Factors affecting the adoption of IFRS.
Shima, Kim M. ; Yang, David C.
I. INTRODUCTION
Based on a broad compilation of prior theoretical reasoning and
empirical research, Choi and Meek (2008, CM) developed a model of
accounting system development to explain observed differences in
financial reporting worldwide. In CM's framework, eight factors in
a country's environment are believed to have a significant
influence on the differences found in accounting systems: major source
of finance; legal systems; taxation; political and economic ties;
inflation; economic development; education; and culture. International
Financial Reporting Standards (IFRS) have been touted as high quality
accounting standards that will enhance the value of accounting
information across international borders. Over 100 countries now require
or allow IFRS for domestic reporting (1). In light of the increasing
popularity of IFRS, we attempt to identify how the set of factors in
CM's comprehensive framework plays into the decision.
Our sample consists of 73 countries based on survey of listing
requirements from the period 2000 to 2007, supplemented and
cross-checked with data from IASB and the World Bank Report on Country
Observations of Standards and Codes (ROSC). Variables are constructed
using data collected from the World Bank and other publicly available
sources. These variables are then empirically tested in a general
adoption model using random-effects logit regressions. Alternative
specifications, including the addition of EU countries, and other
analysis are discussed in robust section.
Section II provides a background of IFRS and accounting system
development literature. Section III develops hypotheses and Section IV
details the methodology and variable constructs. Section V discusses the
results and robustness checks. Finally, Section VI concludes the paper.
II. BACKGROUND
A. IFRS Development
Diversity in accounting systems has significant economic
consequences for the interpretation of financial reporting on an
international level (e.g., Choi et al., 1983; Choi and Levich, 1991;
Lainez and Callao, 2000; Bushman and Smith, 2001). As a result,
international accounting and securities organizations initiated a
process to promote the harmonization of accounting standards as a means
to improve financial transparency and comparability. Efforts by the
International Accounting Standards Committee (IASC, predecessor of the
IASB), the International Organization of Securities Commissions (IOSCO),
and other worldwide accounting bodies have led to the development of
International Accounting Standards, now described as the International
Financial Reporting Standards (IFRS). The adoption of IFRS has increased
since the first set of core standards was completed in 1998, most
notably by Australia and members of the European Union in 2005. However,
there are some notable exceptions to this trend, such as the United
States and Japan. It is not fully clear why there remain some prominent
countries that have been reluctant to adopt.
Arguments in support of IFRS emphasize the potential benefits such
as increased investor confidence and reduced reporting costs for
international cross-listed firms (2). Thus, the prospect of a
comparative advantage from higher liquidity and lower cost of capital
may influence national policy setters to adopt internationally
recognized accounting standards (e.g., Leuz and Verrecchia, 2000; Daske
et al. 2008). Some studies using firm-level data find an increase in
investment allocation (Yu, 2009), others find no effect (Beneish et al.,
2009) and still others finding only an effect conditional on certain
factors (Florou and Pope, 2009; DeFond et al., 2011). Adoption of common
accounting standards may enhance business relations between countries by
lowering information processing and monitoring costs and increasing the
linkages within communication networks (e.g., Meeks and Swann, 2009;
Hail et al., 2010). Similarly, improvements in financial disclosure
and/or comparability may lead to greater international capital mobility
and cross-border investment (e.g., Young and Guenther, 2003; Bradshaw et
al., 2004; Aggarwal et al., 2005; Covrig et al., 2007). Finally,
countries without resources to develop rigorous domestic accounting
standards may "borrow" international accounting standards as a
signaling mechanism to attract foreign capital.
On the other hand, there are compelling reasons why countries may
not adopt internationally based standards. Accounting systems develop
organically within countries in response to unique environmental
conditions. As a result, standardization may not produce financial
reports that are relevant for all nations because it may obscure those
underlying differences in the environment (e.g., Choi and Levich, 1991;
Alford et al., 1993; Nobes and Parker, 1995). For example, code law
countries are associated with insider oriented systems, i.e. higher
ownership concentration and lower investor protection, (e.g., La Porta
et al., 1998; Nobes et al., 1998), and have accounting standards that
are more dissimilar to IFRS than common law countries (Ding et al.
2007). Although external considerations may motivate a change in
financial reporting (e.g., Ding et al., 2005), transition costs may not
be trivial (Hail et al., 2010). Countries with weaker investor
protection may "bond" to more comparable and comprehensive
reporting standards (Hope et al., 2006), yet concerns over weaker
enforcement mechanisms may dampen investor interest (Armstrong et al.,
2010). In the end, overall reporting practices may still differ due to
the persistence of those differences and the interdependencies between
reporting rules and institutional structures (Leuz, 2010). Thus, the
cost-benefit analysis for changing a reporting regime is tempered by
environmental factors. In our paper, we hope to shed light on how those
environmental factors play into this decision.
B. International Accounting System Development
Factors influencing international accounting system development
have been investigated by accounting researchers since the 1960's
(Mueller 1967). It is important to understand how environmental factors
shape accounting reporting and disclosure standards in order to predict
the progress towards harmonization efforts. Some factors such as culture
change very little over time and thus may hinder these efforts (Doupnik
and Salter, 1995), while other variables such as economic ties are more
dynamic due globalization. The adoption of international accounting
standards provides a new venue where these factors may be linked with
accounting development. The next section will discuss these factors and
develop hypotheses for the general adoption model.
III. HYPOTHESIS
A prediction model for adoption of IFRS is developed that is
derived from CM's eight factors influencing accounting system
development.
A. Major Sources of Finance
1. Equity finance
Equity financing is an important element in the development of
accounting systems. Strong equity systems are normally dominated by
outsiders who do not have a privileged relationship with the company
(Nobes, 1998). Agency theory (Jensen and Meckling, 1976) suggests that
as the relationship between businesses and providers of capital becomes
more distant, information asymmetries between contracting parties
increase, which stimulates the demand for more financial disclosures. In
countries where equity financing is dominant, accounting takes on a more
capital market orientation and higher levels of disclosure patterns are
observed (e.g. Salter and Niswander, 1995; Salter, 1998). Moreover,
Adhikari and Tondkar's (1992) study of international stock
exchanges found capital market size to be singularly significant in
explaining the extensiveness of disclosure requirements.
However, the process of formulating international standards
requires compromises, especially on allowable methods. Countries with
well-developed stock markets, such as the United States, generally have
accounting standards considered to be more advanced and may be reluctant
to adopt alternative ones if the proposed standards are not considered
as rigorous as their own (Ramanna et al., 2009). Countries with less
advanced capital markets may be more inclined to adopt internationally
recognized standards in an effort to signal their intentions to attract
foreign capital. An early study of developing countries found that both
capital market development and economic growth were negatively related
to IAS adoption (Larson and Kenny, 1995), and similarly in the Asian
Pacific region (Guan and Lau, 2004). In contrast, other studies show a
higher voluntary use of international standards, i.e. IAS or US GAAP, in
exchange listed firms (e.g., El-Gazzar et al., 1999; Tarca, 2004), and
in those with better access to capital markets (Hope et al., 2006).
Consistent with earlier country-level studies, we expect a negative
relation between equity financing and adoption.
H1a: Greater reliance on equity financing will negatively affect
the likelihood of adoption of IFRS.
2. Foreign debt finance
Adoption of IFRS has been linked with equity market benefits, i.e.
lower cost of capital and increased liquidity (e.g., Leuz and
Verrecchia, 2000; Sengupta, 1998), and may be beneficial for foreign
debt financing as well. Accounting practice where bank financing is
dominant is more focused on creditor protection (Doupnik and Salter,
1995). Information is communicated more efficiently through private
channels, reducing the need for public disclosures. However, private
information gathering may be more difficult across national boundaries
and foreign debt financing may benefit from greater financial disclosure
through the use of IFRS.
