Toward IFRS: economic consequences of accounting convergence in an emerging economy

Abstract

Purpose – The purpose of this article is to investigate whether underlying firm-level incentives influence firms’ compliance with International Financial Reporting Standards (IFRS) convergence practices and whether this adoption impacts firms’ cost of equity capital and market liquidity in Brazil, a setting with a poor institutional environment but high growth opportunities.

Methodology/approach – Using a sample of 54 companies from the São Paulo Stock Exchange, this article employs three measures of accounting convergence based on: (i) compliance to a 37-item index, called the International Accounting Standards Convergence Index (IASCI), (ii) increase in annual reports disclosure, and (iii) increase in accounting earnings quality. Furthermore, the article employs statistical analysis to test the influence of firm-level incentives on IFRS compliance and its economic consequences for the capital market.

Findings – The results indicate that firm-level incentives are important drivers of compliance with IFRS convergence practices. The results suggest that firms that (i) are larger, (ii) are more exposed to international markets, and (iii) have greater financing needs are more likely to adopt IFRS practices by implementing material changes in their accounting policies. The economic consequence analysis shows that cost of capital does not seem to be related to any of the convergence measures used. However, there is a statistically significant relationship between all the market liquidity variables and the IASCI, indicating that companies that best meet the convergence requirements have lower trading costs and greater liquidity, and their share price is less susceptible to the influence of individual investors.

Research limitations and implications – The scope of the study is limited to a relatively small sample of listed Brazilian companies, and they may not represent all listed companies. The sample restriction is due to information availability, since the study requires earnings estimates from the Thomson ONE Analytics database.

Originality/value – The study extends the work of Barth (2008) considering Ball's (2006) observation that superior accounting standards do not necessarily translate into higher quality reporting, since reporting quality may be largely shaped not only by accounting standards, but also by economic/political forces and firm-level economic incentives.

Citation

Simmer de Lima, V., Augusto Sampaio Franco de Lima, G., Nelson Guedes de Carvalho, L. and Siqueira Lima, I. (2010), "Toward IFRS: economic consequences of accounting convergence in an emerging economy", Tsamenyi, M. and Uddin, S. (Ed.) Research in Accounting in Emerging Economies (Research in Accounting in Emerging Economies, Vol. 10), Emerald Group Publishing Limited, Leeds, pp. 251-295. https://doi.org/10.1108/S1479-3563(2010)0000010015