Why Do Firms Downlist? Evidence on the Costs of IFRS Compliance and Enforcement

Abstract

This paper investigates the role of costs associated with mandatory IFRS adoption and pertinent enforcement activities. We exploit an exogenous shock to the cost-benefit trade-offs associated with opting out of the EU-regulated market in Germany, and find that the costs of IFRS compliance and enforcement play an important role for firms’ decisions to downlist, i.e., to migrate from the regulated market to unregulated segments. We exploit two particular features of our setting, the availability of error findings established by the enforcement mechanism, and the observability of market and accounting data after firms downlisted. This enables us to identify a strong enforcement effect, which on many occasions appears to be the principal driver of firms’ decisions to opt out of the IFRS and enforcement mandate. Our findings shed light on the hitherto virtually unexplored costs of the EU’s IAS regulation. They raise concerns about potentially restrictive costs of applying and complying with IFRS, and suggest that self-selection issues need to be addressed when investigating economic effects of mandatory IFRS adoption.

Keywords: IFRS, enforcement, bonding, going dark, downlisting

JEL Classification: M48