ABSTRACT
The adoption of international accounting standards, namely the IFRS, at the country level has sparked two contrasting, but not mutually exclusive, viewpoints. One view is that IFRS engenders better reporting standards, and uniform adoption allows for greater comparability. The upshot is that IFRS adoption will improve a firm's information environment and hence contribute toward a lower cost of capital. The alternative view is that disclosure quality is shaped by political and economic forces, and hence higher-quality accounting standards will not necessarily translate into higher-quality reporting. We empirically evaluate these arguments on IFRS adoption using both private and public-traded firm observations from Kenya, a developing country with relatively open capital markets but limited enforcement resources. Our analysis takes advantage of a unique dataset involving firm-specific measurements of IFRS compliance. We find that while both private and public firms are required to adhere to IFRS, public, rather than private firms, exhibit greater IFRS compliance. Highlighting the influence of capital market openness, we find that foreign ownership is positively and significantly correlated with IFRS compliance. Probing the underlying causal relationship, additional analysis suggests that greater foreign ownership leads to greater IFRS compliance. Examining the effects of IFRS compliance, higher compliance is positively associated with share turnover. Overall, our evidence illustrates both the importance of economic incentives in shaping IFRS compliance and the capital market benefits to being compliant with IFRS in a low enforcement country.
JEL Classifications: M41; M44; M47; G15; G38.
