Do Adoptions of International Financial Reporting Standards Enhance Capital Investment Efficiency?

Abstract

We examine whether adoptions of International Financial Reporting Standards (IFRS) enhance capital investment efficiency, a purported benefit. Data for 10,340 adoptions across 26 countries during 2001-08 reveal mandatory but not voluntary IFRS adoptions to be significantly associated with enhanced capital investment efficiency measured by investment-cash flow sensitivity and value-enhancing risk taking. In contrast to prior findings for capital market effects of IFRS adoptions, associations between mandatory IFRS adoptions and capital investment efficiency are stronger in countries with weaker legal protections, more concentrated ownership, and prior reporting standards that differ more from IFRS. Combined, these findings lend support to mandatory but not voluntary IFRS adoptions serving to enhance firm-level capital investment efficiency, particularly in countries with weaker investor protections.