Paper 1

The International Journal of Accounting
(2020) 2050013 (36 pages)

°c Board of Trustees, Vernon K. Zimmerman Center, University of Illinois
DOI: 10.1142/S1094406020500134
by UNIVERSITY OF NEW ENGLAND on 10/26/20. Re-use and distribution is strictly not permitted, except for Open Access articles.
Voluntary IFRS Adoption by Unlisted

European Firms: Impact on Earnings Quality and
Cost of Debt
Mara Cameran*
Bocconi University
Department of Accounting
Int. J. Acc. Downloaded from www.worldscientific.com
Via Roentgen 1, 20136 Milan, Italy

mara.cameran@unibocconi.it
Domenico Campa
International University of Monaco
INSEEC U Research Center
16 Rue Clerissi, 98000 Monaco
Principality of Monaco
dcampa@inseec.com
Published 17 October 2020
This paper investigates the impact of the voluntary adoption of International

Financial Reporting Standards (IFRS) by unlisted firms on both their financial
reporting quality and cost of debt. Using a large international sample of unlisted
EU companies for which the choice of IFRS is voluntary, we find that IFRS
adoption has a positive impact on financial reporting quality and results in a
decrease in the cost of debt. In addition, unlisted firms adopting IFRS are more
likely to be acquired or go public in the years subsequent to the adoption, relative to
other unlisted firms. We document a tangible benefit of voluntary IFRS adoption by
unlisted firms.
Keywords: Voluntary IFRS adoption; unlisted firms; earnings quality; cost of debt.
JEL Classifications: M41, M48, C33.
*Corresponding author.
2050013-1
M. Cameran & D. Campa
1. Introduction
The aim of this paper is to examine the impact of voluntary adoption of
International Financial Reporting Standards (IFRS) by unlisted non-financial
companies in the European Union (EU) on both their financial reporting
quality (measured by earnings quality, EQ) and on their cost of debt.1

While research about the effects of IFRS adoption on EQ is extensive, it is
based almost entirely on mandatory IFRS adoption by listed firms, pro-
viding mixed results (De George et al., 2016). Furthermore, EQ among listed
and unlisted entities is not necessarily homogeneous because the incentives
for producing high-quality information are different between these groups of
firms. The former, in fact, are subject to natural information asymmetry
because of their higher ownership dispersion and greater separation between
ownership and control, in comparison with unlisted entities (Hope et al.,
2012). Accordingly, external stakeholders expect more reliable information.

Unlisted firms, however, allow providers of funds to access internal infor-
mation and to assume an active management role (Chen et al., 2011). In
addition, they have no access to capital markets, and their annual reports
are not widely distributed to the public. Accordingly, it is very likely that
their financial statement is significantly affected by dividend policies and tax
strategies (Ball & Shivakumar, 2005).
From a different angle, listed firms may have greater incentive than un-
listed companies to engage in more extensive earnings management prac-
tices, which decrease EQ. Indeed, in being scrutinized by a greater number
of stakeholders, listed entities are subject to market and financial analyst
pressure, which may lead these firms to engage in earnings manipulation
practices, especially in the presence of missed financial targets and earnings
benchmarks (Burgstahler et al., 2006). Unlisted companies are not subject to
this type of pressure; thus, they will have less incentive than listed entities to
lower EQ by manipulating earnings.
Although unlisted companies have a smaller number of stakeholders and
less financial pressure than listed firms, the investigation of their financial
reporting quality is not irrelevant. Indeed, unlisted companies could theo-
retically benefit the most from the adoption of high-quality accounting
standards, such as IFRS, if they use them to improve their EQ. Banks, for
1
IFRS adoption is mandatory for firms listed in the EU. Throughout the paper, we consider
the adoption of the full version of IFRS and not the adoption of IFRS for SMEs as, for
example, in Albu et al. (2013) and in Litjens et al. (2012). In addition, the terms unlisted and
private are used synonymously, as well as the words public and listed.
2050013-2
Voluntary IFRS Adoption by Unlisted European Firms
example, which are the main provider of external finance to private firms
(Graham et al., 2008), consider financial reporting quality when they assess
credit risk and, consequently, the cost of debt (Bharath et al., 2008). In
addition, the voluntary use of IFRS, aimed at establishing a commitment to
higher financial reporting quality, could also take place in view of future
strategies that may include going public or being targeted for an acquisition
(Chaney et al., 2004). Moreover, unlisted firms are very important to the
EU, accounting for more than 99% of EU companies (EU Commission, 2008)
and generating more than 75% of the European GDP, as well as being the
main providers of employment and the source of the largest proportion of
European economic growth (Ecoda, 2010). This is line with the worldwide
situation, as Kim et al. (2011a) highlight that \privately held companies
constitute a major portion of any free-market economy, and private debts
such as bank loans are the most important source of external financing in
virtually all countries, including the United States" (p. 587). Accordingly,
high-quality financial reporting by such entities would mean better infor-
mation quality from the biggest segment of the economy.
Defining and measuring EQ are, however, not as straightforward as they
may seem. While the literature has reported several definitions of what is
meant by EQ (see Dechow et al., 2010, for a comprehensive review), the
term is generally related to the ability of companies’ reported results to
accurately reflect past performance and forecast future income (Richardson
& Tuna, 2012). Contemporary research on accounting usually investigates
three dimensions of EQ, namely, earnings management, timely loss recog-
nition (TLR), and value relevance (Christensen et al., 2015), under the
assumption that higher quality earnings are related to less earnings man-
agement, more TLR, and a higher value relevance of earnings and equity
book value (Barth et al., 2008). We follow this approach but, since we
investigate unlisted entities, the value relevance aspect, which is based on
market data, is not applicable to our setting. Thus, we focus on the first two
dimensions, which are also of the utmost importance to our study, as they
measure managerial discretion (Christensen et al., 2015).
This paper uses data from EU member states where IFRS adoption by
private non-financial companies is allowed but is not an obligation.2 This
context permits us to consider the cost-benefit trade-off that would drive
2
As explained in detail in Section 2, EU Regulation 1606/2002 mandates IFRS for listed
firms, but leaves member states free to choose whether or not to mandate, allow, or forbid the
use of international accounting standards for unlisted companies.
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IFRS adoption by these firms (Pope & McLeay, 2011). Indeed, the switch to
a new set of accounting standards bears costs: entities need to adjust their
software and accounting systems, the accounting department needs to
familiarize itself with IFRS, and voluntary IFRS adopters may require
consultancy services from experts, among others (Morris et al., 2013). On

the other hand, the use of IFRS should signal a commitment from the
adopter to mitigate adverse selection problems, increasing and improving
their public disclosure (Karamanou & Nishiotis, 2009). From the perspective
of the providers of funds, it would allow lenders to better assess borrower
credit quality with lower monitoring and re-contracting costs, which could
potentially result in a positive effect on the cost of debt (Kim et al., 2011c).
Since unlisted firms are highly dependent on banks for external financing
(Graham et al., 2008), a lower cost of debt is probably one of the most
desirable outcomes for these entities. Accordingly, we also explore the effect
of IFRS adoption, if any, on firms’ cost of debt.
Our focus on the EU has additional advantages. On the one hand,
it involves looking at firms characterized by \fairly similar" accounting
practices (Burgstahler et al., 2006, p. 990) because of the accounting
standard harmonization introduced by the EU at the end of the 1970s
(Van Hulle, 2004). Thus, it can be considered as an examination of boundary
conditions for the impact of IFRS adoption (Chen et al., 2011). On the other
hand, the EU allows us to take into consideration firms’ reporting incentives,
distinguishing between unlisted firms that are part of a group where the
parent company is listed in the EU (also referred to as subsidiaries of listed
companies) and other unlisted firms. The former entities, in fact, may adopt
IFRS because of a decision by the parent company, which is required to
prepare a consolidated annual report under IFRS in accordance with the EU
regulation, with the main objective of simplifying the consolidation process
(PricewaterhouseCoopers, 2009).
We employ a large international sample of EU companies (i.e., 3,284
unique entities and 25,984 firm-year observations), as well as a methodology
that deals with self-selection bias based on a treatment group of IFRS
adopters and a control sample of non-adopters, built using propensity scores,
the Heckman (1979) two-stage method, and a differences-in-differences
approach and provide evidence of an overall positive effect of IFRS
adoption on EQ among unlisted firms which voluntarily switched from
national general accepted accounting principles (GAAP) to IFRS, in com-
parison with companies that still report under local accounting standards.
We also find that, in general, voluntary IFRS adopters exhibit a lower cost
2050013-4
of debt after the adoption of IFRS. More detailed analyses show that IFRS
adoption has a positive impact on our dimensions of EQ and on the cost of debt,
albeit only for entities that are not subsidiaries of firms listed in the EU. This is
in line with the literature, which suggests that the effect of IFRS is related to
firms’ financial reporting incentives, rather than to their mere adoption

(Christensen et al., 2015). In addition, our prediction model indicates that IFRS
adopters are more likely to be involved in an acquisition or to go public.
This paper makes several contributions. From a practical point of view,
our findings could be of interest to private companies that are considering
whether to adopt IFRS. Indeed, on one hand, they may be discouraged by
the costs related to this decision; on the other hand, we provide evidence
that IFRS adoption reduces firms’ cost of debt when it is associated with an
increased financial reporting quality. Furthermore, we add to the paucity of
research on accounting among unlisted firms by examining the impact of

