Rev Account Stud (2012) 17:518525

DOI 10.1007/s11142-012-9202-y

Why do firms rarely adopt IFRS voluntarily?

Academics find significant benefits and the costs appear
to be low
Hans B. Christensen

Published online: 6 July 2012

Springer Science+Business Media, LLC 2012

Abstract Kim and Shi (Rev Account Stud, doi:10.1007/s11142-012-9190-y, this

issue) document that voluntary IFRS adoption is associated with significant benefits
and argue that the effect is causala conclusion that is similar to many published
papers on IFRS adoption. Yet voluntary IFRS adopters constitute only a small
percentage of the global population of firms, which implies that either practitioners
behave irrationally or the benefits are incorrectly estimated by academics. In this
discussion I argue that the error is on the part of academics, not practitioners, and
that it is mainly due to the lack of exogenous variation in accounting standards. This
conclusion is based on inconsistencies between the estimated benefits and costs of
IFRS adoption, as well as the accounting standards choices of presumed rational
managers. I also propose a contracting explanation for the capital market benefits
around IFRS adoption in which managers behave rationally, but IFRS per se is not
the cause.
Keywords International accounting
International Accounting Standards (IAS)

International Financial Reporting Standards (IFRS)
JEL classification

G14
G15
G30
K22
M41
M47

1 Introduction
Kim and Shi (this issue) find that, on average, voluntary adoption of International
Financial Reporting Standards (IFRS) is associated with a 59 % increase in firmspecific information capitalized in stock prices. The finding that voluntary IFRS
H. B. Christensen (&)
Booth School of Business, University of Chicago, 5807 South Woodlawn Avenue,
Chicago, IL 60637, USA
e-mail: hans.christensen@chicagobooth.edu

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adoption is associated with significant improvements in the information environment is consistent with the majority of papers published in top accounting journals
on the consequences of IFRS adoption.1 Similar to Kim and Shi, many studies
implicitly or explicitly attribute improvements in the information environment
around IFRS adoption to the accounting standards. A review of the literature on the
economic consequences of IFRS adoption would thus likely conclude that IFRS
adoption leads to significant capital market benefits.2 Such a conclusion would be
premature, however, because it ignores contradictory empirical evidence. In
particular, such a conclusion ignores the fact that the overwhelming majority of
managers decide not to adopt IFRS when given a choice. This raises the question:
why do firms choose not to adopt IFRS voluntarily when the documented benefits
are large and the costs appear to be low? I attempt to answer this question through a
discussion of Kim and Shis arguments and evidence.
Over the past decade, the International Accounting Standards Board (IASB) has
had notable success in promoting the use of IFRS. The handful of firms that
employed IFRS in the mid-1990s has increased to many thousands as of 2011. This
remarkable progress was spurred by mandatory IFRS adoption in over 90 countries.3
Mandatory adoption of IFRS is often justified with reference to academic studies
that document capital market benefits around IFRS adoption. Today, even the
United States is considering mandatory IFRS adoption for listed companies (SEC
2008). Against this backdrop, studies on the economic consequences of IFRS
adoption are highly relevant, and Kim and Shi deserve credit for addressing a
question that is important to academics and policymakers alike. The policy
relevance of studies on the consequences of IFRS adoption warrants a strong
emphasis, however, on the caveats to the conclusions drawn.
Kim and Shi provide evidence based on a sample of firms from 34 countries that
adopted IFRS voluntarily over the seven-year period of 1998 through 2004. They use
stock price synchronicity as a (inverse) measure of firm-specific information in stock
prices and show that stock prices incorporate more firm-specific information for
voluntary IFRS adopters than local GAAP firms. Kim and Shi also document that
IFRS adoption is associated with the greatest reduction in synchronicity when analyst
following is low and institutions are weak. They draw three conclusions based on
their evidence: (1) IFRS improves the information environment by facilitating the
flow of firm-specific information into the market, (2) the synchronicity-reducing role
of IFRS is more pronounced when there is less competing information from analysts,
and (3) IFRS adoption can substitute for weak institutions.
1

See the literature review in Kim and Shi (this issue, p. 1) for capital market benefits documented upon
voluntary IFRS adoption. Notable exceptions that provide a more nuanced picture include Van Tendeloo
and Vanstraelen (2005), Daske (2006), and Daske et al. (2011). The evidence on mandatory IFRS
adoption is also mixed (for example, Daske et al. 2008), but in this discussion I focus on the consequences
of voluntary IFRS adoption.

