Economic consequences of IFRS convergence: evidence from phased manner implementation in India

doi:10.1108/jabs-10-2021-0414

Paper

Economic consequences of IFRS convergence: evidence from phased manner implementation in India

Published Feb 10, 2022 · Mani Bansal

Journal of Asia Business Studies

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11

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Abstract

Purpose This study is to examine the economic consequences of International Financial Reporting Standards (IFRS) converged standards by exploring its phased manner implementation in India. Design/methodology/approach The study measures the economic outcomes in the form of capital market reactions such as cost of equity capital, cost of debt capital, information asymmetry and market liquidity. Difference-in-difference (DiD) methodology has been used to analyze the data for this study. Findings Based on a sample of 2,685 Bombay Stock Exchange (BSE) listed firms, results show that the Indian capital market reacts negatively to the adoption of IFRS-converged standards. In particular, results show that the cost of equity capital, cost of debt capital and information asymmetry have been increased and market liquidity has been decreased for test firms relative to benchmark firms immediately after IFRS convergence and this negative effect is more pronounced among small firms than large firms. Subsequent tests suggest that test firms have better capital market reactions in the later year of implementation relative to benchmark firms that are implementing IFRS for the first time. It indicates the learning curve effect of IFRS on the economic outcomes as negative impact ameliorates over time. Originality/value The study is among earlier attempts to investigate the impact of IFRS on capital market reactions by exploring the phased manner implementation framework. The study is also among the pioneering attempts to examine the learning curve impact of IFRS on capital market reactions.

Study Snapshot

The Indian capital market initially reacts negatively to IFRS convergence, with increased costs of equity and debt capital, information asymmetry, and decreased market liquidity, but this negative impact improves over time.

PopulationOlder adults (50-71 years)

Sample size24

MethodsObservational

OutcomesBody Mass Index projections

ResultsSocial networks mitigate obesity in older groups.

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Economic consequences of IFRS convergence: evidence from phased manner implementation in India

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References

Impact of corporate life cycle on misclassification practices: evidence from IFRS adoption in India

Adoption of IFRS in India has increased expense shifting practices, negatively impacting accounting quality, with firms at high life cycle stages more likely to engage in revenue misclassification.

IFRS convergence and accounting quality: India a case study

Adopting IFRS-converged standards in India initially deteriorates accounting quality, but this improves over time.

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Adoption of high-quality standards does not guarantee higher accounting quality in countries with weak enforcement mechanisms.

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This paper identifies a research gap in understanding the relationship between IFRS enforcement and accounting quality, highlighting the need for further studies on the effectiveness of IFRS-related enforcement mechanisms.

Liquidity, earnings management, and stock expected returns

Increased stock liquidity in Chinese firms is associated with a decrease in earnings management and a positive relationship with future stock returns.

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IFRS adoption in South Korea has led to increased accounting quality and improved transparency in the country's capital markets and accounting environment.

The economic effects of IFRS adoption in Korea*

Korea's mandatory adoption of IFRS leads to improved earnings quality, increased value relevance, more accurate analysts' forecasts, and higher audit fees and hours.

Accrual management and expected stock returns in India

The Indian stock market is inefficient in incorporating accruals in expected stock returns, potentially leading to misallocation of capital.

Citations

IFRS convergence and accounting quality: A comparative analysis of global and Indian corporate

IFRS adoption generally improves accounting quality, but its impact varies across countries and regions, and sustained improvement in Indian corporates requires careful monitoring and overcoming implementation obstacles.

Unveiling the Influence of IFRS 17 Insurance Contracts on the Quality of Financial Reports: Insights from Finance Professionals

Implementing IFRS 17 Insurance Contracts significantly improves the quality of financial reports, enabling investors and decision-makers to make informed decisions.

The effect of IFRS convergence on risk disclosure: an investigation into the Indian accounting system

IFRS convergence in India has significantly improved corporate risk disclosure, leading to increased usage of risk-related words and sentences in reports, but also increased audit fees.

One-woman director mandate and earnings quality: role of financial expertise and woman presence on the audit committee

The mandate to appoint at least one woman director in Indian firms improves earnings quality, with financial expertise and the presence of a woman on the audit committee strengthening this positive impact.

Do IFRS convergence affects firm performance? Picturing Indian-listed manufacturing firms

IFRS convergence has not significantly improved firm performance for Indian-listed manufacturing firms, suggesting full adoption is more beneficial.