IFRS adoption on EQ at an international level, which is something that, to
the best of our knowledge, has not been done before. We also contribute to
the scant literature investigating the effects of reporting incentives on the
EQ of private entities (Burgstahler et al., 2006; Peek et al., 2010). Finally,
our paper adds to the debate on accounting harmonization (e.g., Gernon &
Wallace, 1995; Saudagaran & Meek, 1997) and accounting convergence
(Bradshaw & Miller, 2008; Joos & Lang, 1994; Joos & Wysocki, 2006; Land
& Lang, 2002), providing evidence that the adoption of IFRS in lieu of
national (European) GAAP may be an effective way to improve financial
reporting quality and, in turn, provide significant benefits to firms.
The remainder of the paper is structured as follows. Section 2 summarizes
the accounting regulatory setting in the EU. Section 3 frames our research in
the context of the extant literature and develops the hypotheses. Section 4
illustrates the sample and the methodology. Section 5 provides the main
empirical results and robustness tests. Section 6 concludes the paper and
highlights its main implications and limitations.
2. Accounting Regulatory Setting in the EU

At the end of the 1970s, the EU started a process aimed at achieving
accounting harmonization across member states. The process was initiated
by the Fourth Directive in 1978, which required limited liability companies
to prepare their financial statements according to the principles set by
the same Directive and to make these statements publicly available.
The prescriptions of the Fourth Directive were followed by the Seventh
2050013-5
Directive, issued in 1983, which regulated the preparation of consolidated

financial statements. In accordance with EU rules, European Directives need
the formal acceptance of member states before becoming effective and, in
certain cases, this process takes a very long time. For example, Italy only
fully implemented the Fourth Directive, issued in 1978, in 1991 (Took, 1997)

more than 10 years after its issuance. In Germany, the implementation
also required around 10 years, since the Fourth Directive was only adopted
there in 1985 and became effective in 1987 (Haller &, 2004). These delays
compromised the smooth implementation of accounting harmonization.
The content of the Directives summarized above made accounting prac-
tices for unlisted firms \fairly similar" across member states (Burgstahler
et al., 2006, p. 990). However, it is worth pointing out that harmonization does
not mean that accounting standards for unlisted firms are exactly the same
across the EU. In fact, the process incorporating the Directives into national
laws has resulted in different accounting options across EU member states.3
In 2000, the EU Commission, in a communication, stated that \whilst
the EU’s Accounting Directives remain the basis of the EU’s accounting
rules for limited liability companies, our existing directives do not meet
the needs of companies that wish to raise capital on pan-European or
international securities markets" (EU Commission, 2000, p. 4). Thus, to
continue improvements to accounting harmonization and accounting com-
parability across the EU, the European Commission opted for regulations,
rather than directives, because they produce immediate effects for member
states without any need for formal acceptance by the latter. The most
important result of this process was EU Regulation 1606/2002. This law
mandates the use of IFRS for the preparation of consolidated accounts from
the fiscal year starting on or after January 1, 2005, by all companies listed on
any European financial market. Member states are left free, however, to
regulate the use of IFRS for unlisted companies, even if the original intention
of the legislator was to mandate the use of IFRS for all companies, including
unlisted entities (Pope & McLeay, 2011). During the period considered in
the present research, some countries required unlisted non-financial firms
to prepare their separate annual report under IFRS (e.g., Bulgaria and
Cyprus), while others did not permit the use of these standards by such
entities (e.g., Austria, Belgium, Czech Republic, France, Latvia, Romania,
3
For example, the Directives included different options for the presentation of single ac-
counting items; furthermore, some of them may not have been adopted by some member
states during the process of incorporation of these Directives into national legislation.
2050013-6
Spain, and Sweden). Finally, a third group of countries allow unlisted non-
financial firms to choose between IFRS and local GAAP. In 2013, these were
Denmark, Estonia, Finland, Greece, Ireland, Italy, Lithuania, Luxembourg,
Malta, Netherland, Poland, Portugal, Slovakia, Slovenia, and the UK.
There are also special cases, such as Germany and Hungary, where private
companies are allowed to use IFRS in their separate financial statements,
but only in addition to the local GAAP (PricewaterhouseCoopers, 2014). A
coherent regulatory situation such as the one reported here was observed
throughout the entire time period considered in our research (Commission of
the European Communities, 2008; Guggiola 2010).
3. Literature Review and Hypotheses Development

The impact of IFRS on the EQ of firms has attracted the attention of the
academic literature, especially since their mandatory adoption by entities
listed in the EU. In fact, from fiscal years starting on or after January 1,
2005, IFRS replaced European-local GAAP, with the aim of ensuring higher
quality information and accounting comparability of listed firms across the
EU (Horton et al., 2013).
The extant evidence, however, which is based almost entirely on such a
mandatory IFRS adoption among listed firms, is mixed (De George et al.,
2016). While there is evidence that IFRS did improve the EQ of firms (e.g.,
Paananen & Lin, 2009; Tsalavoutas & Evans, 2010), most of the studies
reveal very limited improvements, conflicting evidence across EQ measures
and dimensions, or no significant impact of IFRS on EQ (e.g., Van Tendeloo
& Vanstraelen, 2005). Furthermore, there is also evidence that the EQ of
firms decreased after IFRS adoption (e.g., Ahmed et al., 2013; Callao &
Jarne, 2010; Jeanjean & Stolowy, 2008).
The reason for these conflicting results is that IFRS adoption, per se, may
be ineffective in improving EQ. Indeed, in order to bring about benefits,
mandatory IFRS adoption must be supported by strong legal enforcement
(e.g., Byard et al. 2011; Houqe et al. 2012) and/or firm incentives (e.g.,
Christensen et al. 2015; Daske et al. 2013). In relation to the latter point,
Christensen et al. (2015) explicitly state that accounting quality improve-
ments following IFRS adoption \are confined to firms with incentives to
adopt, that is, voluntary adopters" (p. 31). This finding is also supported by
previous research on listed firms showing that early IFRS adopters, which
are considered voluntary adopters, experience an improvement in EQ that is
more pronounced than firms that used IFRS only after the mandatory date,
2050013-7
and that reporting incentives dominate accounting standards in shaping

financial reporting quality during IFRS adoption (Doukakis, 2014). Thus,
voluntary IFRS adoption has been seen as a firm-level strategic commitment
to higher quality reporting (Covrig et al., 2007; Kim & Shi, 2012a; Kim
et al., 2011c; Leuz & Verrecchia, 2000). Accordingly, we formulate our first
hypothesis as follows:
H1 : Voluntary IFRS adoption enhances the EQ of unlisted firms in the EU.

The current EU regulation requires firms listed on any European financial
market to prepare their consolidated annual report using IFRS. This rule is
very important to a sample of unlisted entities drawn from European
countries which permit, but not oblige, unlisted entities to use IFRS because
of the possibility of isolating a particular category of companies: unlisted
IFRS adopters which are part of a group where the parent company is listed
in the EU. The presence of these firms in the sample is noteworthy because,
on one hand, they are formally voluntary IFRS adopters; thus, in accor-
dance with the literature stated above, they may enjoy benefits from the
adoption of IFRS. Meanwhile, the decision to adopt IFRS for these entities
may have been taken by the listed parent company for reasons related to the
simplification of the consolidation process (PricewaterhouseCoopers, 2009),
rather than for motives linked to firm-level incentives for better financial
reporting quality. In fact, the adoption of IFRS by these firms would mean
preparing only one financial statement, which can be used both for the
separate reporting of the subsidiary and the consolidated financial statement
of the listed parent company. Accordingly, whether the voluntary adoption
of IFRS by unlisted firms, which are part of a group where the parent
company is listed on a European financial market, is a firm-level strategic
commitment to higher-quality reporting is not that straightforward. In ad-
dition, Bonacchi et al. (2018), investigating a European member state (i.e.,
Italy), document that the reporting incentives of subsidiaries of listed firms
may be significantly altered by the needs of the listed parent company.
Based on the discussion reported above, separating the unlisted IFRS
adopters where the parent company is listed in the EU from all the other
unlisted entities would capture different reporting incentives for IFRS
adoption. Thus, we state our second hypothesis as follows:
H2 : The effect of voluntary IFRS adoption on the EQ of unlisted firms in the

