Does Mandatory IFRS Adoption Facilitate Financial Market Integration?

• In Event: International Reporting and Financial Markets

Abstract

Financial market integration improves risk sharing and is posited to contribute to a lower cost of capital. Prior research contends accounting quality can hamper financial market integration. However, it has also been argued that accounting standards will have a bearing on financial market integration since it significantly impacts accounting quality. We evaluate this contention by focusing on the mandatory adoption of International Financial Reporting Standards (IFRS). We find IFRS adoption positively impacts financial market integration. This finding is robust across multiple measures of financial market integration. We also find these results to be pronounced in countries where there is significant distance in quality between IFRS and domestic accounting standards. We also find the impact of IFRS to be pronounced in countries with stringent legal enforcement in place. Overall, our study provides initial evidence on the role of accounting standards on financial market integration.

Authors

• Yan Li, National University of Singapore

• Dan S Dhaliwal, The University of Arizona

• Wen He, The University of New South Wales

• Raynolde Pereira, University of Missouri–Columbia