeier, Michael Welker, and
workshop participants at the 2008 American Accounting Association meeting, American University, Bucerius Law
School, University of Chicago, Chinese University’s CIG conference, Columbia University, Darden School, UC Davis
Financial Markets Research conference, 2008 European Accounting Association meeting, Lancaster University, New
York University, University of Oregon, Queen’s University, Tilburg University, 2008 VHB Frühjahrstagung, 2008
Western Finance Association meeting, and the Wharton School. Christian Leuz gratefully acknowledges research
funding provided by the Initiative on Global Markets (IGM) at the University of Chicago, Graduate School of Business.
Holger Daske gratefully acknowledges the financial contribution of the European Commission Research Training
Network INTACCT.
Electronic copy available at: http://ssrn.com/abstract=1024240
1
1. Introduction
The introduction of International Financial Reporting Standards (IFRS) for listed companies in
many countries around the world is one of the most significant regulatory changes in accounting
history.1 Over 100 countries have recently moved to IFRS reporting or decided to require the use of
these standards in the near future and even the U.S. Securities and Exchange Commission (SEC) is
considering allowing U.S. firms to prepare their financial statements in accordance with IFRS
(www.sec.gov/news/press/2007/2007-145.htm). Regulators expect that the use of IFRS enhances the
comparability of financial statements, improves corporate transparency, increases the quality of
financial reporting, and hence benefits investors (e.g., EC Regulation No. 1606/2002). From an
economic perspective, there are reasons to be skeptical about these expectations and, in particular, the
premise that simply mandating IFRS makes corporate reporting more informative or more
comparable. Thus, the economic consequences of mandating IFRS reporting are not obvious.
In this paper, we provide early evidence on the capital-market effects around the introduction of
mandatory IFRS reporting in 26 countries around the world. Using a treatment sample of over 3,100
firms that are mandated to adopt IFRS, we analyze effects in stock market liquidity, cost of equity
capital, and firm value. These market-based constructs should reflect, among other things, changes in
the quality of financial reporting and hence should also reflect improvements around the IFRS
mandate. We employ four proxies for market liquidity, i.e., the proportion of zero returns, the price
impact of trades, total trading costs, and bid-ask spreads, four methods to compute the implied cost of
equity capital, and use Tobin’s q as a proxy for firms’ equity valuations.
The primary challenge of our analysis is that the application of IFRS is mandated for all publicly
traded firms in a given country from a certain date on. This makes it difficult to find a benchmark
1 International Accounting Standards (IAS) were renamed to IFRS in 2001. We use IAS and IFRS interchangeably but
our analysis does not presume or require that earlier IAS and later IFRS adoptions have the same consequences.
2
against which to evaluate any observed capital-market effects. Our empirical strategy uses three sets
of tests to address this issue. First, using firm-year panel data from 2001 to 2005, we benchmark
liquidity, cost of capital and valuation effects around the introduction of IFRS against changes in
other countries that do not yet mandate or allow IFRS reporting. We also include firms from IFRS
adoption countries that do not yet report under IFRS at the end of our sample period because their
fiscal year ends after December 2005, which, except for Singapore, is the date from which on our
sample firms must use IFRS. Both benchmarks help us to control for contemporaneous capitalmarket
effects that are unrelated to the introduction of IFRS. In addition, we introduce firm-fixed
effects to account for unobserved time-invariant firm characteristics.
Second, still using firm-year panel data, we examine whether the estimated capital-market effects
exhibit plausible cross-sectional variation with respect to countries’ institutional frameworks. As the
regulatory change forces many firms to adopt IFRS that would not have done so otherwise, we expect
mandatory IFRS reporting to have a smaller effect or no impact in countries with weak legal and
enforcement regimes or where firms have poor reporting incentives to begin with. Moreover,
assuming that mandatory IFRS reporting is properly enforced, the impact is likely to be smaller in
countries that already have high reporting quality or where local GAAP and IFRS are fairly close
(e.g., due to a prior convergence strategy).
Third, we exploit that firms begin applying IFRS at different points in time depending on their
fiscal-year ends and that, as a result, the adoption pattern in a given country is largely exogenous
once the initial date for IFRS adoption is set.2 We relate this pattern to changes in aggregate liquidity
in a given country and month. If the introduction of IFRS reporting has indeed discernable effects,
2 We note that the initial date (and whether a country sticks to it) is likely to be endogenous to current political and
market conditions. However, once the date is set and adoption begins, the pattern is largely given, which is what our
identification strategy exploits.
3
we expect changes in aggregate liquidity to be most pronounced in months when many firms report
under IFRS for the first time. That is, changes in liquidity should mirror countries’ stepwise
transition towards the new reporting regime and not simply reflect a time trend or a one-time shock.
As this approach has fewer data restrictions, we analyze liquidity effects for 6,500 mandatory
adopters, i.e., firms that report under IFRS for the first time when it becomes mandatory.
