Mandatory IFRS Reporting and Changes in Enforcement

In recent years, a large number of countries have made reporting under International Financial Reporting Standards (IFRS) mandatory. The capital-market effects of this change have been extensively studied, but their sources are not yet well understood and still heavily debated. This paper presents new evidence that aims to distinguish between several potential explanations for these capital-market effects. We show that, across all countries, mandatory IFRS reporting had little impact on liquidity and, in line with prior work, the liquidity effects are concentrated in the European Union (EU). This finding is not driven by the fact that the EU consists of many countries with strong legal systems and a proven track record of implementing regulation. It is also not driven by concurrent changes in other financial market regulation in the EU. Instead, we show that five countries started to proactively review financial statements concurrent with IFRS reporting, and the liquidity effects are limited to those countries with enforcement changes. Liquidity does not increase in the other EU member states even if they have strong regulatory quality or legal systems. We also show that concurrent enforcement changes can explain the liquidity effects for voluntary IFRS adopters around the IFRS mandate. Thus, our results indicate that concurrent changes in reporting enforcement play an important, if not dominant, role for the documented liquidity benefits around mandatory IFRS adoption. JEL classification: G14, G15, G30, K22, M41, M48