See, for instance, the European Commissions evaluation of mandatory IFRS a few years after the
mandate (EU 2008, p. 7): Academics have started to analyse the impact of introduction of IFRS on
securities markets, but it is still too early to give conclusive results. However, preliminary studies indicate
that there is an overall reduction in the cost of capital for companies supplying IFRS accounts.

See iasplus.com.

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Why do firms rarely adopt IFRS voluntarily?

519

adoption is associated with significant improvements in the information environment is consistent with the majority of papers published in top accounting journals
on the consequences of IFRS adoption.1 Similar to Kim and Shi, many studies
implicitly or explicitly attribute improvements in the information environment
around IFRS adoption to the accounting standards. A review of the literature on the
economic consequences of IFRS adoption would thus likely conclude that IFRS
adoption leads to significant capital market benefits.2 Such a conclusion would be
premature, however, because it ignores contradictory empirical evidence. In
particular, such a conclusion ignores the fact that the overwhelming majority of
managers decide not to adopt IFRS when given a choice. This raises the question:
why do firms choose not to adopt IFRS voluntarily when the documented benefits
are large and the costs appear to be low? I attempt to answer this question through a
discussion of Kim and Shis arguments and evidence.
Over the past decade, the International Accounting Standards Board (IASB) has
had notable success in promoting the use of IFRS. The handful of firms that
employed IFRS in the mid-1990s has increased to many thousands as of 2011. This
remarkable progress was spurred by mandatory IFRS adoption in over 90 countries.3
Mandatory adoption of IFRS is often justified with reference to academic studies
that document capital market benefits around IFRS adoption. Today, even the
United States is considering mandatory IFRS adoption for listed companies (SEC
2008). Against this backdrop, studies on the economic consequences of IFRS
adoption are highly relevant, and Kim and Shi deserve credit for addressing a
question that is important to academics and policymakers alike. The policy
relevance of studies on the consequences of IFRS adoption warrants a strong
emphasis, however, on the caveats to the conclusions drawn.
Kim and Shi provide evidence based on a sample of firms from 34 countries that
adopted IFRS voluntarily over the seven-year period of 1998 through 2004. They use
stock price synchronicity as a (inverse) measure of firm-specific information in stock
prices and show that stock prices incorporate more firm-specific information for
voluntary IFRS adopters than local GAAP firms. Kim and Shi also document that
IFRS adoption is associated with the greatest reduction in synchronicity when analyst
following is low and institutions are weak. They draw three conclusions based on
their evidence: (1) IFRS improves the information environment by facilitating the
flow of firm-specific information into the market, (2) the synchronicity-reducing role
of IFRS is more pronounced when there is less competing information from analysts,
and (3) IFRS adoption can substitute for weak institutions.
1

See the literature review in Kim and Shi (this issue, p. 1) for capital market benefits documented upon
voluntary IFRS adoption. Notable exceptions that provide a more nuanced picture include Van Tendeloo
and Vanstraelen (2005), Daske (2006), and Daske et al. (2011). The evidence on mandatory IFRS
adoption is also mixed (for example, Daske et al. 2008), but in this discussion I focus on the consequences
of voluntary IFRS adoption.

See, for instance, the European Commissions evaluation of mandatory IFRS a few years after the
mandate (EU 2008, p. 7): Academics have started to analyse the impact of introduction of IFRS on
securities markets, but it is still too early to give conclusive results. However, preliminary studies indicate
that there is an overall reduction in the cost of capital for companies supplying IFRS accounts.

See iasplus.com.

123

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H. B. Christensen

I provide an alternative perspective on the evidence and interpretations that Kim

and Shi offer. In Sect. 2, I evaluate the main arguments and findings that Kim and
Shi rely on to draw their conclusions. I begin by arguing that the low global
frequency of voluntary IFRS adoption is inconsistent with a causal interpretation of
the large benefits documented around IFRS adoption. I then show that variation in
the net benefits of IFRS adoption estimated by Kim and Shi does not predict which
firms voluntarily adopt IFRS. This implies that either managers are irrational or the
benefits are incorrectly estimated. I argue that the latter is more likely. In Sect. 3,
I provide an alternative explanation for Kim and Shis results whereby managers
behave rationally but IFRS per se has little to no direct effect on firms information
environment. Essentially, a large proportion of voluntary IFRS adopters implemented the standards in order to list on new stock market segments that
contractually required IFRS compliance. The decision to list on the new segments
coincided with fundamental firm changes that improved the information environment, but IFRS was not the cause. This alternative explanation is closely related to
discussions in Christensen et al. (2008), Daske et al. (2011).

