Network Effects in Countries’ Adoption of IFRS

Abstract

If the differences in accounting standards across countries reflect relatively stable institutional differences, why did several countries rapidly adopt IFRS in the 2003-2008 period? We test the hypothesis that perceived network benefits from the extant worldwide adoption of IFRS can explain part of countries’ shift away from local accounting standards. We find that perceived network benefits increase the degree of IFRS harmonization among countries and that smaller countries have a differentially higher response to these benefits. Further, economic ties with the European Union are a particularly important source of network effects. The results, robust to numerous alternative hypotheses and specifications, suggest IFRS adoption was self-reinforcing during the sample period, which, in turn, has implications for the consequences of IFRS adoption.

An older unpublished version of the paper is available at http://ssrn.com/abstract= 1590245.

Keywords: diffusion, IASB, IFRS, international trade, network effects

JEL Classification: M41, M44