Spillover effects of public firms‘ mandatory IFRS adoption on private firms

• Applicant: Professorin Dr. Vanessa Flagmeier
• Subject Area: Accounting and Finance
• Term: Funded in 2017
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 390763169

The global adoption of International Financial Reporting Standards (IFRS) represents one of the most important regulatory changes in accounting history so far. Hence, it is not surprising that the literature on effects of the mandatory adoption of IFRS is abundant. The majority of studies focuses on firms that are directly affected by the IFRS introduction – firms that are required to adopt IFRS at a certain point in time (e.g., firms listed on an EU-regulated market have to adopt IFRS for their consolidated statements for fiscal years beginning January 1, 2005). However, a considerable number of firms continues to report under local generally accepted accounting principles (GAAP) after the mandatory introduction of IFRS. These firms are mainly private firms that are not required to adopt IFRS. Still, due to the change in information environment, private firms might be indirectly affected by the IFRS adoption. Quality and extent of information provided in public (IFRS adopting) firms’ financial statements changes with the adoption of IFRS and affects their private peers’ information environment. In this study, I analyze whether and how private firms are affected by their public peers’ mandatory IFRS adoption. I focus on real effects of the adoption, in particular investment efficiency. Building on the prior literature, disclosures of one firm can affect other firms’ strategic decisions. Specifically, the IFRS adoption might affect the ability of private firms to evaluate their public rival firms’ investment projects and hence the usability of this information for their own investment decisions. I expect private firms to adjust their investment behavior after the IFRS adoption based on the new information environment and I analyze this relation for a large global sample of public and private firms. As investment decisions are among the most fundamental tasks of a firm, it is of profound interest whether IFRS adoption affects this economic activity. While there is plentiful evidence on capital market effects of the IFRS adoption, few studies focus on real economic effects to date. Further, private firms represent an economically very important group and should be considered in assessing how reporting regulations affect social welfare. Effects of the IFRS adoption on non-adopting private firms could indicate so-called unintended consequences of the reporting regulation that have been not been identified by the literature so far.

• DFG Programme: Research Fellowships
• International Connection: USA
• Host: Professor Dr. Wayne Landsman