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Are international accounting standards more credit relevant than domestic standards?

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  • Florou, Annita
  • Kosi, Urska
  • Pope, Peter F.

Abstract

We examine whether the credit relevance of financial statements, defined as the ability of accounting numbers to explain credit ratings, is higher after firms are required to report under International Financial Reporting Standards (IFRS). We find an improvement in credit relevance for firms in 17 countries after mandatory IFRS reporting is introduced in 2005; this increase is higher than that reported for a matched sample of US firms. The increase in credit relevance is particularly pronounced for higher risk speculative-grade issuers, where accounting information is predicted to be more important; and for IFRS adopters with large first-time reconciliations, where the impact of IFRS is expected to be greater. These tests provide reassurance that the overall enhancement in estimated credit relevance is driven by accounting changes related to IFRS adoption. Our results suggest that credit rating analysts’ views of economic fundamentals are more closely aligned with IFRS numbers, and that analysts anticipate at least some of the effects of the IFRS transition.

Suggested Citation

  • Florou, Annita & Kosi, Urska & Pope, Peter F., 2017. "Are international accounting standards more credit relevant than domestic standards?," LSE Research Online Documents on Economics 68202, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:68202
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    File URL: http://eprints.lse.ac.uk/68202/
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    Cited by:

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    3. Ann Jorissen & Ronita Ram & Pedro Moraya Barros, 2022. "Are IFRS Standards a ‘trusted’ language for private firm credit decisions? An analysis of country differences in users’ perspective," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 3021-3065, June.
    4. Vincent Tawiah & Ernest Gyapong, 2023. "International financial reporting standards, domestic debt finance and institutional quality: Evidence from developing countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2915-2936, July.
    5. Alshehabi, Ahmad & Georgiou, George & Ala, Alessandro S., 2021. "Country-specific drivers of the value relevance of goodwill impairment losses," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).
    6. Halabi, Hussein & Alshehabi, Ahmad & Wood, Geoffrey & Khan, Zaheer & Afrifa, Godfred, 2021. "The impact of international diversification on credit scores: Evidence from the UK," International Business Review, Elsevier, vol. 30(6).
    7. Akarsh Kainth & Ranik Raaen Wahlstrøm, 2021. "Do IFRS Promote Transparency? Evidence from the Bankruptcy Prediction of Privately Held Swedish and Norwegian Companies," JRFM, MDPI, vol. 14(3), pages 1-15, March.
    8. Mohammed Saeed Hassan & Adel M. Sarea & Gagan Kukreja, 2019. "Testing the Level of Compliance of International Accounting Standard IAS 38: Evidence from Bahrain," Accounting and Finance Research, Sciedu Press, vol. 8(3), pages 136-136, August.
    9. Xiao Li & Jeffrey Ng & Walid Saffar, 2021. "Financial Reporting and Trade Credit: Evidence from Mandatory IFRS Adoption," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 96-128, March.
    10. Kim, Jonghoon & 金, 鐘勲 & Koga, Yuya, 2020. "The Value and Credit Relevance of IFRS versus JGAAP Accounting Information," Hitotsubashi Journal of commerce and management, Hitotsubashi University, vol. 53(1), pages 31-48, February.
    11. Anantharaman, Divya & Henderson, Darren, 2021. "Contrasting the information demands of equity- and debt-holders: Evidence from pension liabilities," Journal of Accounting and Economics, Elsevier, vol. 71(2).

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    More about this item

    Keywords

    IFRS; debt markets; credit ratings; credit relevance;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K20 - Law and Economics - - Regulation and Business Law - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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