Financial Accounting Information and Product Market Competition

• In Event: Product market competition and IFRS adoption
  In Paper Session: Product Mmarket Competition and IFRS Adoption

Abstract

This paper examines the impact of financial accounting information on product market competition. The endogenous relation between financial accounting information and competition is circumvented by exploiting an exogenous change in EU accounting regimes in 2005. We argue the effect of earnings opacity upon competition is driven through three channels recognized by Bushman and Smith (2001). We find that the IFRS-induced earnings opacity is negatively associated with industry-level competition. The results also suggest that the link between our measure of IFRS adoption and competition varies predictably with i) investor reliance on accounting information and ii) managers’ incentives to compete and innovate. Finally, we capitalize on a distinguishing characteristic of IFRS adopters vis-à-vis non-adopters to advance a firm-level hypothesis consistent with our industry-level tests. Results from this test not only support our industry-level analyses, but also provide evidence suggesting adopters benefit from IFRS through increased market share.

Authors

• Jimmy Downes, Oklahoma State University

• Vanessa Flagmeier, University of Graz

• David Godsell, Queen's University, Kingston