H1b: Countries whose companies use higher amounts of foreign
sourced debt financing will be more likely to adopt IFRS.
B. Legal Systems
La Porta et al. (1997, 1998) observed a direct relationship between
the legal system, level of investor protection and capital market
development. More importantly, legal systems have been directly
associated with disclosure practices (Doupnik and Salter, 1995; Jaggi
and Low, 2000) and variations in reporting incentives and earnings
properties (Ball et al. 2000). IFRS adoption may translate into market
benefits only where there are greater incentives for better disclosure
(Daske et al., 2008; Li, 2009). In common law countries, information
asymmetry is likely to be resolved by timely and greater public
disclosures to shareholders ("shareholder model"), whereas
communication in code law countries is more likely to be conducted more
privately between major political groups ("stakeholder
model"). As a result, accounting standards in common law countries
may be similar to IFRS, thus making adoption of IFRS easier and more
enforceable.
H2: Countries with common law legal systems will have a higher
likelihood of adoption of IFRS than code law countries.
C. Taxation
Taxation has been asserted to influence accounting system
development. Governments that have greater control over managing the
resources of a country, i.e., macro-economies, tend to become major
players in shaping reporting standards (Alnajjar, 1986; Doupnik and
Salter, 1993; Xiao et al., 2004). Greater government oversight of a
nation's resources and economic goals is linked with financial
accounting rules whose primary purpose is oriented toward satisfying
regulatory needs, such as taxation and compliance issues, rather than
information needs of investors. Financial and tax reporting conformity
has been associated with a decrease in value relevance of accounting
earnings (Ali and Hwang, 2000), and a decrease in capital mobility
(Young and Guenther, 2003). Adoption of IFRS can increase costs to
modify current tax enforcement systems by altering current tax
calculations and financial reporting (Hail et al., 2010). Therefore, it
is predicted that as the importance of corporate taxation increases, the
likelihood that countries will adopt IFRS will decrease.
H3: Countries where corporate taxation is more important for
central government financing will have a lower likelihood of adoption of
IFRS.
D. Political and Economic Ties
1. Colonialism
Accounting traditions can be transferred to other countries because
of historical political and social ties, such as through colonialism
(Nobes, 1988; Gernon and Meek, 2001). For example, Great Britain
exported both its accounting system and its accountants to its former
colonies. It has been observed that many countries outside Europe may
have inherited their accounting systems through this route (Nobes,
1998). Similarly, studies of developing countries in the Asian-Pacific
region found evidence of the influence of colonization as well as free
market forces on accounting practice (Yang and Lee, 1994; Craig and
Diga, 1996; Xiao et al., 2004).
Historic political and social ties of colonialism are expected to
affect a country's decision to adopt IFRS. The former colonies of
the United Kingdom may have developed similar accounting standards to UK
GAAP, which had a strong influence on the development of IFRS (Joshi,
1998). Historically, the United Kingdom has had prominent membership
position in the IASB and has made substantial contributions to the
standard setting process (Carlson, 1997).
H4a: Countries that were former colonies of the United Kingdom will
be more likely to adopt IFRS.
2. Trade alliances
International organizations whose principal objectives are to
create greater economic gains through mutual trade and investment have
increased with the formation of such groups as the European Union (EU)
and others. Membership in these groups creates incentives to minimize
differences between members to facilitate cross-border contracting. For
example, extending credit across borders involves financial analysis,
which is more easily done if accounting rules are familiar. Although
politically, socially and culturally diverse, countries within ASEAN
have reporting standards that are more harmonized than other neighboring
countries (Craig and Diga, 1996; Saudagaran and Diga, 2000). Regional
trade organization membership also fosters compliance with international
standards (El-Gazzar et al., 1999; Ramanna et al., 2009). Thus, the fact
that a trading partner has adopted IFRS may prompt a country to enact
similar requirements.
H4b: Countries whose major trading partners have adopted IFRS will
have an increased likelihood of adoption of IFRS themselves.
E. Inflation
Inflation presents a challenge to standard setters, especially in
countries with high or hyper-inflationary economies. IAS 29 requires a
restatement of non-monetary items based on a change in the general price
level index at the balance sheet date. However, IFRS may not allow
sufficiently suitable alternative reporting methods as compared to local
GAAP. Many South American countries with historically high inflation
have been reluctant to adopt, e.g., Brazil, Argentina, and Chile.
Inflation is an accepted part of doing business in these regions, and as
a result standard setters in these economies have adapted by setting up
more complex rules and regulations (Choi and Meek, 2008). For example,
Brazil has required the preparation of multiple financial statements
using different reporting requirements (Doupnik et al., 1995).
Therefore, higher inflation levels are expected to decrease likelihood
of adoption.
H5: Countries with higher inflation levels will have a decreased
likelihood of adoption of IFRS.
F. Economic Development
As business transactions become more numerous and complex, the
process of recording and reporting these transactions will necessarily
become more sophisticated as well (Choi and Meek, 2008). However,
empirical evidence on the relation between accounting and economic
development has been mixed. There is some evidence of a positive
relation between disclosure requirements and GNP (Cooke and Wallace,
1990) and GNP growth (Belkaoui, 1995) in developed countries. Rajan and
Zingales (1998) found that the growth rate of industries with a greater
reliance on external financing was significantly higher in countries
with more public disclosures. Salter (1998) summarized this relation by
observing that economic development positively impacts disclosure
regulation, and when combined with enforcement produces greater
financial disclosure.
On the other hand, a study by Adhikari and Tondkar (1992) found no
association between economic development and the disclosure requirements
of international stock markets. Additionally, Larson and Kenny's
(1995) study of developing countries showed a relatively small negative
relation between economic growth and IAS adoption. A possible
explanation is that economies with limited internal resources may use
IFRS adoption as a signaling mechanism to attract foreign capital to
generate growth. Therefore, level of economic development is expected to
influence IFRS adoption, but the direction will be determined by the
empirical results.
H6: A country's level of economic development will influence
the decision to adopt IFRS, but the direction is unsigned.
G. Education
A more highly educated population will require more sophisticated
accounting systems to meet its information needs. As accounting
standards and practices become more complex, the ability to apply and
interpret those standards and practices will depend on the educational
level of the population (Choi and Meek, 2008). Countries with less
sophisticated educational systems may find the transition to IFRS more
costly to implement compared to other countries with better education
systems. Therefore, education should be positively related to adoption.
H7: Countries with a more highly educated population will be more
likely to adopt IFRS.
H. Culture
A country's environment influences societal (cultural) values
and norms, which are then internalized to shape that society's
various institutions (Hofstede, 1980, 1984). Although the construct of
culture has been empirically tested in many forms, including religion,
language, and patterns of human behavior (e.g., Frank, 1979; Stulz and
Williamson, 2003), Hofstede's cultural dimensions have been the
most ubiquitous. Empirical evidence of culture's influence on
accounting system development has been mixed, with marketplace and
institutional variables surpassing culture in explaining extant
disclosure practice (Zarzeski, 1996; Jaggi and Low, 2000).
Uncertainty avoidance (UA) may be the most relevant of
Hofstede's cultural values to explain the choice to adopt IFRS.
Societies that operate with high UA tend to prefer systems that are
relatively more secretive, i.e., certain, and take on a more
conservative approach to measurement in order to manage risks.
