Capital Market Effects of Mandatory IFRS Reporting in the EU: Empirical Evidence

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Abstract
This report provides a review of the academic literature relevant to the mandatory adoption of IFRS reporting for member countries of the European Union in 2005 and an empirical analysis of the associated capital-market effects. In the empirical analysis, we focus on the effects on firms' costs of capital and market liquidity. More specifically, we analyze the effect of mandated IFRS reporting on the implied cost of equity capital, percentage bid-ask spreads, the price impact of trades and the frequency of zero-return days. The analysis provides a mixed picture for the capital-market effects of mandatory IFRS reporting in the EU. For the mandatory IFRS period, we find some evidence that the cost of capital is lower for all firms reporting under IFRS and for those that adopted IFRS for the first time in 2005 (relative to non-IFRS firms). The effects are small in magnitude and depend on the choice of benchmark sample. However, it is possible that the results are weakened by anticipation effects in markets ahead of IFRS adoption. The liquidity proxies provide stronger results that are robust across different benchmarks. In particular, the findings for the price impact of trades and for the frequency of zero-return days suggest improvements in market liquidity after IFRS reporting becomes mandatory. The results for the bid-ask spreads point in the same direction, but are weaker. The results for all three liquidity proxies become statistically significant when we introduce firm-fixed effects. However, we caution to attribute the observed effects solely or even primarily to the adoption of IFRS itself. Recently many EU countries have changed their enforcement (and governance) regimes, which could play an important role in our findings.