The Impact of Mandatory IFRS Adoption on IPOs in Global Capital Markets

Abstract

This study examines the impact of mandatory IFRS adoption on IPO underpricing and the relative amount of IPO capital raised in foreign markets. Using a difference-in-differences design, we find a decrease in IPO underpricing and an increase in the relative proceeds from foreign markets following mandatory IFRS adoption. We also find that mandatory IFRS adoption has a greater impact on IPO underpricing and relative foreign proceeds for firms in countries with a larger number of accounting changes, and this relation is more pronounced among firms in countries with stronger implementation credibility. In addition, we find that the decrease in underpricing associated with mandatory IFRS adoption holds for both domestic IPOs and global IPOs, and this effect is more pronounced for global IPOs than for domestic IPOs. Overall, our study contributes to the literature by documenting the impact of changes in financial accounting standards on IPO underpricing and capital market globalization.

A Review of the IFRS-Adoption Literature

“…In contrast to the preceding studies' focus on the effects of IFRS adoption on stock liquidity and cost of capital, Hong, Hung, and Lobo (2014) illuminate another capital market consequence by evaluating the effect of IFRS adoption on the underpricing of initial public offerings (IPOs). As IPO underpricing is at least partly caused by information asymmetry between informed and uninformed investors, IFRS adoption can help decrease IPO underpricing by decreasing information asymmetry.…”

Firms in Transition: A Review of the Venture Capital, IPO, and M&A Literature

“…Hong et al () examine the impact of mandatory IFRS adoption on underpricing and IPO capital raised. They use a difference‐in‐difference methodology, with the expectation that mandatory IFRS adoption will reduce information asymmetry, by enhancing both the comparability and quality of financial information.…”

“…Overall they find that underpricing and OCI follow a similar pattern year by year, and that owners issue fewer shares in years of high underpricing to offset the potential cost to them. Hong et al (2014) examine the impact of mandatory IFRS adoption on underpricing and IPO capital raised. They use a difference-in-difference methodology, with the expectation that mandatory IFRS adoption will reduce information asymmetry, by enhancing both the comparability and quality of financial information.…”

Discussion of ‘Unrealised earnings, dividends and reporting aggressiveness: an examination of firms’ behavior in the era of fair value accounting'

“…To increase dividend payouts, these firms manipulate both accounting and tax income, take on additional debt and cut their investments in research and development. The study by CG contributes to prior research in this area by providing new evidence for the impact of IFRS adoption on corporate financing decisions (Hail et al ., ; Hong et al ., ; Naranjo et al ., ; Frances et al ., ). It also joins an emerging literature that examines the costs of mandatory IFRS adoption.…”