Contracting parties in high UA environments resolve information
asymmetries by exchanging information privately, and financial
disclosures tend to be lower (e.g., Gray, 1988; Salter, 1998). Gray
(1988) formally introduced the construct of culture into theoretical
accounting models by linking Hofstede's cultural values with
accounting values. Salter and Niswander (1989) empirically tested
Gray's model and found that societies with low UA were less likely
to have accounting systems that were dictated by prescriptive legal
requirements, yet more open in reporting practice (financial disclosure
driven by marketplace rather than by rigid accounting rules). It follows
that countries with low UA may be more attracted to IFRS for similar
reasons. IFRS have been described as more "principle based"
rather than "rules based", and proponents claim IFRS creates
more efficient markets by making financial reporting that is more
transparent and easily comparable (e.g., Zarb, 2006). Therefore, the
relationship between adoption of IFRS and UA is expected to be negative.
H8: Countries with lower levels of uncertainty avoidance will be
more likely to adopt IFRS.
A general prediction model incorporating these hypotheses is
presented in the next section with definition of variable constructs.
IV. METHODOLOGY
A. Data and Descriptive Statistics
Panel A of Table 1 summarizes the sample selection. An initial
sample of 129 countries and territories for IFRS adoption was obtained
from a Deloitte Touche Tohmatsu survey supplemented and cross-checked
with data from the World Bank Report on Observations of Standards and
Codes (ROSC) and IASB website for the years 2000-2007. The sample was
subsequently reduced due to EU membership and limitations on data
availability, resulting in a final sample consisting of 527 observations
from 73 countries (3). EU membership mandates adoption of IFRS by
countries regardless of environmental factors that may predict
otherwise. The number of observations is most limited for the measure
for culture (UA), where sample size is only 47 countries.
IFRS adoption, the dependent variable, was measured by an ordinal
scale from zero to two. At the minimum, zero indicates that IFRS is not
permitted for domestic financial reporting. Countries with a score of
one allow the use of IFRS or require it for some domestically listed
companies (6). At the maximum, a score of two indicates that IFRS are
required for all listed companies. See Table 1 Panel B for a summary of
the statistics by region, with country designation by the World Bank.
The rate of IFRS adoption for the entire sample is over 56%. These
statistics demonstrate that although IFRS has gained acceptance
globally, there are still large areas, particularly North America and
Asia, which retain local GAAP for domestic listing requirements.
To examine the relationship between IFRS adoption and country-level
sources of finance, market capitalization data for prior years was
obtained from World Development Indicators (WDI, World Bank) to measure
equity sourced financing, EQUITY. To measure foreign sourced debt
financing, DEBT, data from WDI and World Factbook (CIA.gov website) was
obtained on the amount of total public and private debt owed to
nonresidents. (7) Each of these variables was scaled by GDP.
Legal system, LEGAL, was measured by an indicator variable equal to
unity if the legal system was based on a common law system, zero
otherwise. Data for legal system was obtained from World Factbook.
The relative importance of taxation has been measured using a
variety of constructs in prior studies. Similar to Salter and Niswander
(1995), this study measured the importance of taxation, TAX, as the
highest marginal corporate tax rate in prior year, obtained from PwC
Corporate Tax Worldwide Summaries and WDI.
The political and economic ties construct was based on two
variables: UKCOL, an indicator variable equal to unity if the country
was a former colony of the United Kingdom (source: Encyclopedia: British
Empire, Nationmaster.com website); and ONE, an indicator variable equal
to unity if a major trading partner, top import or export partner, has
adopted IFRS in prior year (World Factbook).
Inflation, INFLAT, is measured as the average inflation rate of
consumer prices estimated for the previous ten year period. Data was
obtained from WDI and the International Financial Statistics Yearbook
(International Monetary Fund).
The level of economic development construct was measured by two
variables: GROWTH, the average annual growth of GDP; and CAPFOR, the
average gross capital formation as a percentage of GDP (both obtained
from the World Development Report, World Bank). Both measures are an
average rate for the previous ten years period.
The country's education level, LIT, was measured as the adult
literacy rate, average of men and women aged 15 years of age and above,
for prior year (WDI).
Lastly, the measure of culture, UA, is the country or regional
score for uncertainty avoidance (Hofstede, 2001).
Summary statistics for the independent variables are presented in
Table 2. Results of group mean testing reveals significant differences
in six of the factors. IFRS adoption was significantly lower in
countries where TAX and INFLAT were higher. While IFRS adoption was
higher in former UK colonies (UKCOL), had at least one trading partner
using IFRS (ONE), and growing (CAPFOR). IFRS adoption was also more
prevalent in countries that were less educated (LIT). While these
univariate results were mostly in line with our expectations, regression
analysis will shed more light on these findings.
The correlation matrix presented in Table 3 indicates that most
variables have the predicted sign with the dependent variable, IFRS.
Three of the thirteen measures are significantly and positively
correlated with IFRS: political and economic ties variables as measured
by UKCOL and ONE, and economic development as measured by CAPFOR.
Relative importance of tax, inflation and education, as measured by TAX,
INFLAT and LIT, were significantly negatively related to IFRS. Most are
significant at the .1% level.
B. Regression Model
Based on the previous discussion, the final prediction model is
presented below.
[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]
where Z is the ordinal response of country i in year t to IFRS
adoption.
The extremely high correlation between LEGAL and UKCOL (r
[approximately equal to] .769, p < .001 and VIF score of 7.19 and
6.37, respectively) precluded including both variables in the same
regression. Although both exhibited positive coefficients, and UKCOL was
chosen for inclusion in the analyses based on its higher significance
level. Similarly, separate regressions were run without the measure of
culture (UA) due to the significant correlation with other variables and
the reduced sample size. (8)
V. RESULTS
A. Panel Analysis: Random Effects Logit Results
Table 4 presents results of logit random-effects regressions
testing variations of the basic prediction model. Hausman testing with
fixed effects regression of the full model indicated that random effects
can be appropriately used for analysis. Year indicator variables were
added to the full and reduced model to control for possible temporal
autocorrelation of the residuals. The year variables were increasingly
positive and significant at the 1% level beginning in 2004, which is an
indication of the growing popularity of IFRS. The regression results
showed that most coefficients had the predicted sign, with the exception
of UA. Although the univariate results indicated a negative relation
between UA and IFRS adoption, the multivariate results may be as a
result of the high correlation of UA with other variables. Overall,
results indicate that all variables were significant at least at the 5%
level in most of the models.
The factor measuring equity source of finance (EQUITY) was
consistently negatively related to IFRS adoption and significant at
least at the 5% level in all models. Similarly, measures of the
importance of taxation and inflation, TAX and INFLAT, were negatively
related to IFRS adoption and significant in most models. The negative
coefficients for these variables may reflect a concern by standard
setters for internal issues that hinder adoption, such as political
costs involved with negation between interest groups or reservations
policy makers have about the standards and potential conversion costs.
The political and social ties variable, UKCOL, indicates that
adoption is significantly increased if a country was a former UK colony.
Similarly, a country having at least one top import or export partner
that has adopted IFRS (ONE) is associated with greater likelihood of
adoption. Higher levels of foreign sourced debt were positively related
to adoption. These results may suggest that political and economic
relations with other countries, i.e., "globalization", provide
a strong incentive for country policy setters to adopt IFRS.
GNP average growth over the previous ten year period (GROWTH), a
proxy for economic development, was moderately related to IFRS adoption.
These results are in contrast to earlier studies by Larson et al. (1995)
and Guan et al. (2004) that show a negative relation with adoption and
may be an indication of the popularity of IFRS. Similarly, average
capital formation (CAPFOR) moderately increased the likelihood of
adoption. Considering both, these results suggest that countries whose
economies are expanding and increasing capital are more willing to adopt
IFRS. This observation is consistent with the findings for foreign debt,
DEBT, which emphasizes the draw of foreign capital as a major
"selling point" for IFRS. Finally, a more highly educated
population, LIT, is associated with a higher likelihood of adoption.
