There is No Evidence that Mandatory IFRS Adoption Significantly Decreased IPO Underpricing

Abstract

A recently published study (Hong, Hung, and Lobo, The Accounting Review 2014) claims to show that, depending on the benchmark sample used, the 2005 mandatory adoption of IFRS is associated with a 38-82% reduction in IPO underpricing. We re-examine this result controlling for the concurrent adoption of the Prospectus Directive (PD), which mandated increased IPO prospectus disclosures, and the enforcement of these disclosures in the member states of the European Union (EU). First, we find that there is a significant data error in Hong et al.’s study that renders their reported results unreliable: approximately 30% of the treatment firms this study categorizes as mandatory IFRS adoptions are not, in fact, subject to a mandate to report in IFRS. These are firms admitted to trading on “exchange-regulated” markets in the EU that do not require IFRS. We use hand-collected prospectus data to identify the correct treatment sample. Our analysis shows that, for affected firms, there is a statistically significant decrease in IPO underpricing associated with adoption of the PD for firms based in countries that also concurrently enhanced accounting enforcement (see Christensen, Hail, and Leuz 2013), but there is no association between mandatory IFRS adoption and IPO underpricing. We also examine voluntary IFRS adoptions by firms admitted to trading on exchange-regulated markets after 2005. Overall we find no evidence that mandatory IFRS adoption resulted in very large economic gains for IPO firms. This study also provides a brief but comprehensive description of much of EU capital markets law.

The Vanishing Role of IFRS Application on the Performance of Saudi Arabian IPO Companies

“…This research adds to IPO-IFRS literature by offering the first verifiable research of the advantages of the IFRS on the quality of IPO businesses' accounting information in developing nations. The results that IFRS standards have no long-term impact on long-term performance might support the existing studies that IFRS do not aid new IPO enterprises (Dorsman et al 2010;Byard et al 2019). If all emerging economies were like this, more than half of IFRS implementers wouldn't need to embrace it.…”

The combined impact of IFRS mandatory adoption and institutional quality on the IPO companies’ underpricing

“…Firth and Gounopoulos (2017) find that IFRS increases IPO underpricing in Australia, while Maglio et al (2018) observe no influence of IFRS in Italy. Byard et al (2019) recently cast doubt on the empirical evidence obtained by Hong et al (2014), stating that if such an outcome is extended to emerging economies, there is no economic reason to implement IFRS. Emerging countries have been urged by accountants and scholars in the accounting disclosure literature to forego national accounting standards in favor of IFRS' superior standards.…”

“…The IPO market’s information asymmetry drives this phenomenon (Habib and Ljungqvist, 2001; Ritter and Welch, 2002; Alanazi and Al-Zoubi, 2015; Boulton et al , 2017; Chen et al , 2017; Utamaningsih, 2017). Researchers claim that underpricing is a sensible reward provided by issuing companies to investors to decrease uncertainty due to the likelihood of information asymmetry (Boulanouar et al , 2016; Byard et al , 2019). Despite the extensive disclosure requirements for IPOs, previous studies demonstrate that the IPO discount is mostly due to the information asymmetry between market players (Kennedy et al , 2006; Warganegara and Indriastari, 2009; Jamaani and Alidarous, 2019; Lee et al , 2020).…”