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

This paper examines the economic consequences of voluntary IFRS adoptions around the world. In contrast to prior work, we focus on the heterogeneity in the consequences, recognizing that firms have considerable discretion in how they adopt IFRS. Some firms may simply adopt a label, while others view the decision as a serious commitment to transparency. We hypothesize that the economic consequences depend on the extent to which IFRS adoptions represent a serious commitment to transparency. Our results support this prediction. We classify firms into “label” and “serious” adopters and analyze whether capital markets respond to differences in adoption quality, using proxies for market liquidity and the cost of capital. We find that the average effects of voluntary IFRS reporting on these proxies are generally modest, especially when compared to other forms of commitment such as cross-listing in the U.S. However, consistent with our predictions, we find that “serious” adopters experience significantly stronger effects on the cost of capital and market liquidity than label adopters.