The adoption of common accounting standards generates both a precision effect and a network effect. When firms use common standards, investors can leverage their knowledge about the standards to process more financial reports. Embedding both effects into the economic framework of Baiman and Verrecchia (1995, 1996), we study the adoption's effects on reporting precision, firm value, and liquidity of both the switcher and the early adopter. The model helps address the identification challenge and reconcile some existing results in the empirical literature on IFRS adoption. It also generates implications for standardizing disclosure and accounting methods.
Bibliographical noteFunding Information:
We are grateful for comments from Michael Brennan, Tim Baldenius, Qi Chen, Hans Christensen, Phil Dybvig, Wayne Guay (the editor), Xi Li, Christian Leuz, Pierre Liang, Katherine Schipper, Luo Zuo, an anonymous referee, and workshop participants at Columbia, Duke, University of Minnesota, Southwest University of Finance and Economics, and Global Issues in Accounting Conference. We also thank Jinzhi Lu and Mengxia Xu for able research assistance. All errors are our own. We gratefully acknowledge financial support from the University of Chicago Booth School of Business, the PCL Faculty Scholarship, the Duke University Fuqua School of Business, the Center for Financial Excellence, and National Natural Science Foundation of China (project 71620107005 ?Research of Capital Market Trading System and Stability?).
- Firm value
- Information processing
- International Financial Reporting Standards (IFRS)
- Network effect
- Reporting quality