The Impact of Mandatory International Financial Reporting Standards Adoption on Investment Efficiency: Standards, Enforcement, and Reporting Incentives

42 Pages Posted: 17 Sep 2018

See all articles by Ru Gao

Ru Gao

The University of Queensland

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting

Date Written: September 2018

Abstract

This paper investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) is followed by a decline in firms’ suboptimal investments. On average, we find that the probability of under‐investment in capital expenditure declines for firms from 23 countries requiring mandatory adoption of IFRS relative to firms from countries that do not have such requirements; meanwhile the probability of over‐investment remains unchanged. However, this real effect becomes smaller when we control for concurrent changes to the enforcement of financial reporting along with the introduction of IFRS in some countries, suggesting that the switch in standards is only one of the drivers for the observed benefits. Moreover, we find that the reduction in suboptimal investments is driven by firms with high reporting incentives to provide transparent financial reports from countries where the existing legal and enforcement systems are strong. We further show that the real effect increases with the predicted changes in accounting comparability. Finally, we find that after mandatory IFRS adoption, capital investment becomes more value‐relevant, less sensitive to the availability of free cash flows, and more responsive to growth opportunities. Our findings provide new insights into the real effects of mandatory IFRS adoption.

Keywords: Mandatory IFRS adoption, Regulatory enforcement, Reporting incentives, Reporting standards, Suboptimal investments

Suggested Citation

Gao, Ru and Sidhu, Baljit K., The Impact of Mandatory International Financial Reporting Standards Adoption on Investment Efficiency: Standards, Enforcement, and Reporting Incentives (September 2018). Abacus, Vol. 54, Issue 3, pp. 277-318, 2018, Available at SSRN: https://ssrn.com/abstract=3249690 or http://dx.doi.org/10.1111/abac.12127

Ru Gao (Contact Author)

The University of Queensland ( email )

Colin Clark, 39 Blair Dr,
St Lucia QLD
Brisbane, Queensland 4607
Australia
61 07 3443 4502 (Phone)

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

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