2 Main arguments and findings

Kim and Shis main finding is a reduction in stock price synchronicity around IFRS
adoptionthe estimated reduction is 59 % for a firm with no analyst following. The
decrease in synchronicity suggests that IFRS adoption facilitates the flow of firmspecific information into stock prices. As the most common argument for IFRS
adoption is increased disclosure quality, the results suggest significant benefits from
adopting IFRS. In this section, I evaluate this finding and discuss its implications.
Kim and Shi argue that the lower stock price synchronicity for voluntary IFRS
adopters is consistent with an improved information environment due to IFRS
adoption. Proponents of IFRS would find this evidence compelling since they argue
that a comprehensive capital-market oriented set of accounting standards improves
transparency over national accounting standards, which are often less extensive.
However, there is also the argument that accounting standards give significant
discretion to managers, and hence it is not clear that IFRS per se improves
disclosure quality (e.g., Ball et al. 2000, 2003; Burgstahler et al. 2006).
Although the significant benefits around IFRS adoption that Kim and Shi
document are consistent with most prior studies on the economic consequences of
IFRS adoption, they are inconsistent with the actions of practitioners. Consider the
frequencies of global IFRS adoption that Kim and Shi report in Table 1. The
descriptive statistics in Panel B indicate that very few firms voluntarily adopted
IFRS before 2000, and almost all of the voluntary adopters are headquartered in
member states of the European Union (EU). The European Commission outlined its
strategy to mandate IFRS (as of 2005) in June 2000, formally proposed it in
February 2001, and legally adopted the regulation in June 2002. Hence, in the EU
only IFRS adoption prior to 2000 can be considered truly voluntary; adoption after
2000 may represent early adoption of mandatory rules. The descriptive statistics that
Kim and Shi provide show that in 2000 only 5 % of the sample firms had adopted

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IFRS, and, by 2004, the year before mandatory IFRS adoption in the EU, this
frequency had grown to only 9 %.4 Thus truly voluntary IFRS adoption was rare
and even early adoption of mandatory IFRS appears somewhat uncommon in Kim
and Shis sample. Interpreted in an economic framework based on rationality, the
large benefits appear inconsistent with these low IFRS adoption frequencies.
One way to maintain the rationality assumption and justify the large benefits is to
argue that the costs of IFRS adoption offset the estimated benefits. Like most prior
papers, Kim and Shi only estimate the benefits of IFRS adoption, so the costs could
plausibly explain why firms rarely adopt IFRS voluntarily. However, while it is hard
to estimate the costs of IFRS adoption, several arguments suggest that they are
limited during the period that Kim and Shi consider. First, the standards in effect
during Kim and Shis sample period were developed by the International
Accounting Standard Committee (IASC). The IASC at its founding in 1973 had
members from nine countries with very different accounting traditions (for example,
France, United States, Germany, and Japan) and a three-quarter majority was
required to approve exposure drafts and final standards. Since country delegations
often defended their national accounting practices and some preferred the flexibility
of having optional accounting treatments, many standards issued by the IASC are
based on free choice (Zeff 2012). For instance, the standard on property, plant, and
equipment (IAS 16) allows discretion over the choice between historical cost and
fair value accounting, which reflects the German tradition of conservative asset
valuation and the UK tradition of revaluing assets. Second, the IASC, and later
IASB, has followed what can be characterized as a principle-based approach to
standard settings. As a result, IFRS include far fewer bright-line rules than US
accounting standards. Compare, for instance, the US standard for leasing from 1976
(FASB 13) to the IFRS standard on leasing issued in 1982 (IAS 17). While the US
standard has a number of bright-line thresholds, the IFRS standard includes only
principles and a series of examples. The question is how costly it is to adopt
accounting standards that rely heavily on discretion and principles. I argue that the
costs are likely low.
Low costs of adopting IFRS questions whether we can interpret the large benefits
estimated by Kim and Shi as a causal effect of the accounting standards. However,
so far I have merely presented anecdotes and arguments, which are debatable. As
empirical evidence, I again turn to Kim and Shis descriptive statistics in Table 1.
Regardless of the average cost of adopting IFRS, it is straightforward to argue that
the costs of IFRS adoption increase in the extent to which compliance with the
accounting standards is enforced. It is generally inexpensive to claim compliance
with rules that are not enforcedin particular, if application of the rules requires
substantial judgment as under the early IFRS standards (Ball 2006; Daske et al.
2011). Thus, in Table 1, we should observe that firms located in low enforcement
4

