Case

Applying IFRS in Germany – Determinants and Consequences

Joachim Gassen Wirtschaftswissenschaftliche Fakultät Humboldt-Universität zu Berlin 10099 Berlin, Germany Phone: +49(0)30-2093 5764 E-mail: gassen@wiwi.hu-berlin.de

Thorsten Sellhorn Fakultät für Wirtschaftswissenschaft Ruhr-Universität Bochum Universitätsstraße 150 44780 Bochum, Germany Phone: +49(0)234-32 28300 E-mail: sellhorn@iur.rub.de

First Version, June 2006 This Version, July 2006 Forthcoming in: Betriebswirtschaftliche Forschung und Praxis, 58 (4), 2006. We thank Karsten Detert for some of the data used in this study.

Applying IFRS in Germany – Determinants and Consequences

Abstract: We address three research questions motivated by the recent ascent of International Financial Reporting Standards (IFRS) in Europe. First, analyzing the determinants of voluntary IFRS adoption by publicly traded German firms during the period 19982004, we find that size, international exposure, dispersion of ownership, and recent IPOs are important drivers. Second, using the results from this determinant model to construct propensity score-matched samples of IFRS and German-GAAP (HGB) firms, we document significant differences in terms of earnings quality: IFRS firms have more persistent, less predictable and more conditionally conservative earnings. Third, analyzing information asymmetry differences between IFRS and HGB firms, we show that IFRS adopters experience a decline in bid-ask spread of 70 base points and an average of 17 more days with price changes per year. On the other hand, IFRS adopter’s stock prices seem to be more volatile. In the light of some important limitations of our study, we discuss IFRS-related research opportunities in post-2005 Europe. Keywords: IFRS, earnings quality, earnings attributes, information asymmetry, standard setting, IAS Regulation, Europe, propensity-score matching, voluntary adoption

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Introduction The European Commission’s ‘IAS Regulation’ (EC 2002)...