Electronic copy available at: http://ssrn.

com/abstract=1590245

Copyright © 2010, 2011 by Karthik Ramanna and Ewa Sletten
Working papers are in draft form. This working paper is distributed for purposes of comment and
discussion only. It may not be reproduced without permission of the copyright holder. Copies of working
papers are available from the author.


Network Effects in Countries’
Adoption of IFRS

Karthik Ramanna
Ewa Sletten




Working Paper

10-092

Electronic copy available at: http://ssrn.com/abstract=1590245



Network Effects in Countries’ Adoption of IFRS
*




Karthik Ramanna
Harvard Business School
kramanna@hbs.edu

and

Ewa Sletten
MIT Sloan School of Management
esletten@mit.edu


This draft: June 20, 2011


Abstract

If the differences in accounting standards across countries reflect relatively stable institutional
differences (e.g., auditing technology, the rule of law, etc.), why did several countries rapidly,
albeit in a staggered manner, adopt IFRS over local standards in the 2003–2008 period? We test
the hypothesis that perceived network benefits from the extant worldwide adoption of IFRS can
explain part of countries’ shift away from local accounting standards. That is, as more
jurisdictions with economic ties to a given country adopt IFRS, perceived benefits from lowering
transactions costs to foreign financial-statement users increase and contribute significantly
towards the country’s decision to adopt IFRS. We find that perceived network benefits increase
the degree of IFRS harmonization among countries, and that smaller countries have a
differentially higher response to these benefits. The results, robust to numerous alternative
hypotheses and specifications, suggest IFRS adoption is self-reinforcing, which, in turn, has
implications for the consequences of IFRS adoption.


*
We thank Michelle Hanlon, Bob Holthausen, S.P. Kothari, Christian Leuz, Sugata Roychowdhury, Doug Skinner,
Thor Sletten, Eugene Soltes, Rodrigo Verdi, Ross Watts, Joe Weber, Gwen Yu, and seminar participants at Arizona
State, Boston College, Emory, the Harvard Applied Statistics Workshop, Minnesota, MIT, Oregon, UCLA, the 2010
European Accounting Association Annual Meeting, the 2011 Harvard Business School International Research
Conference, and the 2010 Penn State Accounting Conference for helpful suggestions and comments on this paper.
The paper is based in part on our manuscript, “Why do countries adopt IFRS,” and has also benefited from
comments we received on that manuscript, including from John Core, David Hawkins, Paul Healy, Shiva Rajgopal,
Eddie Riedl, Terry Shevlin, D. Shores, Suraj Srinivasan, Steve Zeff, and seminar participants at Boston University,
UC–Boulder, HBS, the 2009 GIA Conference at UNC–Chapel Hill, Rice, Toronto, and the University of
Washington. Any errors are our responsibility.
Electronic copy available at: http://ssrn.com/abstract=1590245
1

I. Introduction
The International Accounting Standards Board (IASB) was established in 2001 to
develop International Financial Reporting Standards (IFRS). In the period from 2003 through
2008, nearly 50 countries (including the EU countries) mandated IFRS for all listed companies in
their jurisdictions. Further, in that period, another 15 countries either mandated IFRS for some
listed companies or allowed listed companies to voluntarily adopt IFRS. Another group of 16
countries initiated “convergence” projects with IFRS through 2008, and the list of states with
convergence projects planned beyond 2008 includes some of the world’s largest economies such
as China and the U.S.
1
There has been considerable research into the consequences of a
country’s IFRS adoption for firms in its jurisdiction (e.g., Armstrong, Barth, Jagolinzer, and
Riedl, 2010; Daske, Hail, Leuz, and Verdi, 2008; DeFond, Hu, Hung, and Li, 2011; and Lang,
Maffett, and Owens, 2010); but less is known about why countries themselves adopt IFRS.
2
We
develop and test the hypothesis that the intertemporal shift towards IFRS over local standards
can be explained, in part, by perceived network benefits, i.e., perceived lower transactions costs,
given the network of IFRS adopters. If true, the implication is that worldwide IFRS acceptance is
self-reinforcing, i.e., adoption begets adoption.
Prior literature argues that financial reporting standards have co-developed with a
country’s economic, political, and cultural institutions (e.g., Ball, Kothari, and Robin, 2000; Ball,
Robin, and Wu, 2003; Bushman and Piotroski, 2006; Bradshaw and Miller, 2008; and Hail,
Leuz, and Wysocki, 2010). In particular, the nature of standards comprising a reporting regime
reflects the monitoring and information processing capabilities of existing market institutions

