Mandatory IFRS Adoption and Changes in Default Prediction Accuracy

Abstract

The study tests for changes in default prediction accuracy following the country-level switch to International Financial Reporting Standards (IFRS) in 20 European Union (EU) and nonEU jurisdictions. Using a default prediction model that combines both accounting and market inputs, we find that compared to a control group of non-adopters, IFRS adopters do not benefit from the international standards in terms of default prediction accuracy. Further cross-sectional analyses of companies from adopting jurisdictions in the post-adoption period show that voluntary adopters and companies domiciled in jurisdictions with large distances between their local GAAP and IFRS have higher default prediction accuracy. Higher enforcement is associated with higher default prediction accuracy in the EU and with lower default prediction accuracy in non-EU jurisdictions. The results add to the literature on the consequences of IFRS adoption and speak to the performance of default prediction models across jurisdictions, given a change in accounting regulation.

Keywords: IFRS, Default Prediction, Incentives, Enforcement

JEL Classification: M4, M41