EU differs between subsidiaries of companies listed in the EU and other
unlisted entities.
2050013-8
Worldwide, privately held firms rely on bank debt as the most important
source of external financing (e.g., Graham et al., 2008; Kim et al., 2011b),
thus, monitoring the cost of debt is of vital importance for such compa-
nies. In order to assess borrowers’ credit quality and set the cost of a loan,
banks peruse annual reports of companies (Kim et al., 2011c). Lower

quality information may penalize companies if banks incorporate this
aspect into the cost of debt. Indeed, there is evidence that banks consider
the quality of financial reporting when assessing credit risk (e.g., Bharath
et al., 2008), with companies that exhibit higher financial reporting
quality having a lower cost of debt (Minnis, 2011). Improved accounting
information quality via IFRS would ease the information uncertainty
faced by lenders in relation to borrowers’ credit risk, resulting in a lower
cost of debt for such firms. Accordingly, our last hypothesis is stated as
follows:
H3 : Voluntary IFRS adopters, which after IFRS adoption exhibit higher EQ,
experience a decrease in their cost of debt.
4. Methodology
4.1. Sample selection
To test our hypotheses, we focus on those EU countries where non-
financial firms have the option, but not an obligation, to use IFRS for
financial reporting purposes in the time span considered in our study
(see Section 2). Using the Amadeus database, we selected all unlisted
nonfinancial firms operating in those member states that chose to pre-
pare their annual reports using international accounting standards over
a nine-year period starting from 2005
the year when the adoption of
IFRS came into force in the EU.4 We excluded from the sample all
companies that are not required to prepare full accounts, firms under
liquidation, and inactive firms. Finally, we excluded those countries
where, according to Amadeus, the number of voluntary IFRS adopters
was less than 10.
To compare the effect of IFRS on the EQ of voluntary adopters, we
carefully evaluated how to deal with potential endogeneity which arises from
firms’ self-selecting to adopt IFRS. Following the best practices highlighted
by De George et al. (2016), first of all, we created a control sample of non-
4
Amadeus is a database provided by Bureau van Dijk which contains information on around
21 million companies across Europe.
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IFRS adopters.5 Starting from a potential pool of over 109,000 entities, we

estimated propensity scores using a logistic model (Lawrence et al., 2011),
which relates the adoption of IFRS to firm size, leverage, profitability, and
industry in the year of the transition to the new accounting standards. Finally,
we matched, without replacement, each IFRS adopter to the non-IFRS adopter

with the closest propensity score following the nearest neighbor matching
procedure.6 This process resulted in a sample comprising 3,284 unique firms
(1,642 IFRS adopters and 1,642 non-IFRS adopters) and a total of 25,984 firm-
year observations.7 These firms (firm-year observations) represent five coun-
tries, namely, Greece, Ireland, Italy, Poland, and the UK, as follows: 1,046
(8,838) are from Greece, 30 (196) are from Ireland, 646 (5,700) are from Italy,
240 (1,758) are from Poland, and 1,322 (9,492) are from the UK.8
4.2. Dealing with non-random samples: The Heckman (1979)

two-stage approach
Given the presence of a non-random sample, we performed our analyses
using the Heckman (1979) two-stage approach to correct for selection bias
(De George et al., 2016). This method allows us to explore the firm-level
characteristics that are associated with IFRS adoption and provides us with
a powerful methodology for testing our hypotheses. Consistent with the
Heckman (1979) procedure, we ran a first-stage probit regression to inves-
tigate the probability of adopting IFRS. This is done by applying model (1)
below, which links the adoption of IFRS to a vector of firm-level char-
acteristics that explain such a decision in accordance with previous studies
on the private setting (Bassemir, 2018; Kim & Shi, 2012a,b) and to certain
events, such as involvement in an acquisition, being listed (Chaney et al.,
5
The companies included in the large group of non-IFRS adopters for each country are the
results of a preliminary selection from Amadeus, where firms met the following criteria:
(a) availability of data from 2005 to 2013; (b) annual report prepared under local GAAP;
(c) firms not involved in a liquidation process; (d) firms are limited liability companies; (e)
total assets, leverage, and profitability are 30% lower than the minimum and 30% higher than
the maximum of the same variables for the group of IFRS adopters.
6
Please note that some of the data used in our analyses needed to be hand-collected or were not
immediately downloadable (e.g., whether a firm was controlled by an entity listed in the EU
and the presence of an audited annual report in any year included in the time period investi-
gated); thus, using the full sample of around 109,000 as the control group was not feasible.
Accordingly, we opted for a matched sample by employing adequate controls for selection bias.
7
The number of firm-year observations is lower than 3284 9 years (2005–2013), since there
are cases where the full time series was not available.
8
These countries account for 76% of the GDP of those countries that permit the use of IFRS
during the time period investigated.
2050013-10
2004), or avoiding/postponing filing for bankruptcy,9 which could have

stimulated firms to adopt IFRS voluntarily.10
IFRSARit ¼ 0 þ 1 SIZEit þ 2 LEVit þ 3 ROAit þ 4 GROWTHit
þ 5 CFOit þ 6 QUOTit þ 7 AUDITit þ 8 ACQUISITIONit
þ 9 FUT BANKRUPTit þ 10 FUT LISTit þ i COUNTRY

þ j IND þ k YEAR þ "it ð1Þ
Variables are defined in Appendix A. Heckman’s (1979) methodology

requires the inclusion of the inverse Mills ratio from Eq. (1) in the second-
step regressions, which will be reported below, as an additional explanatory
variable. In this way, the estimated effect of IFRS adoption in the second-
step regressions will be corrected for selection bias. Finally, in line with the
requirements of Heckman’s (1979) methodology, not all the independent
variables included in the probit model in (1) are control variables in our
second-step regressions (Lennox et al., 2012).
4.3. Di®erences-in-di®erences methodology

In addition to the Heckman (1979) approach explained above, we employed
a differences-in-differences methodology. More precisely, for each IFRS
adopter using IFRS after 2005 and each related control firm, we collected
data related to the pre-adoption period up to 2005.11 By doing so, we have a
set of panel data that can be separated into four groups of observations:
(1) observations related to IFRS adopters before the adoption of IFRS, thus
under national GAAP; (2) observations related to the control group for the
period when IFRS adopters still prepared their accounts under local GAAP;
(3) observations related to IFRS adopters after the adoption of IFRS;
(4) observations related to the control group for the period when IFRS
adopters prepared their annual reports using the international standards.
In this way, we can calculate the difference in our EQ measures between our
treatment and control group of firms, both before and after the adoption of IFRS
by the former. By comparing the differences in EQ between these two scenarios,
9
We thank the associate editor for pointing this out to us.
10
We have re-estimated the model using an alternative version for the variable ACQUISI-
TION. More precisely, for the group of IFRS adopters, we coded the variable equal to 1 if the
firm was involved in an acquisition only after the adoption of IFRS. The results are
completely in line with those reported in Table 4. In addition, even with using the Mills ratio
calculated with this new variable, the results reported in Tables 5–8 are consistent.
11
At the time of data collection, Amadeus allowed us to download data from 2004. Since our
variables include lagged values, we started our analysis from 2005. As an example, if a company
voluntarily adopted IFRS in 2008, pre-IFRS data refer to the years from 2005 to 2007.
2050013-11
Table 1. Differences-in-Differences Approach

1. Observations related to 2. Observations related to the ð1 2Þ ¼ difference between
IFRS adopters before control group for the period treatment and control
the adoption of IFRS, when IFRS adopters still group under local GAAP
thus under national prepared their accounts
GAAP under local GAAP
3. Observations related to 4. Observations related to the ð3 4Þ ¼ difference between

IFRS adopters after the control group for the period treatment and control
adoption of IFRS when IFRS adopters pre- group under different
pared annual reports using GAAP
the international standards
ð1 3Þ ¼ difference in the ð2 4Þ ¼ difference in the [ð3¡4Þ¡ð1¡2Þchange in

treatment group after control group after the the differences between
the adoption of IFRS adoption of IFRS by the control and treatment
treatment group group after the adoption
of IFRS by the latter
we can assess the impact of IFRS adoption on companies’ EQ, while, at the same
time, minimizing endogeneity biases. Table 1 illustrates this process.
4.4. EQ measures
As explained in detail in the introduction, we analyze two dimensions of EQ:
earnings management and TLR. The former is investigated using proxies for
discretionary accruals and accrual volatility, while the latter is analyzed
using the Ball and Shivakumar (2005) model. The use of multiple dimensions
and multiple proxies of EQ reduces the risk that our findings are driven by
one particular measure.
4.4.1. Earning management proxies: Discretionary accruals and accrual volatility
We measure discretionary accruals using the methodology developed by
DeFond and Park (2001). Indeed, such a measure is deemed more suitable than
Jones-type abnormal accrual measures in studies focused on unlisted companies
and in contexts where the number of observations per year/industry is limited
(Wysocki, 2004). Kim et al. (2003) also suggest that the DeFond and Park
(2001) estimation of abnormal accruals is free of potential measurement errors
associated with the Jones (1991) model parameters. DeFond and Park (2001)
estimate abnormal working capital accruals (AWCAs) using the following
formula: AWCAit ¼ WCit ðWCit1 =Sit1 Þ Sit .
Variables are defined in Appendix A. AWCAs are divided by beginning total
assets. We use absolute values of AWCAs to analyze earnings management per
se, with higher values of AWCAs indicating greater earnings management.
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Our proxy of accrual volatility (i.e., standard deviation of accruals) is instead

based on the fact that the aim of accruals is to reduce timing and mismatching
problems in underlying cash flows (Dechow & Dichev, 2002). However, to
achieve this goal, management needs to \make assumptions and estimates
about future cash flows, which implies that accruals may include errors of
estimation or noise" (Dechow & Dichev, 2002, p. 35). Accordingly, we use the
model developed by Dechow and Dichev (2002) and subsequently modified by
McNichols (2002). Dechow and Dichev (2002) set up a model measuring accrual
quality as the residuals from firm-specific regressions of changes in working
capital in the case of past, present, and future operating cash flow realizations.
McNichols (2002) provides evidence that \linking the approach taken by
Dechow and Dichev (2002) with that taken by Jones (1991) has the potential to
strengthen both approaches, and to calibrate the errors associated with Jones’
measure of discretionary accruals and Dechow and Dichev’s (2002) measure of

