Economic effects of IFRS adoption: The role of selection effects and opt-outs

• Applicant: Professor Dr. Jörg-Markus Hitz
• Subject Area: Accounting and Finance
• Term: from 2016 to 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 314660291

The project aims to investigate how stock-market regulation plays a role for opt-outs from the mandatory application of International Financial Reporting Standards (IFRS), and how these opt-outs present an omitted variable that prior literature so far has failed to address. This project draws its motivation from an empirical observation: the steady decline in the number of listed EU firms that adopt IFRS, as reported by a major professional financial database.The observed phenomenon may owe to coverage effects on behalf of the database provider, macroeconomic developments, but, more importantly, also to regulation related effects, i.e. an effective drain in particular of IFRS and enforcement regulated firms from listed markets. Our project attempts to discern explanations for this empirical phenomenon, to collect data to provide evidence of country-level institutional factors that shape the empirical pattern we observe, and to discuss research design implications. Hence, our project potentially contributes to various literatures.First, we contribute to the literature on mandatory IFRS adoption by highlighting an important research design issue which, if not addressed, might drive the respective documented IFRS effects in prior studies, as a correlated omitted variable. Our project specifically extends recent research on one important economic outcome, the liquidity effects that are observed concurrent with bundled IFRS and enforcement regulation (Christensen et al., 2013). To that end, our project attempts to provide evidence on a direct channel in which concurrent IFRS and enforcement regulation translate into higher market liquidity. This is important because evidence on the commonly assumed channels, improvements in accounting and reporting quality in the course of IFRS adoption, is rather mixed and inconsistent (Brüggemann et al., 2013).Second, by discerning real opt-out effects from database coverage effects, our project contributes to the literature on financial databases, their coverage decisions, and ensuing research design implications.Third, we aim to shed light on firm-level characteristics and, more importantly, country-level institutional factors that shape cost-benefit tradeoffs pertaining to delisting and downlisting decisions, hence augmenting another large stream in the accounting and finance literature, and providing institutional insight into the strictness of the IFRS mandate.Our project does not only contribute to some of the main research streams in the fields of accounting and finance, but also provides policy relevant information. From a EU perspective, mandatory adoption of IFRS in 2005 is arguably the largest accounting related regulatory event in EU history, with pertinent costs estimated in the three digit millions euro area. Thus, research on economic consequences and market externalities of this regulatory event is of potential interest to regulators, and relevant to economic welfare.

• DFG Programme: Research Grants
• Co-Investigator: Dr. Nico Lehmann