The Cost of Regulatory Inaction: Evidence from IFRS Non-adoption

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2022
Authors
Liu, Miao
Xu, Wanrong
Zhang, Rachel
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Numerous countries adopted IFRS in 2005 for a more detailed and comparable financial reporting regime. But many others did not. We study the consequences of regulatory inaction by non-adopting countries. We first show that IFRS adoption by other countries does not affect the liquidity of S&P 1500 US firms. Using S&P 1500 US firms as the control group, we find that the liquidity of firms in non-US countries that did not adopt IFRS significantly declined after the fourth quarter of 2005, suggesting a deteriorating information environment. To search for the forces behind the liquidity drop, we further show that analysts and institutional investors migrated away from non-adopting countries to adopting countries after 2005. Overall, our findings suggest that regulatory inaction can be costly – valuable information production resources can shift attention away to cover companies in the new regime, resulting in a worse information environment for companies that stay in the old regime.
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IFRS, Regulatory Inaction, Information Environment, Liquidity, Analyst Coverage, Institutional Investment
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