earnings quality" (p. 65). Accordingly, McNichols added a proxy for growth and
the level of property, plant, and equipment to the original Dechow and Dichev
model. Following Dechow and Dichev (2002) and McNichols (2002), we use the
standard deviation of the residuals from model (2) below, the latter reflecting
the magnitude of accruals, unrelated to cash flow realizations, sales growth, and
level of investments, as our proxy for accrual volatility:
WC it ¼ 0 þ 1 CFOit1 þ 2 CFOit þ 3 CFO itþ1
þ 4 SALES it þ 5 PPE it þ "it ð2Þ
Variables are defined in Appendix A.
Dechow and Dichev (2002) state that the volatility of operations is
systematically related to the propensity to make estimation errors. Since accruals
should reflect the mismatch between recorded costs and revenues and the outflow
and inflow of cash, a higher standard deviation of accruals (SDACC), once con-
trolled for cash flow movements as well as additional firm-level factors, denotes
lower EQ because it reflects higher estimation errors (Dechow & Dichev, 2002).
The differences-in-differences model, which measures the impact of
voluntary IFRS adoption on discretionary accruals and accrual volatility,
is constructed as follows, in line with De George et al. (2016):
AWCA=SDACC it ¼ 0 þ1 IFRS it þ 2 POSTADOPT it
þ3 IFRS it POSTADOPT it þ 4 SIZE it þ 5 LEV it þ6 CFO it
þ 7 ROAit þ8 GROWTH it þ 9 DISSUE it þ10 AUDIT it
þ 11 MILLS it þi COUNTRY þ j IND þk YEARþ"it
ð3Þ
2050013-13
Variables are defined in Appendix A. The coefficient 1 of model (3), with reference to
Table 1 in Section 4.3, compares the magnitude and volatility of discretionary accruals
between IFRS adopters and the control group when POSTADOPT is 0 (i.e., before
IFRS adoption). Thus, a positive (negative) coefficient indicates that companies that
decided to adopt IFRS previously exhibited higher (lower) levels of earnings manage-
ment or higher (lower) levels of accrual volatility in comparison with the control group
of non-IFRS adopters (i.e., 1 2 in Table 1). The sum 1 þ 3 provides the same
information for the post-IFRS adoption period (i.e., 3 4 in Table 1). The coefficient
3 is the relevant one to test our hypotheses, as it indicates whether the adoption of
IFRS has changed the difference in earnings management between our treatment and
control groups, observed before IFRS adoption (i.e., ð3 4Þ ð1 2Þ in Table 1; De
George et al., 2016). A positive (negative) coefficient 3 indicates that, after IFRS
adoption, IFRS adopters exhibit higher (lower) levels of discretionary accruals or
higher (lower) accrual volatility in relation to non-IFRS adopters, compared to the

period when both groups of companies employed the same set of local GAAP.
A set of control variables takes into account other firm-level factors which
affect EQ, such as firm size (SIZE; Johnson et al., 2002); the level of com-
pany debt (LEV; Dechow et al., 1995); performance of companies (Kothari
et al., 2005), assessed by their cash flow (CFO) and profitability (ROA);
company growth (GROWTH; Carey & Simnett, 2006); issuance of new debt
(DISSUE; Shan et al., 2013); and the presence of an audited annual report
(AUDIT). In fact, in the EU, statutory audit requirements also involve
unlisted companies; thus, they have to engage an auditor with the char-
acteristics illustrated by the EU Eighth Directive (i.e., Directive 2006/43/
EC) and later amendments.12 Finally, the model also includes the inverse
Mills ratio (MILLS) from model (1) as well as country, industry, and year
dummy variables to control for unobservable country and industry char-
acteristics, and for unobservable time effects (De George et al., 2016).13
12
The Fourth Council Directive 78/660/EC, Article 51 (Commission of the European
Communities, 1978), states that: \(a) Companies must have their annual accounts audited by
one or more persons authorized by national law to audit accounts. (b) The person or persons
responsible for auditing the accounts must also verify that the annual report is consistent with
the annual accounts for the same financial year." The member states may relieve companies
that do not exceed the limits of two of the following criteria for two consecutive financial
years, as outlined by Directive 2006/46/EC Amending 78/660/EC: a balance sheet total of
EUR 4.4 million, a net turnover of EUR 8.8 million, an average number of employees during
the financial year of 50.
13
Since the estimation of the variable SDACC is based on a model that uses the cash flow
from operations, we re-estimated our model (3) reported in Table 6 by excluding CFO from
the control variables. The results are consistent.
2050013-14
4.4.2. Timely loss recognition proxy

We test TLR using through a model specifically suited to unlisted firms,
which links accruals and cash flows. This model was introduced by Ball and
Shivakumar (2005) to overcome the limitations of the Basu (1997) meth-
odology, which was originally developed for listed firms. The Ball and
Shivakumar (2005) accrual–cash flow model, completed with the inclusion of
the inverse Mills ratio from model (1), is specified by model (4) below:
ACCit ¼ 0 þ 1 DCFOit þ 2 CFOit þ 3 DCFOit CFOit þ 4 IFRSit
þ 5 IFRSit DCFOit þ 6 IFRSit CFOit
þ 7 IFRSit DCFOit CFOit þ 8 MILLSit
þ i COUNTRY þ j IND þ k YEAR þ "it ð4Þ
Variables are defined in Appendix A. Accruals and cash flow from operations
are naturally negatively related; thus, 2 is expected to be negative. TLR
is based on expected, not realized, cash flows and therefore should
attenuate this negative relationship. For example, if the reporting entity is
experiencing a decline in demand for its products, it likely needs to recognize
a loss for the possibility that inventory can only be liquidated below cost. It
follows that the timely recognition of unrealized losses should attenuate the
negative relationship between accruals and cash from operations (Ball &
Shivakumar, 2005), thereby resulting in a positive and significant 3 . If the
adoption of IFRS further improves (worsens) the TLR, 7 is expected to be
positive (negative) and significant.
We run this model separately for POSTADOPT equal to 0 and equal to 1
in order to investigate the difference in the TLR between IFRS adopters and
their control group, before and after the decision of the former to use IFRS.
Finally, we test the difference in the coefficient 7 under these two scenarios.
If 7 estimated in the post-adoption period is significantly higher (lower)
than the same coefficient in the pre-adoption period, this indicates that IFRS
adopters report losses on a more (less) timely basis in comparison with a
comparable group of non-IFRS adopters after the adoption of the interna-
tional standards.
4.5. IFRS adoption and the cost of debt

To investigate the impact of IFRS adoption on companies’ cost of debt (H3),
we need a proxy for the latter variable. As we are investigating unlisted
firms, information about their cost of capital is not as easily available as that
of listed entities. Accordingly, we estimated firms’ cost of debt by dividing
2050013-15
the interest expenses from the income statement by companies’ financial

liabilities recorded on their balance sheet, in line with previous literature
(e.g., Fonseka et al., 2019; Jung et al., 2018; Lim et al., 2018). Given that it
is unlikely that banks base the cost of debt in one year on the annual report
of that year (i.e., if firms ask for a loan in 2012, in the best-case scenario, the
most recent annual report available to banks would be that of 2011), we use
lead values for the cost of debt as the dependent variable in model (5) below,
which investigates our H3.
CoDitþ1 ¼ ’0 þ ’1 IFRSit þ ’2 POSTADOPTit þ ’3 IFRSit POSTADOPTit
þ ’4 SIZEit þ ’5 LEVit þ ’6 CFOit þ ’7 ROAit
þ ’8 GROWTHit þ ’9 DISSUEit þ ’10 AUDITit þ ’11 MILLSit
þ ’i COUNTRY þ ’j IND þ ’k YEAR þ "it ð5Þ
Variables are defined in Appendix A. In line with model (3), ’3 provides

evidence to test our third hypothesis. A positive (negative) coefficient ’3
would indicate that after IFRS adoption, the difference between the cost of
debt of IFRS adopters in relation to that of non-IFRS adopters increased
(decreased), compared to the period when both groups of companies
employed the same set of local GAAP.
In accordance with Kim et al. (2011c), we include proxies for firm size,
leverage, cash flow, return on assets, growth, and issue of debt to control for
firm credit quality as well as the presence of an audited annual report to
control for potential cross-firm differences in the information environment.
Finally, the inverse Mills ratio is included to control for self-selection bias.
Given the focus of this study, our models are reported for the entire
sample and also separately for the group of unlisted entities which are
subsidiaries of a company listed on a European financial market and for the
other unlisted entities. We define the former group of firms as those entities
where majority of the capital is owned, directly or indirectly, by an entity
listed in the EU. To collect this information, we individually perused the
ownership composition of each company included in our sample, including
analyzing several cases where the ownership structure was complex (i.e.,
situations in which a firm was owned by another company which was itself
owned by another firm, etc.), which meant investigating the ownership
structure of several entities in order to find out who the ultimate owner was.
Models (3), (4), and (5) are estimated using OLS. All p-values are calculated
from robust standard errors. Finally, Lennox et al. (2012) indicate that the
use of the Heckman (1979) methodology may be affected by multicollinearity
2050013-16
because of the introduction of the inverse Mills ratio as an additional inde-

pendent variable. Accordingly, we performed a diagnostic test for multi-
collinearity by estimating the variance inflation factor (VIF) coefficients for
our regression models, which are all below the threshold of 10 (Kennedy,
2008), suggesting that multicollinearity does not affect our analyses.
5. Results
5.1. Descriptive statistics and univariate analysis
Table 2 presents the descriptive statistics for the variables considered in the
study. They are reported for the pooled sample.
They reveal that the average abnormal accruals account for around 12%
of firm total assets and the standard deviation of the residuals from model
(2) is about 1.6%. Firms, on average, fund their activities mainly through
debt at an average cost of 7.3%.14 About 24% of the sample is controlled by a
Table 2. Descriptive Analysis
N. Mean Median St. Dev Min Max
AWCA 25,984 0.115 0.068 0.129 0.005 0.508