We begin our first set of analyses with a simple difference-in-differences analysis and find that
mandatory adopters exhibit a significantly larger increase in market liquidity than a random sample
of non-adopting benchmark firms from around the world. In contrast, the changes in Tobin’s q for
mandatory adopters are insignificant and their cost of capital even increases relative to benchmark
firms. While the latter findings may be surprising, they do not yet account for the possibility that
markets likely price the IFRS mandate ahead of the actual adoption date.
Next, we run firm-level panel regressions that control for time-varying firm characteristics,
market-wide changes in the dependent variable, industry-year-fixed, and firm-fixed effects. We find
that market liquidity increases for firms that adopt IFRS reporting when it becomes mandatory. In
our main specification, the percentage of days without trades declines by 100 basis points for
mandatory adopters, which is close to a 4% liquidity improvement relative to the median level prior
to IFRS adoption. Total trading costs and the percentage bid-ask spreads both decline by 12 basis
points, indicating liquidity increases of 3% and 6%, respectively, relative to the median level prior to
IFRS adoption. The results for price impact are insignificant in the main specification. For
parsimony and to reduce measurement error, we aggregate all four liquidity proxies into a single
liquidity factor and again find a statistically significant increase in liquidity for mandatory IFRS
adopters. We also vary the composition of the benchmark sample using the complete Worldscope
population or U.S. firms only. While these variations do not change the tenor of the results, they
4
indicate that benchmarking and the specific choice of the benchmark are important in evaluating the
liquidity effects around the IFRS mandate.
The cost of capital and Tobin’s q results are mixed. Our base specification indicates an increase
in the cost of capital and a decrease of Tobin’s q in the year when IFRS reporting becomes
mandatory, similar to the difference-in-differences analysis. It is possible, though, that these results
stem from transition effects, such as temporary difficulties to forecast earnings under the new
accounting regime, which can affect the implied cost of capital, or changes in the measurement of
total assets, which can affect Tobin’s q. Another explanation is that markets anticipate the effects of
the IFRS mandate, in which case including observations of switching firms before the introduction of
IFRS (as our panel approach does) likely works against finding a decrease (increase) in the cost of
capital (Tobin’s q). Consistent with the existence of anticipation effects, we find that the cost of
capital decreases by 26 basis points and Tobin’s q increases by 7% when we measure the effect one
year before the mandatory adoption date.
While the liquidity and the (anticipation-adjusted) cost of capital and valuation effects for
mandatory adopters are economically significant, they are generally smaller than the corresponding
capital-market effects of voluntary adopters. That is, the latter group exhibits significant liquidity,
valuation and cost of capital effects around the introduction of mandatory IFRS reporting, despite the
fact that these firms have already switched to IFRS prior to the mandate.3 There are several ways to
interpret this finding. First, it could reflect comparability benefits that accrue to the voluntary
adopters when the other firms in the country have to switch to IFRS. We conduct some tests on the
3 In addition, we find significant liquidity and valuation benefits for firms that adopt IFRS ahead of the mandated
change. We label these firms “late voluntary” adopters as they switch after their home country announces the move
to mandatory IFRS reporting. One can also think of them as “early mandatory” adopters. Their adoption effects
have to be interpreted cautiously as they likely reflect self-selection, rather than IFRS reporting itself (see also Daske
et al. [2007]).
5
role of comparability effects, but are unable to provide statistical support for this argument. Second,
the capital-market effects for voluntary adopters could stem from concurrent changes in the
enforcement and governance regimes that (some) countries have introduced together with the IFRS
mandate. Such changes should affect mandatory and voluntary adopters in a given country and,
hence, could explain the capital-market effects. Our cross-sectional results, which we discuss next,
are consistent with this interpretation. Finally, as the capital-market effects are particularly
pronounced for early voluntary adopters, it is also possible that the mandate increases the
commitment associated with IFRS reporting as it eliminates dual reporting practices and the option to
reverse back to local GAAP.
Our second set of empirical tests, the cross-sectional analyses, show that the capital-market
effects around the introduction of mandatory IFRS reporting are not evenly distributed across
countries and firms. We find that the capital markets effects around mandatory IFRS adoption occur
only in countries with relatively strict enforcement regimes and in countries where the institutional
environment provides strong incentives to firms to be transparent. These findings are consistent with
the view that IFRS implementation is likely to be heterogeneous across countries (e.g., Ball [2006]),
and with the idea that firms’ reporting incentives, which are shaped by markets and countries’
institutional environments, play a crucial role for reporting outcomes (e.g., Ball, Robin, and Wu
[2003], Ball and Shivakumar [2005], Burgstahler, Hail, and Leuz [2006]). We also find that the
effects for mandatory adopters are smaller in countries that have fewer differences between local
GAAP and IFRS and a pre-existing convergence strategy towards IFRS. As expected under the
reporting incentives view, these effects are largest for countries with large GAAP differences that
also have strong legal regimes. Finally, capital-market effects are stronger in member states of the
European Union (EU), possibly reflecting its concurrent efforts to improve governance and
enforcement (Hail and Leuz [2007]).
