Peer Firms’ Reporting Incentives and Enhanced Overall Comparability

• In Event: International Accounting Research

Abstract

Using a sample of IPO firms from countries that mandated IFRS adoption in 2005, we compare the effect of “potentially comparable firms” (PCFs) on IPO underpricing for firms that went public after 2005 using IFRS with that of matched IPOs that went public prior to 2005 using domestic GAAP. We use industry peers reporting in the same accounting standards as a proxy for PCFs. While mandatory IFRS adoption enlarges the network of PCFs, we find that only those IFRS-reporting PCFs listed in jurisdictions with high-quality enforcement environments are associated with a reduction in IPO underpricing. That is, only peer firms with strong reporting incentives provide genuine comparability. Further, in the pre-2005 voluntary adoption setting, we find evidence consistent with peer firms’ reporting incentives also playing a key role in enhanced overall comparability under IFRS compared to domestic GAAP. Our results suggest that IFRS adoption can generate a positive externality of enhanced overall comparability, but only when coupled with high-quality enforcement (or strong firm-level reporting incentives among peer firms).

Authors

• Donal Byard, Baruch College -- CUNY

• Masako Darrough, CUNY-Baruch College

• Jangwon Suh, Long Island University