SDACC 25,984 0.016 0.014 0.011 0.000 0.084
ACC 25,984 0:038 0:032 0.038 0:128 0.024
CoD 16,445 0.073 0.055 0.070 0.000 0.300
IFRS 25,984 0.500 1.000 0.500 0.000 1.000
IFRSAR 25,984 0.336 0.000 0.472 0.000 1.000
POSTADOPT 25,984 0.662 1.000 0.473 0.000 1.000
SIZE 25,984 10.228 10.100 1.706 7.401 13.783
LEV 25,984 0.575 0.607 0.249 0.006 0.967
CFO 25,984 0.080 0.065 0.083 0:067 0.280
ROA 25,984 0.064 0.045 0.096 0:129 0.299
GROWTH 25,984 0.039 0.024 0.239 0:408 0.636
DISSUE 25,984 0.072 0.015 0.328 0:462 0.998
AUDIT 25,984 0.448 0.000 0.497 0.000 1.000
QUOT 25,984 0.235 0.000 0.424 0.000 1.000
ACQUISITION 25,984 0.033 0.000 0.178 0.000 1.000
FUT BANKRUPT 25,984 0.028 0.000 0.165 0.000 1.000
FUT LIST 25,984 0.003 0.000 0.052 0.000 1.000
Notes: Variables are defined in Appendix A.
14
The number of observations related to the cost of debt is lower than that of the other
variables because the value of interest expense was not available for all of the firm-year
observations in the sample. In addition, because we are dealing with unlisted firms, retrieving
this information in alternative ways was unfeasible.
2050013-17
company listed on a European financial market. Firms in the sample have

average total assets of EUR 164 million and a return on assets of 6.4%.
Around 3.3% of companies in the sample have been involved in an acquisi-
tion during the sample period and/or up to the last data collection, which
took place in July 2018, while about 3% of firms filed for bankruptcy and
0.3% of entities went public from the end of the sample period up to the last
data collection.
A Pearson correlation matrix, related to the pooled sample, is reported in
Table 3.
The table exhibits a positive correlation between AWCA and firms that
decided to adopt IFRS ( ¼ 0:045; p-value ¼ 0:000) and a negative corre-
lation between AWCA and the post-adoption period ( ¼ 0.033;
p-value ¼ 0:000). The same result is documented for SDACC. The cost of
debt is negatively correlated to our treatment group of IFRS adopters

( ¼ 0.078; p-value ¼ 0:000), and there is also a negative correlation be-
tween the cost of debt and the post-adoption period ( ¼ 0:066;
p-value ¼ 0:000). It is noteworthy that there are several significant corre-
lations among variables used in our regression models; therefore, only a
multivariate analysis can provide statistically reliable evidence about the
hypotheses proposed.
5.2. Regression analysis

Table 4 presents the estimation of our probit model (1), which is also the first
stage of the Heckman (1979) approach used in this study.
In line with previous evidence (e.g., Bassemir 2018; Francis et al. 2008;
Kim & Shi 2012b), the model indicates that larger firms, as well as entities
with higher levels of leverage and growth, are more likely to adopt IFRS on a
voluntary basis. In addition, subsidiaries of firms listed in the EU and
companies with audited annual reports have a higher probability of volun-
tarily reporting under IFRS. Finally, IFRS adopters are more likely to be
involved in an acquisition or become listed.
Table 5 reports the estimation of our model (3) with AWCA as the de-
pendent variable.
Column A refers to the entire sample. As explained in Section 4.3, the
coefficient 3 provides information useful to assessing the impact of IFRS
adoption on EQ, based on a differences-in-differences approach (De George
et al., 2016). This coefficient is negative and significant at the 5% level
2050013-18
Table 3. Pearson Correlation Matrix
FUT B
AWCA SDACC ACC CoD IFRS IFRSAR POSTADOPT SIZE LEV CFO ROA GROWTH DISSUE AUDIT QUOT ACQUISITION ANKRUP T
AWCA
SDACC 0.083***
ACC 0.076*** 0:167***
CoD 0.005 0:010 0:091***
IFRS 0.045*** 0.122*** 0.003 0:078***
IFRSAR 0.003 0.071*** 0:017*** 0:104*** 0.712***
POSTADOPT 0:033*** 0:023*** 0:012* 0:066*** 0.023*** 0.509***
SIZE 0:068*** 0.023*** 0.041*** 0.005 0.153*** 0.120*** 0.042***
LEV 0:027*** 0.025*** 0:192*** 0.134*** 0.045*** 0.022*** 0:026*** 0.102***
CFO 0.069*** 0.069*** 0:312*** 0:008 0.038*** 0:020*** 0:082*** 0:057*** 0:094***
ROA 0.090*** 0.005 0.019*** 0:029*** 0.036*** 0:026*** 0:084*** 0:051*** 0:113*** 0.886***
2050013-19
GROWTH 0.163*** 0.019*** 0:087*** 0.014* 0.046*** 0.012** 0:046*** 0.052*** 0.062*** 0.288*** 0.288***
DISSUE 0.193*** 0.034*** 0:077*** 0.008 0.047*** 0.011* 0:049*** 0.038*** 0.146*** 0.129*** 0.129*** 0.345***
AUDIT 0.067*** 0.087*** 0.102*** 0:004 0.275*** 0.015*** 0:048*** 0.446*** 0:013** 0.107*** 0.107*** 0.036*** 0.009
QUOT 0.075*** 0.031*** 0.098*** 0:053*** 0.182*** 0.013*** 0:004 0.129*** 0:015** 0.041*** 0.041*** 0.003 0:010 0.322***
ACQUISITION 0:027*** 0.046*** 0:017*** 0.004 0.135*** 0.133*** 0.044** 0.145*** 0:003 0.020*** 0.010 0.018*** 0.008 0.087*** 0:012*
FUT_BANKRUPT 0.038*** 0.016*** 0.057*** 0.042*** 0.019*** 0:007 0:034*** 0:009 0.009 0:044*** 0:044*** 0:011* 0:001 0.040*** 0.017*** 0:022***
FUT_LIST 0:008 0.012** 0:023*** 0:002 0.039*** 0.050*** 0.028*** 0:020*** 0.006 0.021*** 0.021*** 0.008 0.010 0:034*** 0:029*** 0:009 0:009
Notes: *, **, and *** indicate that a coefficient is statistically significant at the 10%, 5%, and 1% level or better. Variables are defined
in Appendix A.
Table 4. Determinants of IFRS Adoption
Dependent Variable IFRSAR

INTERCEPT 2:825***
(0.000)
SIZE 0.051***
(0.000)
LEV 0.138**
(0.023)
ROA 0.253
(0.511)
GROWTH 0.250***
(0.000)
CFO 0:125
(0.782)
QUOT 0.399***
(0.000)
AUDIT 0.568***
(0.000)
ACQUISITION 1.000***
(0.000)
FUT BANKRUPT 0:129
(0.527)
FUT LIST 1.334***
(0.004)
Observations 25,984
Walk chi-squared 2,246.70
Pseudo R-squared 0.172
Year, industry, and country Yes
dummy variables
Notes: P-values (in parentheses below the coefficients)

are calculated using robust standard errors. For clari-
ty, the country-, year-, and industry-specific intercepts
are omitted. *, **, and *** indicate that a coefficient
is statistically significant at the 10%, 5%, and 1%
level or better. Regression model:
IFRSARit ¼ 0 þ 1 SIZEit þ 2 LEVit þ 3 ROAit
þ4 GROWTHit þ5 CFOit þ6 QUOTit þ7 AUDITit
þ 8 ACQUISITIONit þ 9 FUT BANKRUPTit þ
10 FUT LISTit þ i COUNTRY þ j IND þ k YEAR
þ"it . Variables are defined in Appendix A.
( ¼ 0:008; p-value ¼ 0:017), indicating that the adoption of IFRS has

significantly reduced the difference in the abnormal accruals between IFRS
and non-IFRS adopters, thus, improving the accounting quality of the for-
mer. Accordingly, our H1 is confirmed.
Columns B and C investigate our H2. In particular, Column B
analyzes the subsidiaries of groups with a parent company listed in the
EU, which, as mentioned before, could have adopted IFRS to simplify the
2050013-20
Table 5. Discretionary Accruals and Voluntary IFRS Adoption
(B) (C)
(A) Subsidiaries of Unlisted Firms that are
Pooled Parent Companies not Subsidiaries of Parent
Sample Listed in the EU Companies Listed in the EU
Dependent Variable AWCA AWCA AWCA
INTERCEPT 0.254*** 0.247*** 0.171***

