Is Accounting the ‘English’ Language of Business? The Role of Language in IFRS Adoption

• In Event: Financial Reporting Transparency

Abstract

This paper seeks to answer if a language barrier may impact a country’s choice to adopt IFRS. Specifically, can differences between a country’s national language and English, which is used in IFRSs, lessen the likelihood that a country chooses to adopt IFRS. Despite these language differences, if a country does decide to adopt, can these differences reduce the anticipated capital market benefits associated with adoption? We predict and find that as the differences between a country’s national language and English increase (i.e., the linguistic distance between a country’s national language and English), countries will be less likely to adopt IFRS. Our evidence suggests that a one-standard-deviation increase in linguistic distance translates into a 13.50-14.26% reduction in the likelihood of adopting IFRS. This result is robust to the inclusion of geographical, cultural, and historical colonial differences. When countries eventually do adopt, we then predict and find that increases in linguistic distance will significantly lessen improvements in accounting quality post-adoption, as compared to adopters whose national language is English. Our evidence also suggests that a one-standard deviation increase in a country’s linguistic distance score lessens the average increase in post-adoption accounting quality by 88.57%. In fact, we find evidence suggesting that a country with the average level of linguistic distance within our sample would witness a significant reduction in average accounting quality, post IFRS adoption. Our findings suggest that differences in language may act as a barrier to entering the globalized accounting framework.

Authors

• Emily Anne Shafron, University of Georgia

• Xinjiao Guan, National University of Singapore