1
Throughout the paper, “convergence” refers to a country’s efforts to reconcile its domestic accounting standards
with IFRS, in lieu of directly adopting IFRS as issued by the IASB. Convergence projects often result in adopting
IFRS with modifications and exceptions.
2
Hope, Jin, and Kang (2006) provide some preliminary evidence on the determinants of IFRS adoption through
2005 in a sample of 38 countries (including 14 EU countries).
2

such as auditing, securities laws, courts, and financial intermediaries. Under this view of
“institutional complementarities” (Leuz, 2010), a change in a country’s financial reporting
standards should accompany complementary changes in monitoring and information processing
institutions. However, the rapid proliferation in IFRS adoption across countries in the 2003–2008
period has seldom been accompanied by substantial changes in enforcement institutions.
3

Holding institutions constant, the staggered adoption of IFRS over time can be due, in
part, to changing perceptions across countries of the benefits of IFRS. IFRS, as a globally
recognized body of standards, is expected to lower transaction costs associated with foreign users
of financial statements. By adopting IFRS, a country trades off status quo national standards that
reflect its market institutions for (in part) a perceived decrease in transactions costs from using
internationally recognized standards. As more jurisdictions with economic ties to a given country
adopt IFRS, the perceived benefits to that country from lowering transactions costs, and thus
from adopting IFRS, increase. Thus, we hypothesize that a country’s adoption of IFRS is related
to the magnitude of its economic relations with other countries that have adopted IFRS through
that date. We refer to this magnitude as the IFRS network value to a country at a given time.
The first step in an empirical test of IFRS network effects is identifying IFRS adoption
among countries. The nature of IFRS adoption by a country (e.g., converging local standards
with IFRS, permitting firms to voluntarily adopt IFRS, full IFRS adoption, etc.) varies across
jurisdictions and time. Thus, our primary IFRS adoption variable is an ordinal reflecting the
variety of possible adoption states. The variable takes three values: “1” for country-years with no
IFRS-related activities; “2” for country-years with convergence projects, country-years in which
voluntary IFRS adoption is permitted, and country-years in which IFRS is required for some

3
See for example, the discussions in Ball, 2006; and Leuz, 2010. Further, the World Bank cites inadequate
enforcement as a key challenge for nearly every emerging market that is harmonizing with IFRS (as catalogued in
its country-level Reports on Observance of Standards and Codes).
3

listed firms; and “3” for country-years with full IFRS adoption for listed firms. The variable is
constructed for each country-year in a sample of 92 countries for the period 2003–2008.
4

To measure the perceived network benefits to a country from adopting IFRS in a given
year, we construct a variable based on the country’s trade with IFRS-incorporating jurisdictions.
Because “trade” is expected to vary with anticipated IFRS adoption, we compute our measure of
perceived network benefits using the predicted value of trade from an autoregressive model with
controls. Our primary empirical tests involve regressing, in a country-year panel, the IFRS
adoption status on perceived network benefits. Because network effects are measured at the
country-year level, we can include country and year fixed effects in the regression. The country
fixed effects allow us to control for cross-sectional variation in country-specific institutional
features that influence the choice of accounting standards (e.g., enforcement institutions). The
use of country fixed effects assumes that these institutions have not systematically changed
across sample countries over our regression period, 2003–2008, as several scholars and the
World Bank have argued (although, we caution that some institutional changes have likely
occurred). The year fixed effects control for time-based explanations that might lead to a
spurious correlation between IFRS harmonization and our network-effects variable.
The inclusion of country and year fixed effects means that our regressions test whether
perceived network benefits can explain some of the intertemporal variation in IFRS
harmonization across countries, holding constant countries’ institutions and overall worldwide
trends. We find that a country’s IFRS adoption status, as measured by our ordinal dependent
variable, is an increasing function of the perceived value of its IFRS network.
We expect a country’s economic size and its relative economic dependence on other
countries to respectively temper and intensify the perceived effects of a growing IFRS network