(0.000) (0.000) (0.000)
IFRS 0.013*** 0:005 0.019***
(0.007) (0.391) (0.000)
POSTADOPT 0.007*** 0.006 0.009***
(0.007) (0.419) (0.001)
IFRS POSTADOPT ¡0:008** ¡0:001 ¡0:011***
(0.017) (0.917) (0.002)
SIZE 0:010*** 0:008*** 0:010***
(0.000) (0.000) (0.000)

LEV 0:021*** 0:044*** 0:012***
(0.000) (0.000) (0.004)
CFO 0:137*** 0:156*** 0:115***
(0.000) (0.001) (0.000)
ROA 0.113*** 0.102** 0.112***
(0.000) (0.014) (0.000)
GROWTH 0.060*** 0.067*** 0.065***
(0.000) (0.000) (0.000)
DISSUE 0.063*** 0.066*** 0.063***
(0.000) (0.000) (0.000)
AUDIT 0.012*** 0.012* 0.024***
(0.000) (0.078) (0.000)
MILLS 0:013*** 0.032** 0.010
(0.006) (0.026) (0.141)
Observations 25,984 6,117 19,867
F-stat 61.31*** 17.05*** 46.87***
R-squared 0.095 0.094 0.099
Year, industry, and Yes Yes Yes
country dummy variables
Notes: P-values (in parentheses below the coefficients) are calculated using robust standard
errors. For clarity, the country-, year-, and industry-specific intercepts are omitted. *, **, and
*** indicate that a coefficient is statistically significant at the 10%, 5%, and
1% level or better. Regression model: AWCAit ¼ 0 þ 1 IFRSit þ 2 POSTADOPTit
þ 3 IFRSit POSTADOPTit þ 4 SIZEit þ 5 LEVit þ 6 CFOit þ 7 ROAit þ 8 GROWTHit
þ 9 DISSUEit þ10 AUDITit þ 11 MILLSit þi COUNTRY þ j IND þ k YEAR þ "it . Variables
are defined in Appendix A.
consolidation reporting process of the latter (PricewaterhouseCoopers,

2009). The coefficient 3 is not significant (p-value ¼ 0:917) and shows that
IFRS adoption has no effect on the differences in discretionary accruals
between IFRS and non-IFRS adopters among this category of firms.
2050013-21
Column C analyzes private firms which are not subsidiaries of EU-listed

companies. A negative and strongly significant 3 ( ¼ 0:011; p-value ¼ 0:002)
indicates that IFRS adoption has significantly decreased the difference in the
abnormal accruals between IFRS and non-IFRS adopters, thus, signaling a
positive effect on the accounting quality of the former.

In line with our H2, our results show a different impact of international
accounting standards on EQ between unlisted firms that are part of a group
where the parent company is listed in the EU and the others that are not.
They indicate that IFRS adoption improved EQ only in the latter scenario,
where firm-level incentives for the introduction of IFRS would be stronger.
The coefficient 11 , associated with the inverse Mills ratio, is significant in
two out of three columns, indicating that adjusting our models for this
additional variable was important for correcting selectivity bias and col-
lecting unbiased evidence (Wu & Shen, 2013).

Table 6 outlines the results pertaining to the second EQ metrics used in
the study: the volatility of accruals.
Looking at the whole sample (column A), the coefficient 3 is non-sig-
nificant (p-value ¼ 0:903), indicating that the introduction of IFRS has no
significant impact on the accrual volatility of firms. Our H1 is not confirmed
according to this EQ measure.
Moving onto our H2, column B exhibits a positive but non-significant 3
(p-value ¼ 0:111), indicating that the introduction of IFRS has no signifi-
cant impact on this aspect of EQ for the subsidiaries of groups controlled by
parent companies listed in the EU.
Finally, Column C reports a negative and significant 3 ( ¼ 0:001;
p-value ¼ 0:021), which is an evidence of a beneficial impact of IFRS
adoption on the accrual volatility of unlisted firms that are not subsidiaries
of EU-listed companies, in comparison with the period before the intro-
duction of IFRS.
Accordingly, our H2 is again supported because the analyses show a dif-
ferent effect of IFRS adoption on EQ between unlisted firms that are part of
a group where the parent company is listed in the EU and the others that are
not. The results consistently indicate a positive impact of IFRS on accrual
volatility, but only among the latter entities.
The coefficient associated with the inverse Mills ratio is significant in all of
the regressions, signaling again the importance of controlling for selection
bias.
Table 7 presents the estimation of our TLR model, the accrual-cash flow
model (Ball & Shivakumar, 2005).
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Table 6. Standard Deviation of Accruals and Voluntary IFRS Adoption
(B) (C)
Subsidiaries Unlisted Firms that are
of Parent not Subsidiaries of Parent
(A) Companies Listed Companies Listed
Pooled Sample in the EU in the EU
Dependent Variable SDACC SDACC SDACC
INTERCEPT 0.018*** 0.041*** 0.019***

(0.000) (0.000) (0.000)
IFRS 0.002*** 0:002*** 0.004***
(0.000) (0.001) (0.000)
POSTADOPT 0:001*** 0:000 0:001***
(0.010) (0.568) (0.001)
IFRS POSTADOPT ¡0:000 0.001 ¡0:001**
(0.903) (0.111) (0.021)
0:000*** 0:001*** 0:000***
SIZE
(0.000) (0.000) (0.006)
LEV 0.001*** 0.000 0.001
(0.009) (0.586) (0.121)
CFO 0.035*** 0.031*** 0.036***
(0.000) (0.000) (0.000)
ROA 0:029*** 0:025*** 0:032***
(0.000) (0.000) (0.000)
GROWTH 0:000 0:002*** 0:000
(0.351) (0.002) (0.872)
DISSUE 0.001*** 0.000 0.001***
(0.002) (0.541) (0.004)
AUDIT 0.000* 0:002*** 0.000
(0.089) (0.001) (0.597)
MILLS 0:001*** 0:007*** 0:002***
(0.002) (0.000) (0.000)
Observations 25,984 6,117 19,867
F-stat 43.38*** 12.10*** 43.63***
R-squared 0.058 0.066 0.074
Notes: P-values (in parentheses below the coefficients) are calculated using robust
standard errors. For clarity, the country-, year-, and industry-specific intercepts
are omitted. *, **, and *** indicate that a coefficient is statistically significant at the
10%, 5%, and 1% level or better. Regression model: SDACCit ¼ 0 þ 1 IFRSit
þ 2 POSTADOPTit þ 3 IFRSit POSTADOPTit þ 4 SIZEit þ 5 LEVit þ 6 CFOit
þ 7 ROAit þ 8 GROWTHit þ 9 DISSUEit þ 10 AUDITit þ 11 MILLSit þ i COUNTRY
þ j IND þ k YEAR þ "it . Variables are defined in Appendix A.
Columns A and B refer to the entire sample before and after the adoption
of IFRS, respectively. The analysis will be focused on the coefficient 7 ,
which is negative and significant at the 5% level in Column A ( ¼ 0:003;
p-value ¼ 0:014), indicating that IFRS adopters reported losses on a less
2050013-23
Table 7. Timely Loss Recognition and Voluntary IFRS Adoption
Subsidiaries of Unlisted Firms

Parent that are not Subsidiaries
Companies of Parent Companies
Pooled Sample Listed in the EU Listed in the EU
(A) (B) (C) (D) (E) (F)

ACC ACC ACC ACC ACC ACC
Pre-IFRS Post-IFRS Pre-IFRS Post-IFRS Pre-IFRS Post-IFRS
Dependent Variable Adoption Adoption Adoption Adoption Adoption Adoption
INTERCEPT 0:013*** 0:007** 0.023 0:003 0:022*** 0:024***

(0.003) (0.021) (0.412) (0.7171) (0.000) (0.000)
DCFO 0.010*** 0.006*** 0.008 0.004 0.010*** 0.005***
(0.000) (0.000) (0.136) (0.288) (0.000) (0.001)
CFO 0:183*** 0:184*** 0:149*** 0:156*** 0:191*** 0:190***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
DCFO CFO 0.239*** 0.349*** 0.296*** 0.325*** 0.218*** 0.363***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

