IFRS Adoption and Changes in Default Prediction Accuracy

• In Event: Economic Consequences of IFRS Adoption
  In Paper Session: Economic Consequences of IFRS Adoption I

Abstract

We examine whether IFRS adoption affects the predictive accuracy of default prediction models in 69 jurisdictions classified in four economy groups (Europe, Developed Asia-Pacific, North America, and Emerging Markets). Prior research finds that the accuracy of default prediction models is associated with financial reporting quality and market information environment. We hypothesize that to the extent that IFRS adoption leads to higher (lower) reporting quality and better (worse) market information environment, it will result in higher (lower) accuracy of default prediction. Our analysis indicates that IFRS adoption is associated with an improvement in default prediction accuracy for adopting companies in Europe and a decrease in default prediction accuracy for adopting companies in Asia-Pacific. IFRS do not seem to affect prediction accuracy for adopters in North America and Emerging Markets. Further analysis indicates that Asia-Pacific adopters have higher default prediction accuracy if they operate in countries with both low enforcement and large distance between IFRS and domestic GAAP, while adopters in Emerging Markets benefit from the standards if they operate in countries with large distance between IFRS and domestic GAAP and if they are voluntary adopters. Thus, for companies in the Asia-Pacific and Emerging Markets economy groups the improvement in the quality of accounting standards seems to matter more than the enforcement of the standards. Our study contributes to the literature on IFRS adoption and the incipient research examining default prediction in an international context.

Authors

• Elizabeth Gutierrez, Universidad de Chile

• Bai Hua, National University of Singapore

• Elisabeth Van Laere, National University of Singapore

• Maria Ivanova Vulcheva, Florida International University