Economic Consequences of IFRS Adoption: The Role of Changes in Disclosure Quality*

Abstract

This study adopts a two‐step approach to highlight the disclosure quality channel that drives economic consequences of IFRS adoption. This approach helps address the identification challenge noted by prior research and offers direct evidence on the role of disclosure quality. In the first step, we document the impact of the IFRS mandate on changes in disclosure quality proxied by the granularity of line item disclosure in financial statements. We find that IFRS‐adopting firms provide more disaggregated information upon IFRS adoption, such as more granular disclosure of intangible assets and long‐term investments on the balance sheet and greater disaggregation of depreciation, amortization, and nonoperating income items on the income statement. In the second step, we link the observed disclosure changes to the benefits and costs of IFRS adoption. We show that greater disaggregated information due to IFRS adoption enhances market liquidity and decreases information asymmetry, but does not affect audit fees differentially. Our evidence has implications for standard setters as they evaluate cost‐benefit trade‐offs when considering disclosure changes in the future.

Conceptual formation and explanation in IFRS-based financial accounting research

“…Daske et al (2013) address their central research questions through the use of measures, such as the price impact of trades, percentage bid-ask spreads, and the implied cost of capital, while Barth et al (2018) cross-compare the accounting amounts produced by local standards and IFRS. Li et al (2021) address their central research question by measuring changes in disclosure quality. The methodology the authors use to answer their research questions is empirical in nature.…”

“…The accounting quality can itself be assessed using different measures that vary immensely in terms of the contexts they are applied to. On the other hand, Daske et al (2013), Barth et al (2018), andLi et al (2021) studies include concepts that belong to the conceptual space of economic outcomes and accounting amounts. These conceptual spaces can also vary immensely in terms of their contexts.…”

“…For instance, Barth et al (2018) focus on accounting amounts of the book value of equity, net income, and net income before extraordinary items, while Daske et al (2013) measured their economic outcomes using three concepts. Furthermore, Li et al (2021) use a two-step research design to determine the economic consequences of IFRS adoption.…”

“…In Barth et al (2018) study, the authors state that "All of the accounting quality metrics are based on previous research". In a recent study, Li et al (2021) state that they "use the level of disaggregation of accounting numbers reported in financial statements proposed by Chen et al ( 2015)". One can find similar statements in the other studies, suggesting that the authors have taken concepts from previous research and applied them in various settings.…”

“…Thus, one could view adoption of IFRS as the process that leads to changes in the information environment. Li et al (2021), for instance, mention that IFRS causes changes in disclosure quality which further leads to changes in economic consequences around IFRS adoption. Hence, the nature of the authors' explanation appears to be mechanistic.…”