Do adoptions of International Financial Reporting Standards enhance Capital Investment efficiency?

Abstract

We examine whether adoptions of International Financial Reporting Standards (IFRS) enhance capital investment efficiency, a purported benefit. Data for 10,340 adoptions across 26 countries during 2001-08 reveal mandatory IFRS adoptions, but not voluntary IFRS adoptions, to be significantly associated with enhanced capital investment efficiency measured by investment-cash flow sensitivity and value-enhancing risk taking. This association is stronger for countries with weaker legal and shareholder protections, more concentrated corporate ownership, whose prior reporting standards differ more from IFRS, and for selected industries. Our findings lend support to mandatory but not voluntary IFRS adoptions enhancing firm-level capital investment efficiency, a matter of importance to firm stakeholders, policy makers and regulators globally.