B. Robustness Checks
In this section, the previous findings are subjected to various
robustness checks. First, regressions were re-run including EU countries
(9) and presented in Table 5. Results reveal that although signage is
predominately similar to the previous results, only DEBT, TAX, UKCOL and
INFLAT remain significant. These results may reflect the success of the
EU in their efforts to harmonize accounting policy to the exclusion of
all other environmental factors.
Next, 2SLS was used to control for possible endogeniety of LEGAL,
using UKCOL as the exogenous variable with similar results. A Hausman
test of the coefficients confirms that regular regressions are
sufficient for our tests. Regressions were also rerun using a binary
dependent variable, where one indicates that the country allows or
requires the use of IFRS and zero otherwise, and a truncated model
eliminating outliers at the 5% level show similar signage but an overall
drop in significance levels (results untabulated).
Alternative proxies for some constructs were tested. Regressions
substituting lnGDP for average GDP growth (GROWTH) found a significantly
negative association with IFRS adoption. These findings may not
necessarily be a contradiction of the previous results, but rather a
confirmation of the neoclassical prediction of an inverse relation
between level of economic development and rate of growth (10). A
variable indicating whether the country came into existence since 1990
(NEW) was not significant (results untabulated).
The relative importance of taxation was alternatively proxied by
two variables. The first was a variable based on the proportion of tax
revenues to GDP. The other, Ali and Hwang's (2000) measure based on
financial and tax alignment developed by Alford et al. (1993). The
results confirmed a negative but less significant relation with IFRS
adoption (results untabulated).
Finally, it is not totally clear why a negative relation exits
between the relative importance of equity financing (EQUITY) and IFRS
adoption. To further investigate, the sample was separated into terciles
based on relative size of equity markets with the results of ordered
logit regressions reported in Table 6. The results indicate that the
previous findings are driven by countries with smaller equity markets
adopting IFRS, and to a lesser extent countries with larger capital
markets not adopting IFRS. This supports the argument that smaller
countries may be using IFRS adoption as a signal to global markets that
their financial reporting may provide more open financial disclosure,
while large capital market countries are more hesitant.
VI. CONCLUSION
Prior comparative accounting literature focused on explaining the
differences found in accounting development using variables found in the
environment. Choi and Meek (2008) suggested that eight factors based on
differences found in a country's economic, historical,
institutional and cultural background can be used to explain the these
differences. The choice by countries to adopt IFRS creates a natural
experiment to test these environmental variables that are linked with
accounting development and explain why some countries choose to adopt
while others have not.
In this study, CM's model proved fairly descriptive, with all
eight factors statistically significant in most of the models: source of
finance (equity and foreign debt financing); taxation; legal system;
political and economic ties (colonialism and trade alliances);
inflation; economic development, education and culture. Specifically,
the variables measuring equity sourced financing (EQUITY), the
importance of taxation (TAX) and inflation (INFLAT) were shown to be
negative and significant in relation to the adoption of IFRS. The
political and social ties variables for colonization by the UK (UKCOL)
and the presence of the top import or export partner that has adopted
IFRS (ONE) were positive and significant in relation to the adoption of
IFRS. Additionally, variables measuring the relative level of
foreign-sourced debt financing (DEBT), the growth rate of the economy
(GROWTH), and the gross capital formation (CAPFOR) positively influenced
adoption. Finally, a common law legal system (LEGAL), literacy (LIT) and
uncertainty avoidance (UA) were shown to have a positive and significant
relation to IFRS adoption. Although the variable measuring culture (UA)
was negatively correlated with IFRS adoption in univariate analysis,
multicollinearity with other independent variables may explain the
positive relation in multivariate results.
The negative relation between IFRS adoption and importance of
equity financing, as measured by the relative size of equity markets
(EQUITY), may have been surprising given that IFRS were intended to
benefit capital market participants. Additional analysis finds that
these results were mainly driven by countries with smaller capital
markets adopting IFRS and to a smaller extent the hesitancy of some
countries with larger capital markets to forgo their national standards
in place of IFRS.
This study's findings reveal three themes influencing the
decision for adoption of IFRS. First, the worldwide trend in
"globalization" has produced contracting incentives for
countries to consider. Memberships in certain international trade
organizations, like the EU, and increased trade with IFRS countries
promote adoption as a means to foster easier cross border information
and capital flows. Similarly, colonial ties to the United Kingdom, whose
own accounting practices were influential to IFRS development, may
lessen transition costs for adoption. Negotiations of foreign-sourced
debt contract may be more easily facilitated using an internationally
recognized accounting standard such as IFRS.
Second, the need for foreign investment and financing creates
"signaling" incentives for countries to adopt IFRS. Countries
with growing economies may willingly adopt international standards in an
effort to make financial reporting of higher quality. In an effort to
attract foreign capital, these countries may anticipate that adopting
international standards will bring greater inflows of investment and
international loans.
Lastly, there are some environmental dimensions that hinder
adoption. Factors that concern more domestic issues, such as the greater
importance of taxation, may increase the political costs and
transitional costs of adoption. Similarly, countries with higher levels
of inflation and larger capital markets are more hesitant to adopt IFRS,
which may relate to concerns about replacing existing standards. The
contribution of CM's model is that it identifies those motivational
factors that force national accounting policy makers to adopt IFRS,
while also highlighting national concerns that should be addressed
before transitioning to IFRS. While we limit this paper to CM's
model, future research may include alternative models and revisiting
these results as the IASB continues their efforts at formulating and
revising IFRS.
REFERENCES
Adhikari, A., and R. Tondkar, 1992, "Environmental Factors
Influencing Accounting Disclosure Requirements of Global Stock
Exchanges," Journal of International Financial Management and
Accounting 4 (2): 75-105.
Aggarwal, R., L. Klapper, and P. Wysocki, 2005, "Portfolio
Preferences of Foreign Institutional Investors," Journal of Banking
& Finance 29: 2919-2946.
Alnajjar, F., 1986, "Standardization in Accounting Practice: A
Comparative International Study," International Journal of
Accounting (Spring): 161-176.
Alford, A., J. Jones, R. Leftwich, and M. Zmijewski, 1993,
"The Relative Informativeness of Accounting Disclosures in
Different Countries," Journal of Accounting Research 31
(Supplement): 183-223.
Ali, A., and L. Hwang, 2000, "Country-Specific Factors Related
to Financial Reporting and the Value Relevance of Accounting Data,"
Journal of Accounting Research 38 (1) (Spring): 1-21.
Armstrong, C., M. Barth, A. Jagolinzer, and E. Riedl,
2010,"Market Reaction to the Adoption of IFRS in Europe," The
Accounting Review 85: 31-61.
Ball, R., S. Kothari, and A. Robin, 2000, "The Effects of
International Institutional Factors on Properties of Accounting
Earnings," Journal of Accounting and Economics 29: 1-51.
Belkaoui, A., 1995, "Accounting Information Adequacy and
Macroeconomic Determinants of Economic Growth: Cross-country
Evidence," Advances in International Accounting 8: 87-97.
Beneish, M., B. Miller, and T. Yohn, "The Effect of IFRS
Adoption on Cross-Border Investment in Equity and Debt Markets,"
(May 11, 2009). Available at SSRN: http://ssrn.com/abstract=1403451.
Bradshaw, M., B. Bushee, and G. Miller, 2004, "Accounting
Choice, Home Bias, and U.S. Investment in Non-U.S. Firms," Journal
of Accounting Research 42 (5): 795-841.
