Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions

TLDR

In contrast to prior work, we focus on firm‑level heterogeneity in the economic consequences of IAS/IFRS adoption, recognizing that firms have considerable discretion in how they implement the new standards. This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. We classify firms into “label” and “serious” adopters using firm‑level changes in reporting incentives, actual reporting behavior, and the external reporting environment, and analyze whether capital‑market effects differ across these groups. On average, liquidity and cost of capital often do not change around IAS/IFRS adoptions, but serious adopters experience increased liquidity and lower cost of capital, while label adopters do not, indicating that capital‑market effects reflect reporting incentives and broader strategies rather than the standards alone.

Abstract

ABSTRACT 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 capital‐market effects are different across “serious” and “label” firms. While on average liquidity and cost 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 in firms’ broader reporting strategies, and not just the standards.