4
The EU is represented as a single observation among the 92 countries since EU members adopted IFRS jointly.
4

on the choice of accounting standards. Larger countries, due to the size of their markets, are
likely to attract foreign capital and maintain international trade even if they continue using
domestic standards. Thus, we expect larger (higher GDP) countries to be less swayed towards
IFRS adoption by the value of their IFRS networks. On relative economic dependence, we
expect network effects to be of greater importance to countries where trade accounts for a higher
proportion of GDP. Greater dependence on foreign trade accentuates benefits from lowered
transactions costs perceived from IFRS adoption.
The evidence from multivariate tests accounting for country and year fixed effects is
consistent with network effects mattering less to countries with larger GDPs; the evidence on
countries where foreign trade accounts for a larger fraction of GDP is mixed. For countries in the
largest size quartile, an inter-quartile increase in perceived network benefits is associated with
1.5% of the shift from no IFRS-related activities (level “1”) to some harmonization efforts (level
“2”); by contrast, for countries in the smallest size quartile, an inter-quartile increase in perceived
network benefits is associated with 44% of the shift from level “1” to level “2.” These findings
suggest that a country’s relative economic power shapes its response to the increasing worldwide
adoption of IFRS: economically powerful countries are more likely to restrain from adopting
IFRS or tailor their harmonization with IFRS to the capabilities of domestic institutions.
5

We address several potential alternative explanations for our results on network effects.
Since our results are robust to country and year fixed effects, the explanations we consider are
those that, like network effects, are at least partially panel-based (as opposed to purely cross-
sectional or time-based). Moreover, we focus on explanations captured by variables associated
with our measure of network effects (and thus, potentially confounding the interpretation of our

5
Anecdotal evidence from China’s process of converging with IFRS is consistent with this finding: Ramanna,
Donovan, and Dai (2009) describe various exceptions to IFRS China has carved out as a condition to converging
with the global standards.
5

empirical tests). We identify five such explanations. First, recognizing that since the early 2000s
the World Bank has encouraged its client countries to embrace IFRS (World Bank, 1998–2008),
we include in our tests a variable capturing panel variation in the World Bank’s pressure. Our
second and third alternative-explanation tests are based on the idea that IFRS harmonization can
be part of a country’s broader policy response to globalization. We examine whether IFRS
adoption is related to the extent of internationalization of a country’s economy, and whether our
results can be attributed to countries’ differential exposure over time to global information
resources. The fourth test examines whether countries’ IFRS adoption decisions can be explained
by changes in national governments, since IFRS adoption can be part of a new government’s
broader political-economic strategy. Finally, recognizing the role of the Big 4 audit firms in
promoting and lowering the implementation costs of IFRS adoption, we test whether a country’s
decision to adopt IFRS is related to the entry of the Big 4 auditors into that jurisdiction. We find
some evidence consistent with each of the five alternative explanations above, but the evidence
is not mutually exclusive to network effects: network effects remain statistically and
economically significant determinants of IFRS adoption after the inclusion of these variables.
We also perform a number of sensitivity tests. First, because our adoption status variable
inherently assumes an order among, and equal distances between, the various levels of IFRS
adoption, we perform robustness tests using non-ordinal regressands (e.g., hazard and
multinomial logit models). Second, we test the sensitivity of our results to restricting the
definition of a country’s network benefits to trade with only non-EU countries adopting IFRS.
The EU had a dominant role in the establishment (EC, 2000) and subsequent direction (e.g.,
Leone, 2008) of the IASB, so economic relations with the EU can be overriding in explaining the
impact of network benefits on IFRS adoption. Finally, we expand the ordinal characterization of
6