Bushman, R., and A. Smith, 2001, "Financial Accounting
Information and Corporate Governance," Journal of Accounting and
Economics 32: 237-333.
Carlson, P., 1997, "Advancing the Harmonization of
International Accounting Standards: Exploring the Alternative
Path," The International Journal of Accounting 32 (3): 357-378.
Central Intelligence Agency (CIA). The Word Factbook 2000-2007.
Available at http://www.cia.gov.
Choi, F., S. Nam, H. Hino, J. Ujiie, S. Min, and A. Stonehill,
1983, "Analyzing Foreign Financial Statements: The Use and Misuse
of International Ratio Analysis," Journal of International Business
Studies (Spring/Summer): 113-131.
Choi, F., and R. Levich, 1991, "Behavioral Effects of
International Accounting Diversity," Accounting Horizons 5 (2):
1-13.
Choi, F., and R. Levich, 1991, "International Accounting
Diversity: Does it Affect Market Participants?" Financial Analysts
Journal (July/August): 73-82.
Choi, F., and G. Meek, 2008, International Accounting, 6th ed.
Upper Saddle River, NJ: Pearson Education Inc.
Cooke, T., and R. Wallace, 1990, "Financial Disclosure
Regulation and Its Environment: A Review and Further Analysis,"
Journal of Accounting and Public Policy 9: 79-110.
Covrig, V., M. DeFond, and M. Hung, 2007, "Home Bias, Foreign
Mutual Fund Holdings, and the Voluntary Adoption of International
Accounting Standards," Journal of Accounting Research. 45 (1):
41-70.
Craig, R., and J. Diga, 1996, "Financial Reporting Regulation
in ASEAN: Features and Prospects," The International Journal of
Accounting 31 (2): 239-259.
Daske, H., Hail, L.C. Leuz, and R. Verdi, 2008, "Mandatory
IFRS Reporting Around the World: Early Evidence on the Economic
Consequences," Journal of Accounting Research 46 (5): 1085-1142.
DeFond, M., X. Hu, M. Hung and S. Li, "The Impact of IFRS
Adoption on US Mutual Fund Ownership: The Role of Comparability,"
(January 2011). Available at SSRN: http://ssrn.com/abstract=1473889.
Ding, Y., T. Jeanjean, and H. Stolowy, 2005, "Why do National
GAAP Differ from IAS? The role of culture," The International
Journal of Accounting 40 (4): 325-350.
Deloitte Touche Tohmatsu, 2002-2007, IFRS in Your Pocket, Current
survey available at http://www.iasplus.com, older versions provided at
request.
Doupnik, T., and S. Salter, 1993, "An Empirical Test of a
Judgmental International Classification of Financial Reporting
Practices," Journal of International Business Studies 24 (1):
41-60.
Doupnik, T., and S. Salter, 1995, "External Environment,
Culture, and Accounting Practice: A Preliminary Test of a General Model
of International Accounting Development," The International Journal
of Accounting 30: 189-207.
El-Gazzar, S., P. Finn, and R. Jacob, 1999, "An Empirical
Investigation of Multinational Firms Compliance with International
Accounting Standards," The International Journal of Accounting 34
(2): 239-248.
Florou, A. and P. Pope, "Mandatory IFRS Adoption and Investor
Asset Allocation Decisions," (March 2009) Available at SSRN:
http://ssrn.com/abstract=1362564.
Frank, W., 1979, "An Empirical Analysis of International
Accounting Principles," Journal of Accounting Research. 17 (2)
(Autumn): 593-605.
Gernon, H., and G. Meek, 2001, Accounting: An International
Perspective, 5th ed. Boston, MA: McGraw-Hill.
Gray, S., 1988, "Towards a Theory of Cultural Influence on the
Development of Accounting Systems Internationally," ABACUS 24
(March): 1-15.
Guan, L., and A. Lau, 2004, "An Empirical Evaluation of
Environmental Factors Influencing the Adoption of IAS in Asian-Pacific
Countries," Journal of Business, Industry and Economics 4 (Fall):
61-83.
Hail, L., C. Leuz, and P. Wysocki, 2010, "Global Accounting
Convergences and the Potential Adoption of IFRS by the U.S. (Part I):
Conceptual Underpinnings and Economic Analysis," Accounting
Horizons 24(3): 355-394.
Hofstede, G., 1980, Culture's Consequences: International
Differences in Work-Related Values. Beverly Hills, CA: Sage.
Hofstede, G., 1984, Cultures Consequences: International
differences in work related values. Beverly Hills, CA: Sage.
Hofstede, G., 2001, Culture's Consequences, 2nd edition,
Thousand Oaks, CA: Sage.
Hope, O-K., J. Jin, and T. Kang, 2006, "Empirical Evidence on
Jurisdictions that Adopt IFRS," Journal of International Accounting
Research, 5(2): 1-20.
International Monetary Fund, International Financial Statistics
Yearbook 200-2007. Washington, D.C. International Monetary Fund
Jaggi, B., and P. Low, 2000, "Impact of Culture, Market
Forces, and Legal System on Financial Disclosures," The
International Journal of Accounting 35 (4): 495-519.
Jensen, M. and W. Meckling, 1976, "Theory of the Firm:
Managerial Behavior, Agency Costs and Ownership structure," Journal
of Financial Economics 3 (October): 305-360
Joshi, P., 1998, "Empirical Research on the International
Harmonization of Accounting Standards and Practices: Survey
Findings," Journal of Financial Management and Analysis 11 (2):
44-62.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny,
1997, "Legal Determinants of External Finance," The Journal of
Finance: 52 (3): 1131-1150.
La Porta, R., F. Lopez-de-Silanes, A. Shleifer, and R. Vishny,
1998, "Law and Finance," Journal of Political Economy 106 (6):
1113-1155.
Lainez, J., and S. Callao, 2000, "The Effect of Accounting
Diversity on International Financial Analysis: Empirical Evidence,"
The International Journal of Accounting 35 (1): 65-83.
Larson R., and S. Kenny, 1995, "An Empirical Analysis of
International Accounting Standards, Equity markets and Economic Growth
in Developing Countries," Journal of International Financial
Management and Accounting 6:2 (Summer): 130-157.
Leuz, C., and R. Verrecchia, 2000, "The Economic Consequences
of Increased Disclosure," Journal of Accounting Research 28
(Supplement): 91-124.
Leuz, C., 2010, "Different approaches to corporate reporting
regulation: how jurisdictions differ and why," Accounting and
Business Research, 40 (3) International Accounting Policy Forum:
229-256.
Li, S, 2009, "Does Mandatory Adoption of International
Financial Reporting Standards in the European Union Reduce the Cost of
Equity Capital?" Working paper, Santa Clara University
Meek, Gary, and S. Gray, 1989, "Globalization of Stock Markets
and Foreign Listing Requirements: Voluntary Disclosures by Continental
European Companies Listed on the London Stock Exchange," Journal of
International Business Studies 20 (2): 315-336.
Meeks, Geoff, and G.M. Swann, "Accounting Standards and
Economics of Standards," Accounting and Business Research 39:
191-210.
Mueller, G, 1967, International Accounting, New York, NY:
Macmillan.
Nationmaster, May 2005, Encyclopedia: British Empire. Available at
http://www.nationmaster.com/encyclopedia/British-Empire.
Nobes, C., and R. Parker, 1995, Comparative International
Accounting, 4th ed. Oxford, UK: Phillip Allan/St. Martin's Press.
Nobes, C., 1998, Towards a General Model of the Reasons for
International Differences in Financial Reporting. ABACUS 34 (2):
162-187.
