IFRS adoption in Europe and investment-cash flow sensitivity: Outsider versus insider economies

Thomas Schleicher · Ahmed Tahoun · Martin Walker

110 citations0/0 files storedThe International Journal of Accounting

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Auditing, Earnings Management, Governance Corporate Finance and Governance Accounting Theory and Financial Reporting

Abstract

We examine the economic consequences of the mandatory adoption of IFRS in EU countries by showing which types of economies have the largest reduction in investment-cash flow sensitivity post-IFRS. We also examine whether the reduction in investment-cash flow sensitivity depends on firm size as well as economy type. We find that the investment-cash flow sensitivity of insider economies is higher than that of outsider economies pre-IFRS and that IFRS reduces the investment-cash flow sensitivity of insider economies more than that of outsider economies. Also, we find that small firms in insider economies have the highest sensitivity of investment to lagged cash flow pre-IFRS, and that they are no longer sensitive to lagged cash flow post-IFRS. Overall, our results suggest that IFRS adoption might have improved the functioning of capital markets in relation to small firms in insider economies.

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References

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2018How to measure capital investment efficiency: a literature synthesis 2010Have IFRS made a difference to intra-country financial reporting diversity?2015Do Improvements in the Information Environment Enhance Insiders’ Ability to Learn from Outsiders?2018A review of the current debate on the determinants and consequences of mandatory IFRS adoption 2017IFRS adoption challenges in developing economies: an Indian perspective

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