Comparability, Capital Market Benefits, and the Voluntary Adoption of IFRS

The following post comes to us from Mary Barth, Professor of Accounting at Stanford University; Wayne Landsman, Professor of Accounting at the University of North Carolina; Mark Lang, Professor of Accounting at the University of North Carolina; and Christopher Williams of the Department of Accounting at the University of Michigan.

In our paper, Effects on Comparability and Capital Market Benefits of Voluntary Adoption of IFRS by US Firms: Insights from Voluntary Adoption of IFRS by Non-US Firms, which was recently made publicly available on SSRN, we examine whether voluntary adoption of IFRS is associated with an increase in comparability of accounting amounts and capital market benefits after the firms adopt IFRS. Our evidence is based on samples of non-US firms that voluntarily adopt IFRS matched with firms of similar size in their country and industry that either adopted IFRS before them or do not adopt IFRS.

We find that after firms voluntarily adopt IFRS, their accounting amounts become more comparable to those of firms that adopted IFRS before them and less comparable to those of firms that do not adopt IFRS. We also find that adopting firms generally exhibit an increase in capital market benefits—liquidity, share turnover, and firm-specific information—relative to both adopted and non-adopting firms. However, there is little evidence of capital market consequences for adopted firms and little evidence that non-adopting firms suffer a decrease in capital market benefits.

Findings from additional analyses indicate that capital market benefits are more pronounced in countries with a higher percentage of firms applying IFRS, although such benefits exist even in lower percentage countries. Also, we find that comparability is important to capital market benefits related to IFRS adoption in that adopting firms with greater comparability enjoy greater capital market benefits.

Our study is motivated by the SEC’s proposed Roadmap for incorporating IFRS into the US financial reporting system. As part of the Roadmap, the SEC is considering whether to permit US firms to adopt IFRS voluntarily, possibly as a transitional step. Ideally, a study that assesses the effects on comparability of voluntary IFRS adoption in the US would focus on US firms. However, because publicly listed US firms presently are not permitted to apply IFRS, it is not possible to provide direct evidence on comparability of accounting amounts and attendant capital market benefits associated with permitting US firms to adopt IFRS voluntarily. Nonetheless, our evidence provides insights into the effects of voluntary IFRS adoption on comparability of accounting amounts and attendant capital market benefits.

Our findings suggest that permitting US firms to adopt IFRS voluntarily could enhance comparability of US firms’ accounting amounts with those of firms applying IFRS, including those that list on US as well as non-US exchanges. Also, the findings lend support to the SEC’s belief that enhanced comparability results in capital market benefits. In addition, the findings temper concerns that any potential decrease in comparability between firms that voluntarily apply IFRS and those that continue to apply US GAAP results in negative economic consequences for the firms that apply US GAAP.

The full paper is available for download here.

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