PricewaterhouseCoopers, 2000-2007, Corporate Taxes Worldwide
Summaries, Hoboken, NJ: John Wiley & Sons, Inc.
Ramanna, K. and E. Sletten, "Why do Countries adopt
International Financial Reporting Standards?" Harvard Business
School Accounting and Management Unit Working Paper No. 09-102, revised
June 14, 2009
Rajan, R., and L. Zingales, 1998, "Financial Dependence and
Growth," The American Economic Review (June): 559-586.
Salter, S., and F. Niswander, 1995, "Cultural Influence on the
Development of Accounting Systems Internationally: A test of Gray's
[1988] Theory," Journal of International Business 26 (2): 379-397.
Salter, S., 1998, "Corporate Financial Disclosure in Emerging
Markets: Does Economic Development Matter?" The International
Journal of Accounting 33 (2): 211-234.
Saudagaran, S., and J. Diga, 2000, "The Institutional
Environment of Financial Reporting Regulation in ASEAN," The
International Journal of Accounting 35 (1): 1-26.
Sengupta, P., 1998, "Corporate Disclosure Quality and the Cost
of Debt," Accounting Review 73(4): 459-475.
Solow, R.M., 1956, "A Contribution to the Theory of Economic
Growth," Quarterly Journal of Economics 70: 65-94.
Stulz, R. and R. Williamson, 2003, "Culture, Openness, and
Finance," Journal of Financial Economics 70: 313-349.
Tarca, A., 2004, "International Convergence of Accounting
Practices: Choosing between IAS and US GAAP," Journal of
International Financial Management and Accounting 15(1): 60-91.
World Bank, World Development Report 2000-2007 Washington, DC:
International Bank for Reconstruction and Development/World Bank and
Oxford University Press.
World Bank, Report on Country Observations of Standards and Codes
(ROSC) 2000-2007. Washington D.C.: International Bank for Reconstruction
and Development/ World Bank.
Xiao, J., P. Weetman, and M. Sun, 2004, "Political Influence
and Coexistence of a Uniform Accounting System and Accounting Standards:
Recent development in China," ABACUS 40 (2): 193-218.
Yang, D., and C. Lee, 1994, "An Empirical Analysis of
Pan-Pacific Accounting Practices in the 1970s," Advances in
International Accounting 6: 133-145.
Young, D., and D. Guenther, 2003, "Financial Reporting
Environments and International Capital Mobility," Journal of
Accounting Research 41 (3): 553-579.
Yu, Gowoon, 2009, "Accounting Standards and International
Portfolio Holdings: Analysis of Cross-border Holdings Following
Mandatory Adoption of IFRS," Available at SSRN:
http://ssrn.com/abstracts = 1430589.
Zarb, B.J., 2006, "The Quest for Transparency in Financial
Reporting," CPA Journal 76(9): 30-33.
Zarzeski, M., 1996, "Spontaneous Harmonization Effects of
Culture and Market Forces on Accounting Disclosure Practices,"
Accounting Horizons 10 (1): 18-37.
ENDNOTES
(1.) Deloitte Touche Tohmatsu survey, IFRS in Your Pocket.
(2.) Testimony of Sir David Tweedie before the US Senate Committee
on Banking, Housing and Urban Affairs, February 14, 2002.
(3.) Inclusion of EU countries is included in robustness section
with similar but less significant results.
(4.) Missing observations for: Albania; Armenia; Georgia; Mali;
Moldova; Romania; Switzerland; Turkey; UAE; and Yugoslavia.
(5.) As designated by the World Bank.
(6.) Scores for countries that "allowed the use of IFRS"
were combined with those for countries that "required it for some
listed companies" for brevity. In sample of 73 countries, two
countries were originally coded as "required for some" for at
least some of the years. Regression using original coding resulted in
similar patterns and p-values for significant variables, but slightly
lower adjusted [R.sup.2] values.
(7.) Data on external obligations of private debtors that are not
guaranteed for repayment by a public entity was available for 421
observations. Models substituting this measure became unstable for
analysis. The proxy variable using combined public and private debt,
although it is admittedly a nosier measure, was available for a larger
sample of countries and therefore was used for analysis. The correlation
between external private debt and combined debt is 5.27%.
(8.) The two factors may not be unrelated since it is likely that
many institutions, including legal systems and accounting systems, may
be transferred through colonization. Factor analysis indicated a single
factor can explain both, with less than 15% uniqueness in explanatory
power. Similarly, uncertainty avoidance (UA) exhibited only 50%
uniqueness.
(9.) Regression using change in IFRS adoption was also tested.
However, due to the small number of changes outside of EU, results were
similar but at greater loss of significance and stability of the
regression.
(10.) Neo-classical growth model (Solow 1956) assumes diminishing
returns to capital and labor where economies converge to steady-state
growth, i.e., less developed economies show a higher growth rate
compared to more developed economies.
(11.) Data Availability: Data used in this study are available from
public sources.
(12.) This paper benefited from the comments from participants at
the 2010 meeting of 11th World Congress of the International Association
for Accounting Education and Research and reviewers. We also thank Paul
Pacter Director of Standards for Small and Medium-Sized Entities (SMEs)
at the International Accounting Standards Board and Director in the
Global IFRS office of Deloitte Touche and Tohmatsu for providing access
to IFRS adoption data.
(13.) IFRS Requirements for domestic listing for sample counties:
Not Permitted Permitted or
Required for Some
Albania, Argentina, Bolivia,
Brazil, Canada, Chile, Botswana,China,
Colombia, Cote El Salvador, Israel,
D'Ivoire, India Myanmar (Burma),
Indonesia, Japan, Romania, Russian
Korea (South), Malaysia, Federation, Sri
Mali, Mexico, Moldova, Lanka, Swaziland,
Pakistan, Saudi Arabia, Switzerland, Turkey,
Thailand, United States, Uganda, Zimbabwe
Uruguay, Uzbekistan,
Vietnam, Zambia
31.50% 19.20%
Not Permitted Required for All
Albania, Argentina, Armenia, Mauritius,
Brazil, Canada, Chile, Australia, Namibia,
Colombia, Cote Bulgaria, New Zealand,
D'Ivoire, India Costa Rica, Norway,
Indonesia, Japan, Dominican Republic,
Korea (South), Malaysia, Oman, Ecuador, Panama,
Mali, Mexico, Moldova, Egypt, Papua New Guinea,
Pakistan, Saudi Arabia, Georgia, Peru, Ghana,
Thailand, United States, Philippines, Guatemala,
Uruguay, Uzbekistan, Singapore, Hong Kong,
Vietnam, Zambia South Africa, Honduras,
Tanzania, Jamaica,
Trinidad and Tobago,
Kazakhstan, Ukraine,
Kenya, United Arab
Emirates, Kuwait,
Venezuela, Kyrgyzstan,
Yugoslavia (Serbia &