The IFRS adoption frequencies reported by Kim and Shi in Table 1 are most likely biased upward
compared with the adoption frequencies in the population of firms. The upward bias occurs because large
firms are more likely to voluntarily adopt IFRS (see Table 4) and more likely to be covered by the
databases that Kim and Shi use. Hence, Worldscope data, which is also biased towards large firms and
therefore IFRS adopters, suggest that less than 3 % of the Worldscope universe of firms had adopted IFRS
voluntarily by 2000.

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H. B. Christensen

countries adopt IFRS more frequently than firms located in high enforcement
countries. Table 1, panel A, shows exactly the opposite, however: 69 % of all
voluntary adopters are located in Germany or Switzerland, which arguably have
stronger enforcement than Thailand, Mexico, Brazil, and India, where no sample
firm adopted IFRS voluntarily (e.g., La Porta et al. 1997).
What makes the lack of voluntary adoption in weak enforcement countries even
more surprising is Kim and Shis finding that the benefits of IFRS adoption are
greatest in countries with weak institutions, including enforcement of accounting
standards. The higher benefits and lower costs jointly predict that firms residing in
countries with weak institutions should voluntarily adopt IFRS more frequently than
firms residing in countries with strong institutions. Since we observe exactly the
opposite in Table 1, managers must behave irrationally if the estimated benefits are
correct.
Aside from the inconsistencies between the estimated benefits of IFRS and the
observed frequencies of voluntary IFRS adoption, the finding that IFRS can
substitute for institutions designed to enforce compliance with IFRS is fundamentally different from how scholars have generally thought about the interaction
between rules and enforcement (see Djankov et al. 2003; Shleifer 2005). The
literature generally argues and finds that enforcement is critical to the effect of
regulation. How is the argument for IFRS adoption any different?
Overall, the discussion above suggests that either managers behave irrationally or
IFRS adoption per se does not explain the benefits that Kim and Shi estimate. I
consider the latter more likely than the former, and I next present an alternative
explanation for Kim and Shis results.

3 Alternative explanation for capital market benefits around IFRS adoption

The discussion in Sect. 2 implies that the improvements in the information
environment around IFRS adoption that Kim and Shi estimate are unlikely to be
caused by IFRS adoption. Yet Kim and Shis findings are consistent with most
published papers on the economic consequences of IFRS adoption, so it would be
imprudent to dismiss them as spurious. In this section I offer an alternative
explanation for the finding that voluntary IFRS adoption is associated with capital
market benefits where managers make rational accounting standards choices. For
brevity, I only present one alternative explanation but a detailed examination of the
institutional settings in countries where voluntary IFRS adoption occurs would
likely reveal other similar examples. The alternative explanation is based in part on
the arguments and findings in Daske et al. (2011).
Recall that Table 1 shows that 69 % of the voluntary adopters are located in
Germany or Switzerland. In 2000, when IFRS adoption in Europe was still truly
voluntary, 73 % of the voluntary adopters were headquartered in Germany or
Switzerland.5 The most likely reason for the relatively high number of voluntary
adopters in these countries is the creation of stock market segments that required the
5

I thank the authors for providing this statistic.