our IFRS adoption variable from three levels to five to explore differences between countries’
IFRS “convergence” projects and other partial adoption strategies. We discuss the results of
these sensitivity tests in Section IV.
Overall, the evidence in this paper suggests that perceived network benefits are an
important determinant of IFRS adoption over time. Since we conceptualize and measure network
benefits ex ante, i.e., as a determinant (not consequence) of IFRS adoption, our evidence does
not speak to whether these network benefits are realized.
6
Nevertheless, our findings related to
network effects are important for at least four reasons. First, they add context to findings from
existing firm-level studies on IFRS adoption. Firm-level studies are conditional on countries’
decisions to mandate IFRS, suggesting firm-level studies examine the second stage in what is at
least a two-stage process. Second, the evidence on network effects suggests a country can adopt
IFRS even if its domestically developed accounting standards are particularly well-suited to its
domestic institutions. Third, we find that smaller and, in some cases, more economically
dependent countries are more likely to adopt IFRS because others are doing so. Such countries
also tend to have weaker market institutions (e.g., World Bank, 1998–2008), likely impeding
effective implementation and enforcement of IFRS. Finally, a literature in economics has shown
that when network effects contribute to the dominance of a standard, even superior innovations
in the future may not be implemented (e.g., the QWERTY keyboard; David, 1985; Katz and
Shapiro, 1985). While our evidence cannot establish this will be the case with IFRS, the evidence
is germane in the context of prior research on network effects.
The remainder of this paper is organized as follows. Section II develops our hypotheses.
Section III describes the cross-country dataset on IFRS adoption and our measures of IFRS

6
Daske et al. (2008) show that real capital-market benefits from IFRS adoption occur only in countries with well-
developed information and monitoring institutions. Their evidence suggests that the “perceived” network benefit we
show as being a determinant of IFRS adoption is likely to actualize in only some countries.
7

network values. That section also describes the research design, including our tests of alternative
explanations. Section IV describes the results and Section V concludes.

II. Hypotheses development
Prior literature argues that a country’s financial reporting standards co-develop with the
economics, politics, and culture of its institutions like auditing, securities laws, courts, and
financial intermediaries. One implication from this literature is that institutional differences
across societies can explain countries’ choices on IFRS (i.e., adopt or not). In this vein, Ramanna
and Sletten (2009) describe a number of institutional hypotheses for why countries do not adopt
IFRS, including quality of local governance standards, international influence, and cultural
distance from the EU. Notwithstanding institutional differences, IFRS has grown in popularity
over six years, as seen by the increasing number of countries attempting to harmonize with IFRS
between 2003 and 2008. Assuming the institutions that shape the accounting standards in a
country have not changed substantially over the 2003–2008 period, it remains to be explained
why so many countries adopted IFRS so quickly. We hypothesize that network benefits from
extant worldwide adoption of IFRS are significant determinants in the time-series decision on
IFRS harmonization by any given country.
7

To understand the role of network benefits in IFRS adoption, it is helpful to consider in
parallel the example of a popular network-dependent product, Facebook.
8
The value to a user
from adopting Facebook as a communication portal is driven by three distinct sources: (1) the
demand for a communication portal; (2) the features on Facebook (e.g., applications and
customizability); and (3) the number of other Facebook users. The first two sources are direct

