Mandatory IFRS reporting and changes in enforcement

- Panel-data design together with novel data on other regulatory changes allows the identification and separation of liquidity effects around mandatory IFRS adoption.
- Liquidity benefits observed around IFRS adoption are limited to five EU countries with concurrent changes to the enforcement of financial reporting.
- Liquidity benefits are present not only for mandatory IFRS adopters but also for voluntary IFRS adopters in those countries, suggesting that the switch in standards is not the primary driver.
- No or little evidence for liquidity effects of switch to IFRS per se even when the existing legal and enforcement systems are strong.
- Changes to reporting enforcement are a likely explanation for the capital-market outcomes around IFRS adoption.

In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are concentrated in the European Union (EU) and limited to five EU countries that concurrently made substantive changes in reporting enforcement. There is little evidence of liquidity benefits in IFRS countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Thus, changes in reporting enforcement or (unobserved) factors associated with these changes play a critical role for the observed liquidity benefits after mandatory IFRS adoption. In contrast, the change in accounting standards seems to have had little effect on market liquidity.