IFRS 0:005*** 0:002** 0:007** 0:009*** 0:003** 0.001
(0.000) (0.013) (0.030) (0.000) (0.037) (0.460)
IFRS DCFO 0.001 0.002 0.006 0.005 0:002 0.002
(0.774) (0.363) (0.256) (0.249) (0.557) (0.436)
IFRS CFO 0.040*** 0.030*** 0.023 0.018 0.040*** 0.031***
(0.000) (0.001) (0.291) (0.249) (0.001) (0.000)
IFRS DCFO CFO 0:003** 0.023*** 0:002 0.020** 0:003* 0.023***
(0.014) (0.001) (0.106) (0.018) (0.100) (0.001)
MILLS 0:004*** 0:003*** 0:004 0:004 0:000 0.005***
(0.001) (0.006) (0.312) (0.121) (0.826) (0.000)
Difference-in-difference:
(IF RS DCF O CF O 0.026*** 0.022 0.026**
Post-IFRS Adoption)–
IF RS DCF O CF O (0.000) (0.280) (0.022)
Pre-IFRS Adoption)
Observations 8,786 17,198 2,091 4,026 6,695 13,172
F-stat 106.17*** 141.95*** 16.32*** 37.10*** 86.51*** 110.73***
R-squared 0.260 0.193 0.181 0.212 0.273 0.196
Industry and Yes Yes Yes Yes Yes Yes
year dummy
variables
standard errors. For clarity, the country-, year-, and industry-specific intercepts are omitted.
*, **, and *** indicate that a coefficient is statistically significant at the 10%, 5%, and
1% level or better. Regression model: ACCit ¼ 0 þ 1 DCFOit þ 2 CFOit þ 3 DCFOit
CFOit þ 4 IFRSit þ 5 IFRSit DCFOit þ 6 IFRSit CFOit þ 7 IFRSit DCFOit CFOit
þ 8 MILLSit þ i COUNTRY þ j IND þ k YEAR þ "it . Variables are defined in Appendix A.
timely basis than non-IFRS adopters before the former switched to the in-
ternational standards. The same coefficient becomes positive and significant
at the 1% level in Column B ( ¼ 0:023; p-value ¼ 0:001), suggesting that
after the introduction of IFRS, IFRS adopters exhibit better TLR. Overall,
2050013-24
the effect of IFRS on this dimension of accounting quality has been beneficial
since the coefficient 7 significantly increases from column A to B
(p-value ¼ 0:000). Our H1 is also supported by our TLR proxy.
In relation to our H2, the estimation of model (4) for the subsidiaries of
groups with a parent company listed in the EU before and after IFRS
adoption, respectively, are reported in Columns C and D. In Column C, the
coefficient 7 is non-significant (p-value ¼ 0:106), while it becomes positive
and significant at the 5% level in Column D ( ¼ 0:020; p-value = 0.018).
That said, the difference between these coefficients is not significant (p-value
= 0.280), thus indicating that IFRS adoption has no significant effect on this
dimension of accounting quality for the subsidiaries of groups with a parent
company listed in the EU.
Finally, the estimation of model (4) for unlisted firms which are not
subsidiaries of EU-listed companies is reported in columns E and F. The

coefficient 7 is negative and significant at the 10% level in column E
( ¼ 0:003; p-value ¼ 0:100), which is an (weak) evidence that IFRS
adopters reported losses on a less timely basis than non-IFRS adopters be-
fore the adoption of IFRS. The same coefficient 7 is positive and significant
at the 1% level in Column F ( ¼ 0:023; p-value ¼ 0:001), indicating that
IFRS adopters report losses on a timelier basis than the control group of non-
IFRS adopters after IFRS introduction. The difference between these coef-
ficients is significant (p-value ¼ 0:022), suggesting that IFRS has a positive
effect on TLR among IFRS adopters which are not subsidiaries of EU-listed
companies.
Thus, our third EQ measure also supports H2, and the direction is the
same as that reported for the other EQ proxies: the positive effect of IFRS
adoption on EQ is confined to unlisted firms which are not part of a group
where the parent company is a listed entity. The coefficient associated with
the inverse Mills ratio is significant in three out of six regressions.
Moving onto our third (and last) hypothesis related to the cost of debt,
the results are reported in Table 8.
Column A of Table 8, which refers to the pooled sample, indicates that
IFRS adoption has reduced the cost of debt for IFRS adopters in comparison
with the control group of non-IFRS adopters. Indeed, ’3 is negative and
significant at the 1% level (’ ¼ 0:007; p-value ¼ 0:003).
Column B, which focuses on unlisted firms that are part of a group with
an EU-listed parent company, shows a non-significant ’3 (p-value ¼ 0:524).
This indicates that IFRS adoption has no significant effect on the cost of
debt for these firms in comparison with non-IFRS adopters.
2050013-25
Table 8. Cost of Debt and Voluntary IFRS Adoption
(B) (C)
Subsidiaries Unlisted Firms that
(A) of Parent are not Subsidiaries
Pooled Companies Listed of Parent Companies

Sample in the EU Listed in the EU
Dependent Variable CoD CoD CoD
INTERCEPT 0.044*** 0.042 0.080***

(0.000) (0.175) (0.000)
IFRS 0:006*** 0.007 0:012***
(0.002) (0.126) (0.000)
POSTADOPT 0:003* 0:004 0:003
(0.080) (0.391) (0.124)
IFRS POSTADOPT ¡0:007*** ¡0:004 ¡0:006**
(0.003) (0.524) (0.014)
SIZE 0.000 0.001 0:000

(0.576) (0.494) (0.596)
LEV 0.043*** 0.034*** 0.045***
(0.000) (0.000) (0.000)
CFO 0.070*** 0:004 0.078***
(0.000) (0.910) (0.000)
ROA 0:073*** 0:027 0:077***
(0.000) (0.280) (0.000)
GROWTH 0.003 0.006 0.000
(0.223) (0.256) (0.984)
DISSUE 0:004** 0:001 0:005***
(0.038) (0.886) (0.009)
AUDIT 0.003* 0.008* 0.001
(0.076) (0.086) (0.571)
MILLS 0.005 0.021*** 0:010**
(0.131) (0.009) (0.016)
Observations 16,445 3,520 12,925
F-stat 31.61*** 9.02*** 27.26***
R-squared 0.055 0.080 0.060
standard errors. For clarity, the country-, year-, and industry-specific intercepts are
omitted. *, **, and *** indicate that a coefficient is statistically significant at the 10%,
5%, and 1% level or better.
Regression model: CoDitþ1 ¼ ’0 þ ’1 IFRSit þ ’2 POSTADOPTit þ ’3 IFRSit
POSTADOPTit þ ’4 SIZEit þ ’5 LEVit þ ’6 CFOit þ ’7 ROAit þ ’8 GROWTHit
þ’9 DISSUEit þ’10 AUDITit þ’11 MILLSit þ’i COUNTRY þ’j IND þ ’k YEARþ"it .
Variables are defined in Appendix A.
2050013-26
Finally, column C looks at unlisted firms which are not subsidiaries of

companies listed in the EU. The coefficient ’3 is negative and significant at
the 5% level (’ ¼ 0:006; p-value ¼ 0:014). This is the evidence that un-
listed firms that are not part of a group with a listed parent company and
that have adopted IFRS on a voluntary basis exhibit a reduction in their cost
of debt, after IFRS adoption, in comparison with non-IFRS adopters. We
also consistently observed an improvement in EQ following IFRS adoption
in this group of firms. Thus, our H3 is supported by our findings. The co-
efficient associated with the inverse Mills ratio is significant in two out of
three regressions.
5.3. Robustness tests

We ran a battery of robustness checks (not tabulated for space reasons).
Among unlisted firms, taxation may heavily influence the financial reporting
incentives of private companies (Ball & Shivakumar, 2005). It is worth
mentioning that in all of the countries investigated, equal treatment is
granted to firms in relation to tax liabilities, regardless of the accounting
standards used for external reporting. Accordingly, firm-level tax incentives
should not be the primary reason for adopting IFRS.15 However, to be on the
safe side, we include in our models a proxy for the weight of taxation,
calculated as tax expenses divided by pretax income (e.g., Hanlon &
Heitzman, 2010). All our results reported in the tables presented above hold.
We re-estimated our models using a series of subsamples. First of all, as
indicated in footnote 14, the number of observations on the cost of debt is
lower than that used for the EQ regressions because of missing data on
interest expenses. This means that our model (5) is estimated on a lower
number of observations than that used in our models (3) and (4). We re-
estimated the latter models on the same (smaller) sample used in Table 8,
with the results consistent with those discussed in the main analyses. We
then re-estimated our models without the country with the biggest number
of observations, which is the UK, to make sure that our results, which are
related to the first hypothesis, are not exclusively driven by this country.
The evidence reported in the previous section is again entirely supported.
15
For example, Italy uses a tax principle of neutrality, which means that equal treatment is
granted to those companies adopting IFRS and those which are accounting according to the
Italian GAAP (PricewaterhouseCoopers, 2006). The same happens in the UK, Ireland,
Greece, and Poland, according to discussions engaged with academics working in those
countries.
2050013-27
We removed from our time series the years where the financial crisis was
very severe (i.e., 2008 and 2009), and all our evidence still holds.
Leuz et al. (2003) indicate that the type of legal system
code versus
common law may have an impact on EQ. Although we have country
controls in all of our models, we re-estimated our regressions by replacing the

country dummy variables with another variable, which takes 1 for common-
law countries (i.e., Ireland and the UK) and 0 for code-law countries (i.e.,
Greece, Italy, and Poland), in accordance with the classification provided by
Leuz et al. (2003) and Iliev et al. (2015). All the evidence discussed in Sec-
tion 5.2 holds.
6. Conclusions and Implications

