For Better or for Worse? The Economic Consequences of Frequent Accounting Standard Changes

• In Event: Effects of Changes in Standards

Abstract

This paper sheds light on the short-term capital-market effects of changing or amending International Financial Reporting Standards (IFRS) in the period between 2005 and 2014. The dynamic nature of IFRS is an interesting, yet underexplored setting. Since 2005 the International Accounting Standards Board (IASB) has issued more than 100 changes in accounting standards; claiming to change accounting standards for the better, i.e. to improve transparency of financial reporting from the viewpoint of investors. But any change in the measurement system also makes it hard to understand why there is a change in key indicators – due to a change in fundamentals or due to technical reasons. We thus ask whether standard changes are always for the better, or – at least sometimes – for the worse. Based on an international sample of more than 35,000 firm-year observations from 39 countries, we show that the IASB is compliant with its mission to increase the usefulness of financial reports for capital market participants. Looking at the “content” of changes, we however also show that positive capital market effects (bid-ask-spreads, price impact and liquidity) mainly arise when disclosure rules are changed whereas changing definition or measurement sections in accounting standards might even increase short-term opacity. We also show that changing accounting standards may have adverse effects for firms closer to covenant violations. The paper further contributes to the literature by generating a comprehensive set of proxies for the type and significance of accounting standard changes and testing capital market responses to firms’ first-time-application of new and revised standards. It adds to the scarce literature on effects of (frequently) changing accounting standards.

Authors

• Melanie Demirtas, Frankfurt School of Finance & Management

• Joerg R. Werner, Frankfurt School of Finance & Management gGMBH