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adoption of International Accounting Standards.6 The new market segments focused

on growth firms and were particularly strong in Germany and Switzerland due to
regulation that allowed compliance with International Accounting Standards instead
of local GAAP (Leuz 2003). The largest new segment, Neuer Markt at Frankfurt
Stock Exchange, was established in 1997, which coincides with the increase in
voluntary IFRS adoption starting in 1998 reported by Kim and Shi (see their
footnote 6). Because the adoption of International Accounting Standards was one of
several contractual requirements to be listed on the new segments, if the costs of
adopting IFRS were sufficiently low, managers considering listing their firms on the
new segments could rationally adopt IFRS absent any capital market benefits of
IFRS per se. Thus contracting may explain why some firms adopted IFRS
voluntarily.
Contracting can also explain the capital market benefits around IFRS adoption
because the decision to contract is not random. Managers have the greatest incentive
to reconsider their listing decisions when their firms require external capital.
Consistent with this argument, voluntary IFRS adoption is associated with reliance
on external capital, cross-listings, and connections to banks (e.g., Leuz and
Verrecchia 2000; Ashbaugh 2001; Tarca 2004; Cuijpers and Buijink 2005; Gassen
and Sellhorn 2006; Christensen et al. 2008). In this context, a firm could experience
a fundamental change (for example, a shock to growth opportunities) that motivates
efforts to obtain external capital. The need for external capital, in turn, increases the
benefits to listing on the new segments. To the extent that the fundamental change
also positively affects the information environment (for example, reduces stock
price synchronicity), the researcher will observe benefits around IFRS adoption,
even though these benefits are not caused by IFRS adoption per se. Thus, in this
setting, managers of firms that do not experience a fundamental change rationally
stick to local GAAP even if the costs of IFRS adoption are relatively low.
Kim and Shi acknowledge the endogeneity problem and employ two empirical
methods to overcome it: propensity score matching and a Heckman-type two-stage
treatment effect approach. Propensity score matching controls for cross-sectional
differences in observed variables and hence does not alleviate the concern that
voluntary IFRS adoption could coincide with fundamental but unobservable
changes to the adopting firm. Second, the Heckman approach ideally relies on at
least one valid instrument (see Francis et al. 2010). Unfortunately, valid instruments
are difficult to identify in this setting, and the instruments that Kim and Shi exploit,
namely, foreign sales and growth, are unlikely to meet the exclusion restriction.
That is, foreign sales and growth likely correlate with constructs such as growth
opportunities, which could affect stock price synchronicity.
Finally, stock price synchronicity may not be the ideal outcome variable if the
objective is to identify a causal effect of IFRS adoption. Although it is
straightforward to argue that IFRS could affect the quality of annual, and perhaps
6

Among the new market segments that required the adoption of international standards (IFRS/USGAAP) were Neuer Markt and SWX [see Leuz (2003) for details]. In addition to these market segments, a
number of European stock market indices included only firms that complied with IFRS. For simplicity I
focus on the stock market segments in my discussion, but the arguments logically extend to most
contracting explanations for adopting IFRS voluntarily.

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interim, reports, it is less clear why annual reports should affect stock price
synchronicity. Kim and Shi measure stock price synchronicity weekly over the year,
but annual reports are disclosed, by definition, only once a year. It is unclear why
infrequent disclosures should affect information flow throughout the year. Indeed,
improvements in the flow of information into stock prices throughout the year are
likely to be more consistent with a fundamental change to the firm than a causal
effect of reports disclosed annually.7

4 Summary and implications

Kim and Shi (this issue) present evidence that voluntary IFRS adoption is associated
with a decrease in stock price synchronicity. They interpret the results as IFRS
adoption facilitating the flow of firm-specific information into stock prices and
improving firms information environment. Their evidence is important from both
an academic and a policy perspective.
My central argument is that the large improvements to firms information
environment that Kim and Shi document around voluntary IFRS adoption, although
consistent with prior research, appears inconsistent with the low frequency of
voluntary IFRS adoption globally. Assuming that managers are rational, the benefits
of IFRS adoption must be substantially smaller than what academics generally have
estimated them to be. I reason that endogeneity bias likely explains some of the
capital market changes around voluntary IFRS adoption.
Estimating a causal effect of new accounting standards is an ambitious task, and
it is inevitable that results and their interpretation will be questioned. However,
given the policy relevance of research in this area, I encourage more evidence on the
consequences of IFRS adoption. One of the central questions that remain largely
unanswered is: what are the costs of adopting IFRS? Most research has focused on
estimating benefits of IFRS adoption. Given that firms revealed preferences suggest
that most resist IFRS adoption, it follows that the costs must be significant or that
the benefits are small.
Acknowledgments Author would like to appreciate helpful discussions with Ryan Ball, Ulf
Bruggemann, Christian Leuz, Valeri V. Nikolaev, and Stephen A. Zeff.

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