Montenegro), Macedonia,
Malawi
31.50% 49.30%
Kim M. Shima [a] and David C. Yang [b]
[a] Assistant Professor of Accounting, California State University,
East Bay
25800 Carlos Bee Boulevard, Hayward, CA 94542
[email protected]
[b] Professor of Accounting, University of Hawaii at Manoa
2404 Maile Way, Honolulu, HI 96822
[email protected]
Table 1
Summary statistics of IFRS for years 2000-2007
Panel A: Sample Selection
Observations for which IFRS 1,032
requirement scores are available
Less: EU members 208
Observations for which IFRS scores
are available, excluding
EU members 824
Less: Missing finance 111
(equity and debt) data
Observations for which IFRS scores
and finance data are available, 713
excluding EU members
Less: Missing tax data 186
Number of observations in sample 527
with full data available
Sample Year Number of Countries (4)
2000 66
2001 65
2002 66
2003 66
2004 67
2005 65
2006 66
2007 66
527
Panel B: Descriptive Statistics for Dependent Variable by Region
Region (5) Obs. % IFRS = 0 % IFRS = 1 % IFRS = 2
East Asia and Pacific 112 59.8 19.6 20.5
Europe and Central
Asia 81 42.0 25.9 32.1
Latin America and
Caribbean 144 39.6 11.1 49.3
Middle East and
North Africa 47 29.8 4.3 66.0
North America 16 100.0 0.0 0.0
South Asia 23 82.6 17.4 0.0
Sub-Saharan Africa 104 21.2 47.1 31.7
TOTAL SAMPLE 527 43.4 21.6 34.9
Table 2
Descriptive statistics for environmental variables
Factor Variable IFRS Obs Mean Median
Category
Source of Finance
a. Equity EQUITY (0) Prohibit 229 49.99 33.60
(1) Permit 114 44.52 17.85
(2) Require 184 48.95 24.05
Group F-test 0.24
b. Foreign DEBT (0) Prohibit 229 0.46 0.40
Finance (1) Permit 114 0.53 0.41
(2) Require 184 1.82 0.39
Group F-test 2.08
Legal LEGAL (0) Prohibit 229 0.35 0.00
System (1) Permit 114 0.39 0.00
(2) Require 184 0.40 0.00
Group F-test 0.60
Taxation TAX (0) Prohibit 229 0.02 *** 32.00
(1) Permit 114 27.57 * 30.00
(2) Require 184 25.22 *** 28.00
Group F-test 17.59 ***
Political and Economic Ties
a. Colonialism UKCOL (0) Prohibit 229 0.34 *** 0.00
(1) Permit 114 0.61 *** 1.00
(2) Require 184 0.53 *** 1.00
Group F-test 13.95 ***
b. Trade ONE (0) Prohibit 229 0.19 *** 0.00
Alliances (1) Permit 114 0.59 *** 1.00
(2) Require 184 0.37 *** 0.00
Group F-test 30.97 ***
Inflation INFLAT (0) Prohibit 229 34.57 *** 8.30
(1) Permit 114 21.56 9.60
(2) Require 184 14.76 *** 9.00
Group F-test 7.48 ***
Economic GROWTH (0) Prohibit 229 3.18 3.50
Development (1) Permit 114 3.73 3.75
(2) Require 184 3.67 3.70
Group F-test 2.25
CAPFOR (0) Prohibit 229 15.08 *** 19.00
(1) Permit 114 17.31 17.50
(2) Require 184 18.71 *** 19.00
Group F-test 7.57 ***
Education LIT (0) Prohibit 229 88.11 *** 93.00
(1) Permit 114 85.92 86.00
(2) Require 184 84.55 *** 86.00
Group F-test 3.83 *
Culture UA (0) Prohibit 194 65.37 69.00
(1) Permit 53 61.57 52.00
(2) Require 116 62.93 68.00
Group F-test 0.76
Factor Std. 25th 75th
Dev. Percen Percentile
Source of Finance
a. Equity 53.15 11.20 70.70
78.96 6.00 37.20
81.34 8.70 58.60
b. Foreign 0.30 0.26 0.59
Finance 0.47 0.19 0.71
12.10 0.27 0.64
Legal 0.48 0.27 0.64
System 0.49 0.00 1.00
0.49 0.00 1.00
Taxation 7.95 28.00 35.00
5.71 25.00 30.00
9.67 20.00 30.00
Political and Economic Ties
a. Colonialism 0.47 0.00 1.00
0.49 0.00 1.00
0.50 0.00 1.00
b. Trade 0.39 0.00 0.00
Alliances 0.49 0.00 1.00
0.48 0.00 1.00
Inflation 76.76 3.10 20.60
21.61 7.30 29.00
18.44 3.60 16.85
Economic 2.82 2.20 4.70
Development 3.51 2.10 5.90
2.14 2.80 4.65
10.52 6.60 22.00
10.48 12.40 23.00
7.40 16.50 23.00
Education 15.47 87.00 98.00
8.77 80.00 93.00
12.31 77.00 94.00
Culture 22.27 48.00 85.00
24.97 49.00 90.00
23.47 52.00 86.00
EQUITY is market capitalization as a percentage of GDP; LEGAL is
dummy variable equal to unity if legal system is based on a
common law system; TAX is highest marginal corporate tax rate;
UKcol is a dummy equal to unity if the country was a former colony
of the United Kingdom; DEBT is the amount of total public and
private debt owed to nonresidents repayable in foreign currency,
goods, or services calculated on an exchange rate basis; ONE is
equal to unity if a major trading partner has adopted IFRS; INFLAT
is the average inflation rate of consumer prices for prior ten
year period; GROWTH is average annual growth of GDP for prior ten
year period; CAPFOR is gross capital formation as a percentage of
GDP; LIT is adult literacy rate or percentage of people 15 years
of age and above that are literate; UA is the country or region
score for uncertainty avoidance (Hofstede, 1984). All variables
are based on prior year data or nearest estimated year, except
for INFLAT and GDP growth rate that are for prior ten year period
as noted above.
*, **, *** Significant at 0.05, 0.01, and 0.001, respectively
Table 3
Pair-wise correlation matrix
IFRS EQUITY DEBT LEGAL
IFRS 1.000
EQUITY -0.008 1.000
DEBT 0.082 -0.046 1.000
LEGAL 0.044 0.363 *** -0.036 1.000
TAX -0.251 *** -0.212 *** 0.064 0.305 ***
UKCOL 0.177 *** 0.301 *** 0.067 0.769 ***
ONE 0.183 *** 0.041 0.098 * 0.109 *
INFLAT -0.165 *** -0.192 *** -0.020 -0.197 ***
GROWTH 0.080 0.076 0.013 0.062
CAPFOR 0.167 *** 0.074 0.041 -0.030
LIT -0.119 ** 0.159 *** -0.023 -0.243 ***
UA -0.052 -0.413 *** 0.037 -0.541 ***
ONE INFLAT GROWTH CAPFOR
ONE 1.000
INFLAT 0.041 1.000
GROWTH -0.034 -0.343 *** 1.000
CAPFOR 0.035 -0.224 *** 0.353 *** 1.000
LIT -0.088 * 0.173 *** -0.155 *** 0.060
UA -0.093 0.280 *** -0.325 *** -0.215 ***
TAX UKCOL
IFRS
EQUITY
DEBT
LEGAL
TAX 1.000
UKCOL 0.092 * 1.000
ONE -0.067 0.211 ***
INFLAT -0.081 -0.243 ***
GROWTH -0.080 0.166 ***
CAPFOR -0.117 ** -0.006
LIT -0.126 ** -0.326 ***
UA -0.035 -0.566 ***
LIT UA
ONE
INFLAT
GROWTH
CAPFOR
LIT 1.000
UA 0.067 1.000
IFRS is level of IFRS adoption (0 to 2); EQUITY is market
capitalization as a percentage of GDP; LEGAL is dummy variable
equal to unity if legal system is based on a common law system;
TAX is highest marginal corporate tax rate; UKCOL is a dummy
equal to unity if the country was a former colony of the United
Kingdom; DEBT is the amount of total public and private debt owed
to nonresidents repayable in foreign currency, goods, or services
calculated on an exchange rate basis; ONE is equal to unity if a
major trading partner has adopted IFRS; INFLAT is the average
inflation rate of consumer prices for prior ten year period;
GROWTH is average annual growth of GDP for prior ten year period;
CAPFOR is gross capital formation as a percentage of GDP; LIT is
adult literacy rate or percentage of people 15 years of age and
above that are literate; UA is the country or region score for
uncertainty avoidance (Hofstede, 1984).
