A missing link? How selection effects shape evidence on the economic consequences of mandatory IFRS adoption

Abstract

Since 2005, the year of mandatory adoption of IFRS in many jurisdictions worldwide, the number of listed firms in these countries has been on the decline, compared to non-IFRS jurisdictions. We posit that this decrease is, among other things, consistent with regulatory avoidance by specific firms that opt to leave regulated stock exchanges and hence the IFRS mandate due to unfavorable cost-benefit trade-offs. These firm reactions to the regulation likely create a selection effect in studies that investigate economic outcomes of mandatory IFRS adoption. For a global sample of firms, we find evidence in line with these systematic firm responses. In a cross-country study of the effects of mandatory IFRS adoption on liquidity, we then corroborate previous evidence of positive effects, which are clustered in countries that installed enforcement mechanisms concurrent with the IFRS mandate. However, when we incorporate the selection effect into our model, we show that this effect explains liquidity findings in the post IFRS period beyond the previously documented IFRS, EU, and enforcement variation. Taken together, our findings provide a new perspective on the effects of mandatory IFRS adoption by shedding light on a novel “causal path” from mandatory IFRS adoption to positive market outcomes.