6
In our last set of analyses, we examine monthly changes in aggregate liquidity as IFRS reporting
becomes more widespread, controlling for contemporaneous changes in world market liquidity
averaged over a 100 random samples, changes in liquidity for the same calendar month in the prior
year, lagged levels in liquidity, volatility, market capitalization, and country-fixed effects. We show
that increases in IFRS reporting by mandatory adopters are associated with decreases in the
percentage of zero returns, in bid-ask spreads and, to a lesser extent, in the price impact of trades.
These findings confirm our firm-year analyses but are considerably smaller in magnitude. As the
country-month analysis is likely the cleanest test in terms of separating the consequences of the IFRS
mandate from other factors (e.g., time trends, unrelated institutional changes), the smaller magnitude
of the effects provides further evidence that the documented liquidity improvements in the firm-year
analysis cannot be attributed entirely to the IFRS mandate.4
Despite the consistency of our findings across various analyses, we caution the reader to interpret
this study carefully. First, as several countries around the world have substantially revised their
enforcement, auditing and governance regimes to support the introduction of IFRS reporting, it is
likely that our results reflect the joint effects of these efforts and hence cannot solely, or even
primarily, be attributed to the switch to IFRS. Second, our analyses are based on a relatively short
time period and it is possible that the documented effects are short-lived. But the effects could also
increase over time as market participants gain more experience with IFRS or as recent changes to
countries’ enforcement and governance regimes take further hold. Third, our valuation and cost of
capital proxies may exhibit substantial measurement error and, in particular, may be affected by the
change in accounting measurement per se, which in turn could bias the magnitude of the estimated
effects. For instance, taken at face value, our estimates of the valuation effects seem too large to be
4 An alternative explanation is lack of power. The country-month approach, which we implement in changes, is more
sensitive to the timing of the information release. Leakage of information or errors in assigning the publication of
firms’ financial reports to a particular month likely hurt this analysis more than the firm-year approach.
7
solely attributable to the IFRS mandate. Finally, while we attempt to account for anticipation and
early pricing of the IFRS mandate as well as first-time IFRS interim reporting, these effects and
transitional procedures (see IFRS 1) likely reduce the power of our tests.
With these caveats in mind, our study makes several contributions to the literature. This study is
the first to analyze the capital-market effects around the introduction of mandatory IFRS reporting for
a large and global sample of firms. The move to mandatory IFRS reporting around the world is one
of the most important policy issues in financial accounting. Hence


Pendapat tentang Jurnal IFRS

Menurut kelompok kami IFRS memberikan bukti awal pada pasar modal, IFRS wajib pelaporan di 26 negara di seluruh dunia. Menggunakan contoh pengobatan lebih dari 3.100
perusahaan yang diberi mandat untuk mengadopsi IFRS, kami menganalisis pengaruh likuiditas saham di pasar saham,biaya ekuitas, nilai modal dan perusahaan. D dalam jurnal IFRS ini menggunakan 4 proxy untuk likuiditas pasar, yaitu proporsi dari nol kembali, harga dampak dari perdagangan, total biaya perdagangan, dan tawaran bertanya menyebar. Empat metode untuk menghitung biaya tersirat dari ekuitas modal. Penerapan IFRS ini memiliki mandate untuk semua public perusahaan yang diperdagangkan di Negara diberikan dari tanggal tertentu. strategi empiris menggunakan menggunakan tiga set.
Pertama menggunakan data panel perusahaan tahun 2001-2005, patokan likuiditas, biaya modal dan efek penilaian sekitar pengenalan terhadap perubahan IFRS Negara lainnya yang belum mandat atau mengizinkan IFRS pelaporan. Kedua masih menggunakan data panel perusahaan apakah pasar modal diperkirakan dampak cross-sectional menuju variasi yang masuk akal sehubungan dengan kerangka kerja kelembagaan Negara. Sebagai kekuatan perubahan peraturan, banyak perusahaan untuk mengadopsi IFRS yang tidak akan melakukannya jika tidak, IFRS pelaporan wajib memiliki efek yang lebih kecil atau tidak berdampak di Negara-negara dengan lemah hukum dan penegakan rezim atau di mana perusahaan miskin insentif untuk melakukan pelaporan. Ketiga , bahwa perusahaan mulai menerapkan IFRS pada titik-titik berbeda dalam waktu tergantung pada akhir tahun fiscal dan sebagai akibatnya pola adopsi di Negara tertentu terutama eksogen setelah tanggal awal untuk adopsi IFRS diatur

nama kelompok :
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