The aim of this research is to examine the impact of IFRS adoption on

financial reporting quality and the cost of debt among unlisted non-financial
companies operating in the EU.
Our results reveal a positive effect of IFRS adoption on both EQ and the
cost of debt. Detailed analyses indicate that this evidence holds only for
unlisted entities which are not part of a group controlled by firms listed in
the EU. Moreover, we find that the group of firms that exhibits higher EQ
after IFRS adoption is the same as that for which we observe a decrease in
the cost of debt after the introduction of IFRS.
Our evidence is of interest to private companies currently considering
whether to adopt IFRS for financial reporting purposes. Indeed, our results
show that the adoption of IFRS is a good strategy for reducing the cost of
debt, provided it improves the quality of annual reports. Furthermore, our
prediction model indicates that IFRS adopters are also more likely to be
involved in an acquisition or go public, in comparison with firms that did not
adopt IFRS. Accordingly, potential voluntary IFRS adopters, in considering
the cost of switching to the new standards, should also consider that some
benefits from IFRS adoption will flow to them as well.
Our study contributes to the scarce research on the accounting behaviors
of unlisted firms by examining the impact of IFRS adoption on financial
reporting quality at an international level, which is something that, to the
best of our knowledge, has been never done before. In fact, the sporadic
articles that have investigated IFRS adoption by unlisted firms have either
used national samples, such as Germany (Bassemir & Novotny-Farkas,
2018), Italy (Cameran et al., 2014), and Korea (Lee et al., 2015), or looked at
why firms voluntarily adopted IFRS, rather than the effects of adoption
2050013-28
(Bassemir, 2018). Considering the role played by firm-level incentives, our

paper also adds to the scant literature that has investigated the effects of
reporting incentives on the EQ of private entities (Burgstahler et al., 2006;
Peek et al., 2010). Our study also contributes to the debate on accounting
harmonization (e.g., Gernon & Wallace, 1995; Saudagaran & Meek, 1997)
and accounting convergence (Bradshaw & Miller, 2008; Joos & Lang, 1994;
Joos & Wysocki, 2006; Land & Lang, 2002), providing evidence to the
international debate on whether or not the adoption of IFRS in lieu of na-
tional (European) GAAP is an effective way to improve financial reporting
quality. Furthermore, focusing on the cost of debt, our research explores a
real effect of IFRS adoption and adds a novel perspective which is less
common in previous studies (DeFond et al., 2011).
Our paper has some limitations, which could constitute avenues for future
research. In light of data constraints due to the investigation of unlisted

firms, we could only use one proxy for the cost of debt based on previous
literature. Future studies could use alternative or multiple proxies for this,
even if doing so would require either collecting primary data or having access
to a proprietary database. Future studies could go beyond the EU, even if
this means removing one of the boundary conditions of this study which
contributed to the strength of our results. Finally, we assumed that unlisted
firms that are subsidiaries of a group whose parent company is listed in the
EU had different incentives for adopting IFRS compared to other entities.
The use of a qualitative approach (i.e., surveys or questionnaires) could
investigate firm-level incentives more accurately, even if this would most
likely result in a significant reduction in the sample size.
Acknowledgment
The authors would like to acknowledge the suggestions and the insights of
the Editor, Paul Chaney, and those of an anonymous reviewer. The authors
would also like to acknowledge the helpful comments of the participants at
the 8th Financial Reporting Workshop 2017 (Parma – Italy); the insights of
the participants at the brown bag seminar series at Bocconi University and
at the International University of Monaco; and the contribution of Maria
Antonietta Margiotta and Federica Dantona, research assistants, in hand-
collecting data regarding the controlling status of firms and whether they
had the annual report audited, along with information about their in-
volvement in acquisitions, bankruptcy procedures, and whether the com-
panies went public.
2050013-29
Appendix A
Variable Definitions (in Alphabetical Order)

ACC is earnings less cash flow for operations, divided by beginning total
assets.
ACQUISITION is a dummy variable that takes the value of 1 if a firm has
been involved in an acquisition during the investigation period and up to the
following five years, 0 otherwise.
AUDIT is a dummy variable which takes the value of 1 for companies with
audited annual reports, and 0 otherwise.
AWCA is the absolute value of abnormal working capital accruals based on
the DeFond and Park (2001) methodology.
CFO is cash flow from operations divided by beginning total assets.

CoD is companies’ cost of debt, calculated as interest expenses divided by
financial liabilities.
COUNTRY is a vector of country dummy variables.
DCFO is a dummy variable which takes the value of 1 if cash flow from
operations is negative, 0 otherwise.
DISSUE is the annual change in total liabilities divided by beginning total
assets.
FUT BANKRUPT is a dummy variable which takes the value of 1 if a firm
has filed for bankruptcy after the investigation period and up to the following
five years, 0 otherwise.
FUT LIST is a dummy variable which takes the value of 1 if a firm has
become a listed firm after the investigation period and up to the following
five years, 0 otherwise.
GROWTH is the annual change in net sales divided by beginning total
assets.
IFRS is a dummy variable takes the value of 1 for IFRS adopters, 0 oth-
erwise.
IFRSAR is a dummy variable which takes the value of 1 for firm-year
observations related to annual reports prepared under IFRS, 0 otherwise.
IND is a vector of industry dummy variables.
LEV is total liabilities divided by total assets.
MILLS is the inverse Mills ratio calculated from model (1), as reported in
Table 4.
2050013-30
POSTADOPT is a dummy variable which takes the value of 1 when the

observation of the treatment firm and its control refers to the period post-
IFRS adoption, 0 otherwise.
PPE is the level of property, plant, and equipment divided by beginning
total assets.
QUOT is a dummy variable which takes the value of 1 when a firm is
controlled by company listed in the EU, 0 otherwise.
ROA is operating profit divided by beginning total assets.
S is firms’ net revenues.
SDACC is the standard deviation of the residuals from model (2).
SIZE is the natural logarithm of total assets.
WC is non-cash working capital accruals, calculated as: (current assets |
cash and short-term investments) | (current liabilities
short-term debt).
YEAR is a vector of year dummy variables.

SALES is the change in sales divided by beginning total assets.
WC is the change in working capital accrual as defined by Dechow and
Dichev (2002).
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The International Journal of Accounting

(2020) 2050013 (36 pages)

Voluntary IFRS Adoption by Unlisted

Via Roentgen 1, 20136 Milan, Italy

Published 17 October 2020

This paper investigates the impact of the voluntary adoption of International

JEL Classiﬁcations: M41, M48, C33.

quality (measured by earnings quality, EQ) and on their cost of debt.1

2012). Accordingly, external stakeholders expect more reliable information.

consultancy services from experts, among others (Morris et al., 2013). On

ﬁrms’ ﬁnancial reporting incentives, rather than to their mere adoption

research on accounting among unlisted ﬁrms by examining the impact of

2. Accounting Regulatory Setting in the EU

Directive, issued in 1983, which regulated the preparation of consolidated

3. Literature Review and Hypotheses Development

and that reporting incentives dominate accounting standards in shaping

H1 : Voluntary IFRS adoption enhances the EQ of unlisted ﬁrms in the EU.

H2 : The eﬀect of voluntary IFRS adoption on the EQ of unlisted ﬁrms in the

banks peruse annual reports of companies (Kim et al., 2011c). Lower

IFRS adopters.5 Starting from a potential pool of over 109,000 entities, we

we matched, without replacement, each IFRS adopter to the non-IFRS adopter

4.2. Dealing with non-random samples: The Heckman (1979)

2004), or avoiding/postponing ﬁling for bankruptcy,9 which could have

þ 9 FUT BANKRUPTit þ 10 FUT LISTit þ i COUNTRY

Variables are deﬁned in Appendix A. Heckman’s (1979) methodology

4.3. Di®erences-in-di®erences methodology

Table 1. Diﬀerences-in-Diﬀerences Approach

GAAP under local GAAP

3. Observations related to 4. Observations related to the ð3 4Þ ¼ difference between

ð1 3Þ ¼ difference in the ð2 4Þ ¼ difference in the [ð3¡4Þ¡ð1¡2Þchange in

of IFRS by the latter

Our proxy of accrual volatility (i.e., standard deviation of accruals) is instead

measure of discretionary accruals and Dechow and Dichev’s (2002) measure of

higher (lower) accrual volatility in relation to non-IFRS adopters, compared to the

4.4.2. Timely loss recognition proxy

4.5. IFRS adoption and the cost of debt

the interest expenses from the income statement by companies’ ﬁnancial

Variables are deﬁned in Appendix A. In line with model (3), ’3 provides

because of the introduction of the inverse Mills ratio as an additional inde-

2008), suggesting that multicollinearity does not aﬀect our analyses.

Table 2. Descriptive Analysis

N. Mean Median St. Dev Min Max

AWCA 25,984 0.115 0.068 0.129 0.005 0.508

Notes: Variables are deﬁned in Appendix A.

company listed on a European ﬁnancial market. Firms in the sample have

debt is negatively correlated to our treatment group of IFRS adopters

5.2. Regression analysis

Table 3. Pearson Correlation Matrix

Table 4. Determinants of IFRS Adoption

Dependent Variable IFRSAR

Notes: P-values (in parentheses below the coeﬃcients)

( ¼ 0:008; p-value ¼ 0:017), indicating that the adoption of IFRS has

Table 5. Discretionary Accruals and Voluntary IFRS Adoption

Dependent Variable AWCA AWCA AWCA

INTERCEPT 0.254*** 0.247*** 0.171***

(0.000) (0.000) (0.000)

consolidation reporting process of the latter (PricewaterhouseCoopers,

Column C analyzes private ﬁrms which are not subsidiaries of EU-listed

INTERCEPT 0.254* 0.247* 0.171***

INTERCEPT 0.018* 0.041* 0.019***

INTERCEPT 0:013* 0:007 0.023 0:003 0:022* 0:024*

INTERCEPT 0.044* 0.042 0.080*