There is No Evidence that Mandatory IFRS Adoption Significantly Decreased IPO Underpricing

A recently published study (Hong, Hung, and Lobo, The Accounting Review 2014) claims to show that, depending on the benchmark sample used, the 2005 mandatory adoption of IFRS is associated with a 38-82% reduction in IPO underpricing. We re-examine this result controlling for the concurrent adoption of the Prospectus Directive (PD), which mandated increased IPO prospectus disclosures, and the enforcement of these disclosures in the member states of the European Union (EU). First, we find that there is a significant data error in Hong et al.’s study that renders their reported results unreliable: approximately 30% of the treatment firms this study categorizes as mandatory IFRS adoptions are not, in fact, subject to a mandate to report in IFRS. These are firms admitted to trading on “exchange-regulated” markets in the EU that do not require IFRS. We use hand-collected prospectus data to identify the correct treatment sample. Our analysis shows that, for affected firms, there is a statistically significant decrease in IPO underpricing associated with adoption of the PD for firms based in countries that also concurrently enhanced accounting enforcement (see Christensen, Hail, and Leuz 2013), but there is no association between mandatory IFRS adoption and IPO underpricing. We also examine voluntary IFRS adoptions by firms admitted to trading on exchange-regulated markets after 2005. Overall we find no evidence that mandatory IFRS adoption resulted in very large economic gains for IPO firms. This study also provides a brief but comprehensive description of much of EU capital markets law.