*, **, *** Significant at 0.05, 0.01, and 0.001, respectively
Table 4
Results of panel analysis random effect Logit regressions
(t-statistics in parentheses)
Predicted Model (1) Model (2) Model (3) w/o
sign w/o LEGAL w/o UKCOL LEGAL
w Year dummy
EQUITY - -0.0211 ** -0.020 ** -0.061 **
(-2.92) (-2.66) (-2.80)
DEBT + 5.118 *** 5.162 *** 11.084 **
(3.27) (3.33) (2.51)
TAX - -0.285 *** -0.267 ** -0.741 **
(-3.48) (-3.48) (-2.97)
UKCOL + 10.248 *** dropped 25.592 ***
(4.57) (3.50)
LEGAL + Dropped 10.127 *** dropped
(4.48)
ONE + 1.780 * 1.769 * 2.726
(2.17) (2.16) (1.27)
INFLAT - -0.119 *** -0.118 *** -0.172 ***
(-4.46) (-4.48) (-2.81)
GROWTH ? 0.022 0.043 0.575
(0.09) (0.18) (1.60)
CAPFOR ? 0.347 *** 0.352 *** 0.290
(3.80) (3.82) (1.68)
LIT + 0.116 * 0.117 * 0.336 **
(2.28) (2.31) (2.91)
UA - 0.146 *** 0.146 *** 0.336 **
(4.24) (4.21) (3.47)
Intercept included included included
Year dummy dropped dropped included
N 363 363 363
Wald 26.03 25.85 13.75
[chi square]
Prob> .0037 .0039 .6844
[chi square]
Model (4)
w/o LEGAL,
UA
w Year dummy
EQUITY -0.033 **
(-2.65)
DEBT 6.470 *
(2.17)
TAX -1.106 ***
(-3.41)
UKCOL 4.263 **
(2.33)
LEGAL dropped
ONE 8.395 ***
(3.10)
INFLAT -0.306 ***
(-3.31)
GROWTH 0.853 **
(2.76)
CAPFOR 0.124
(0.85)
LIT 0.489 **
(3.01)
UA dropped
Intercept included
Year dummy included
N 527
Wald 16.80
[chi square]
Prob> .3985
[chi square]
Variables are as defined in Section 4.2. Random-effect logit
regression of the adoption model:
[Z.sub.it] = [[beta].sub.0] + [[beta].sub.1] [EQUITY.sub.it] +
[[beta].sub.2] [DEBT.sub.it] + [[beta].sub.3] [TAX.sub.it] +
[[beta].sub.4][UKCOL.sub.it] + [[beta].sub.6] [ONE.sub.it] +
[[beta].sub.7] [INFLANT.sub.it] + [[beta].sub.8] [GROWTH.sub.it]
+ [[beta].sub.9] [CAPFOR.sub.it] + [[beta].sub.10] [LIT.sub.it]
+ [[beta].sub.11] [UA.sub.it] + e
*, **, *** Significant at 0.05, 0.01, and 0.001 (all one-tail
except when the sign is not predicted), respectively
Table 5
Results of panel analysis random effect Logit regressions with
EU countries (t-statistics in parentheses)
Predicted Model (3) w/o Model (3a)
sign LEGAL w/o UKCOL
w Year dummy w Year dummy
EQUITY - -0.011 -0.008
(-0.61) (-0.75)
DEBT + 6.90 8.672 *
(1.25) (2.08)
TAX - -0.336 ** -0.398 **
(-2.68) (-3.02)
UKCOL + 0.983 dropped
(0.35)
LEGAL + dropped -4.040
(-0.98)
ONE + 3.391 2.789
(1.55) (1.00)
INFLAT - -0.074 -0.098
(-0.97) (-1.21)
GROWTH ? -0.431 -0.473
(-0.73) (-0.72)
CAPFOR ? 0.174 0.160
(1.48) (1.14)
LIT + -0.122 -0.108
(-1.23) (-0.93)
UA - -0.021 -0.042
(-0.34) (-0.61)
Intercept included included
Year included included
dummy
N 508 508
Wald [chi square] 76.13 73.96
Prob> [chi square] .000 .000
Model (4) Model (4a)
w/o LEGAL, UA w/o UKCOL, UA
w Year dummy w Year dummy
EQUITY -0.028 -0.022
(-1.51) (-1.28)
DEBT 6.125 ** 5.615
(2.79) (1.77)
TAX -0.556 *** -0.390 **
(-2.83) (-3.05)
UKCOL 6.147 ** dropped
(2.57)
LEGAL dropped 0.911
(0.36)
ONE 2.340 1.811
(1.21) (1.16)
INFLAT -0.079 -0.069 **
(-2.67) (-3.18)
GROWTH -0.400 -0.311
(-0.89) (-0.87)
CAPFOR 0.208 0.176
(1.80) (1.73)
LIT 0.011 -0.028
(0.11) (-0.44)
UA dropped dropped
Intercept included included
Year included included
dummy
N 697 697
Wald [chi square] 145.49 83.32
Prob> [chi square] .000 .000
Variables are as defined in Section 4.2. Random-effect logit
regression of the adoption model: [Z.sub.it] = [[beta].sub.0]
+ [[beta].sub.2][EQUITY.sub.it] + [[beta].sub.2][DEBT.sub.it]
+ [[beta].sub.3][TAX.sub.it] + [[beta].sub.4][UKCOL.sub.it] +
[[beta].sub.6][ONE.sub.it] + [[beta].sub.7][INFLAT.sub.it] +
[[beta].sub.8][GROWTH.sub.it] + [[beta].sub.9][CAPFOR.sub.it]
+ [[beta].sub.10][LIT.sub.it] + [[beta].sub.11][UA.sub.i]t + e
*, **, *** Significant at 0.05, 0.01, and 0.001 (all one-tail
except when the sign is not predicted), respectively
Table 6
Results of ordered Logit regressions--sample based on relative size
of equity markets (t-statistics in parentheses)
Size of Equity Market
Lower Tercile Middle Tercile
Predicted (EQUITY (8.7 < EQUITY < 38.
sign < 8.7) 3)
EQUITY - 0.520 * -0.032
(2.07) (-1.36)
Other Variables included included
Intercept included included
N 60 131
LR [chi square] 52.54 61.78
Prob > [chi square] .000 .000
Psuedo [R.sup.2] 44.54 22.91
Size of Equity
Market
Upper Tercile
(38.3 < EQUITY)
EQUITY -0.005 *
(-1.77)
Other Variables included
Intercept included
N 172
LR [chi square] 50.30
Prob > [chi square] .000
Psuedo [R.sup.2] 15.75
Variables are as defined in Section 4.2. Random-effect logit
regression of the adoption model: [Z.sub.it] = [[beta].sub.0]
+ [[beta].sub.1] [EQUITY.sub.it] + [[beta].sub.2] [DEBT.sub.it]
+ [[beta].sub.3] [TAX.sub.it] + [[beta].sub.4] [UKCOL.sub.it]
+ [[beta].sub.6] [ONE.sub.it] + [[beta].sub.7] [INFLAT.sub.it]
+ [[beta].sub.8] [GROWTH.sub.it] + [[beta].sub.9] [CAPFOR.sub.it]
+ [[beta].sub.10] [LIT.sub.it] + [[beta].sub.11][UA.sub.it]
* Significant at 0.05 (one-tail)
