Adoption of international financial reporting standards and the cost of adverse selection

Abstract

This paper tests whether the adoption of International Financial Reporting Standards (IFRS) reduces the cost of adverse selection. We find that adverse selection costs fall only for firms that adopt IFRS before the mandated date. We also find that firms in countries with well-developed local reporting standards do not benefit from improved transparency as a result of IFRS adoption. We also find that IFRS adoption relies on strong local enforcement to have any significant impact on transparency. We conclude that IFRS adoption may be less effective if local standards are well-developed, or are poorly enforced.