The effects of IFRS adoption: a review of the literature
This paper provides a comprehensive classification, review and discussion of the body of literature that analyses the effects of IFRS, as intended by standard setters and adopting countries. Trends in the literature are identified and implications for future empirical research, for countries where IFRS has already been introduced and those where adoption is planned, are discussed. Further, other factors, which are also relevant for ensuring that the intended effects of IFRS are achieved, are examined across the different streams of IFRS research. While a number of potential IFRS benefits are still under-researched, and some methodological and sampling issues remain, it can nevertheless be concluded that IFRS adoption was successful in bringing about many of the expected benefits for the quality of financial reporting, the functioning of the capital markets and the efficient capital allocation worldwide. However, it must be noted that firm- and country-specific characteristics that shape the setting in which the standards are implemented also play a significant role in connection with the effectiveness of the introduction of IFRS.
Comparability, Disclosure Quality, Earnings Forecast Accuracy, Earnings Quality, Earnings Management, IFRS, Value Relevance
1. Introduction and motivation
The amount of research on the effects of the adoption of International Financial Reporting Standards (IFRS) in currently about 120 different countries worldwide has increased rapidly over the last three years. Despite the remaining gaps in the literature and issues with research methods (as well as some conflicting findings), the extant evidence does suggest that IFRS have the potential to achieve the positive effects that standard setters, as well as adopting countries, are aiming for. However, the tendency in this literature is to suggest that the adoption of a single set of reporting standards alone is unlikely to be sufficient to guarantee a uniform level of high quality reporting or to result in similar economic and macroeconomic benefits accruing across the different adopting countries. Rather, there are various factors that need to be considered in combination with the strategy for implementation. In the past, a substantial amount of research has focused on certain characteristics of institutional, legal and enforcement frameworks. In addition, it has focussed on cultural and traditional differences between countries that also affect financial reporting outcomes, alongside the reporting standards used. In studies by Ball, Kothari and Robin (2000) and La Porta, Lopez-de-Silanes, Shleifer and Vishny (1996) among others, an important classification was established, which divides countries into common law and code law traditions, in which common law legal origin takes a shareholder focus and the code law tradition takes an approach that focuses on certain stakeholders. Between these two traditions, factors such as investor protection, ownership structure, capital market development and activity, and links between financial and tax reporting, as well as enforcement systems, differ substantially. As IFRS were developed to a great extent in the UK, which is a common law country, and focus on shareholder information needs and their protection, some researchers argue that the institutional and legal environment in a specific country that has adopted (or plans to adopt) IFRS can have a significant impact on the effectiveness of IFRS in achieving the intended benefits [Ball, 2006; Sunder, 2002]. In regions such as the French legal origin countries (for example, France, Greece and Spain) or German legal origins (for example, Germany, Austria and Switzerland), it can be argued that this environment could potentially hinder the effectiveness of the stock market-oriented IFRS in connection with increasing investor protection, financial reporting quality and capital...
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