Abstract:Prior evidence that higher quality financial reporting improves capital investment efficiency leaves unaddressed whether it reduces over-or under-investment. This study provides evidence of both in documenting a conditional negative (positive) association between financial reporting quality and investment for firms operating in settings more prone to over-investment (underinvestment). Firms with higher financial reporting quality also are found to deviate less from predicted investment levels and show less sensitivity to macroeconomic conditions. These results suggest that one mechanism linking reporting quality and investment efficiency is a reduction of frictions such as moral hazard and adverse selection that hamper efficient investment.2

This paper examines the economic consequences of mandatory International Financial Reporting Standards (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 make 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.Keywords regulation, international accounting, IAS, U.S. GAAP, disclosure, market liquidity, cost of equity, enforcement, security markets Disciplines Accounting | International BusinessThis journal article is available at ScholarlyCommons: http://repository.upenn.edu/accounting_papers/64Electronic copy available at: http://ssrn.com/abstract=1024240 Electronic copy available at: http://ssrn.com/abstract=1024240 AbstractThis 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 voluntaril...

This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these predictions, we classify firms into 'label' and 'serious' adopters using firm-level changes in reporting incentives, actual reporting behavior, and the external reporting environment around the switch to IAS/IFRS. We analyze whether capitalmarket effects are different across 'serious' and 'label' firms. While on average liquidity and costs of capital often do not change around voluntary IAS/IFRS adoptions, we find considerable heterogeneity: 'Serious' adoptions are associated with an increase in liquidity and a decline in cost of capital, whereas 'label' adoptions are not. We obtain similar results when classifying firms around mandatory IFRS adoption. Our findings imply that we have to exercise caution when interpreting capital-market effects around IAS/IFRS adoption as they also reflect changes in reporting incentives or broader changes in firms' reporting strategies, and not just the standards. To highlight the difficulties in isolating such effects, we examine cross-sectional differences in capital-market outcomes around IAS/IFRS adoptions and the role of firm-level reporting incentives in explaining them. We show that a simple partitioning based on changes in firm-level reporting incentives around IAS/IFRS adoptions has significant explanatory power for the direction and magnitude of the observed capital-market outcomes. The evidence is consistent with pervasive selection effects, particularly for voluntary adoptions, and cautions us to interpret observed capital-market outcomes as a response to the change in standards alone. The evidence also questions the extent to which a switch to IAS/IFRS by itself (without any other changes)represents a commitment to a certain level of transparency.For the most part, our analyses center on voluntary IAS adoptions. We do so for three reasons. Our main hypothesis is that the observed economic consequences around IAS adoptions depend on management's reporting incentives, including the underlying motivations for the accounting change, rather than the change in accounting standards per se. As a result we expect predictable heterogeneity in outcomes across firms. In particular, one frequently voiced concern is that some firms adopt IAS merely in name without making material changes to their reporting policies (e.g., Ball [2001], [2006]). We refer to these firms as 'label adopters'. Firms may also adopt IAS as part of a broader strategy to increase their commitment to transparency. We refer to these firms as 'serious adopters' meaning that they are 'serious' about the change in...

Investors, regulators, academics, and researchers all emphasize the importance of financial statement comparability. However, an empirical construct of comparability is typically not specified. In addition, little evidence exists on the benefits of comparability to users. This study attempts to fill these gaps by developing a measure of financial statement comparability. Empirically, this measure is positively related to analyst following and forecast accuracy, and negatively related to analysts' dispersion in earnings forecasts. These results suggest that financial statement comparability lowers the cost of acquiring information, and increases the overall quantity and quality of information available to analysts about the firm. ______________________________We appreciate the helpful comments of

This paper examines the economic consequences of mandatory International Financial Reporting Standards (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 make 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.Keywords regulation, international accounting, IAS, U.S. GAAP, disclosure, market liquidity, cost of equity, enforcement, security markets Disciplines Accounting | International BusinessThis journal article is available at ScholarlyCommons: http://repository.upenn.edu/accounting_papers/64Electronic copy available at: http://ssrn.com/abstract=1024240 Electronic copy available at: http://ssrn.com/abstract=1024240 AbstractThis 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 voluntaril...

Abstract:Prior evidence that higher quality financial reporting improves capital investment efficiency leaves unaddressed whether it reduces over-or under-investment. This study provides evidence of both in documenting a conditional negative (positive) association between financial reporting quality and investment for firms operating in settings more prone to over-investment (underinvestment). Firms with higher financial reporting quality also are found to deviate less from predicted investment levels and show less sensitivity to macroeconomic conditions. These results suggest that one mechanism linking reporting quality and investment efficiency is a reduction of frictions such as moral hazard and adverse selection that hamper efficient investment.2

The MIT Faculty has made this article openly available. Please share how this access benefits you. Your story matters. Citation ABSTRACTInvestors, regulators, academics, and researchers all emphasize the importance of financial statement comparability. However, an empirical construct of comparability is typically not specified. In addition, little evidence exists on the benefits of comparability to users. This study attempts to fill these gaps by developing a measure of financial statement comparability. Empirically, this measure is positively related to analyst following and forecast accuracy, and negatively related to analysts' dispersion in earnings forecasts. These results suggest that financial statement comparability lowers the cost of acquiring information, and increases the overall quantity and quality of information available to analysts about the firm. ______________________________We appreciate the helpful comments of

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