7
Währisch (2001) describes how network effects can motivate firms to adopt international accounting systems.
8
A well-developed theoretical literature in economics explores the notion of network effects. See for example, Katz
and Shapiro (1985), Liebowitz and Margolis (1994; 1998).
8

benefits from adopting Facebook, while the third source is the value from Facebook’s network.
The role of direct benefits in adopting Facebook can be explained by idiosyncratic preference
functions that capture an individual’s demand for a communication portal and its user features;
the analogy of direct benefits in the case of countries’ IFRS adoption is the institutional
complementarities discussed earlier. The role of network benefits in adopting Facebook can be
explained by perceived lower transactions costs, given the extant group of Facebook adopters. A
similar argument can be made with respect to IFRS and we elaborate on this point below.
IFRS, as a globally recognized body of standards, is expected to lower transactions costs
for foreign users of financial statements. That is, foreign financial statement users already
familiar with IFRS through their own adoption of the standards are expected to incur lower
barriers in analyzing overseas financials prepared under IFRS, which in turn can result in
benefits accruing to entities reporting under these standards. As more jurisdictions with
economic ties to a given country adopt IFRS, the perceived benefits to that country from
lowering transactions costs to foreign users, and thus from adopting IFRS, can increase.
Consequently, we hypothesize that a country’s adoption of IFRS (holding constant institutional
determinants) can be explained, in part, by the magnitude of its economic relations with other
countries that have adopted IFRS through that date. We refer to this magnitude as the value of
the IFRS network to a country at a given time.
The nature of a country’s economy, specifically as it relates to that of other countries, is
likely to temper or intensify the perceived effects of a growing value of its IFRS network on
accounting standards. We exploit this argument and examine how a country’s economic size and
its relative economic dependence on other countries affect its sensitivity to perceived network
benefits. On economic size, we expect larger countries (i.e., countries with higher GDP) to be
9

less swayed towards IFRS adoption by the value of their IFRS networks. Larger countries are
likely to have greater bargaining power due to the size of their markets, and as a result, are likely
to attract foreign capital and maintain international trade even if they continue using domestic
standards. On relative economic dependence, we predict that network effects are of greater
importance to countries where trade accounts for a higher proportion of GDP. Greater
dependence on foreign trade increases benefits from reduced transactions costs expected through
IFRS adoption. The predictions on size and relative economic dependence generate cross-
sectional tests that can help validate the hypothesis on network effects and provide additional
context to the question why countries adopt IFRS.
9


III. Metrics and research design
The use of countries as a unit of empirical analysis is common in research in international
finance and corporate governance (see for example, La Porta, Lopez-de-Silanes, and Shleifer,
2008, for a recent review). Nevertheless, its use remains relatively rare in the accounting
literature. Accordingly, we begin this section by laying out the basic assumptions implicit in our
empirical tests at the country level. Country-level decisions reflect a country’s domestic political
economy.
10
In using country-level decisions as the unit of empirical analysis, researchers must
assume that the domestic political economies that generated such decisions are not correlated
with their independent variables.
11
The equivalent assumption in our study would be that

9
Note the prediction on size is not that it is inversely related to network effects (countries are likely to perceive
network benefits regardless of size); rather, the prediction is that perceived network benefits matter less to larger
countries. A similar argument applies to relative economic dependence.
10
More specifically, such decisions are the result of actions by special-interest lobbyists and ideology-driven
regulators (see Kothari, Ramanna, and Skinner, 2010, for an analysis of political-economic theories as they apply to
accounting standard setting). The relative power of lobbyists and regulators in country-level decision making is
likely to vary based on the extent of equitable representativeness within countries (e.g., opposing groups are more
likely to get a voice in the United States than in Zimbabwe).
11
Every firm-level study makes a similar assumption vis-à-vis the decision making process within a firm.
10

variation in countries’ perceived networks benefits is not systematically related to variation in
their domestic political economies. However, in our study, if we assume the nature of a country’s
domestic political economy remains static through our six-year sample period, our use of country
fixed effects controls for cross-sectional variation in domestic political economies. Further, our
use of government fixed effects in robustness tests can also address changing political economies
as new governments introduce new policies into their jurisdictions.
To test our hypotheses on network effects, we use by-country time-series measures of
both IFRS harmonization and network benefits. The first two sub-sections of Section III describe
these measures. In the remaining sub-sections, we discuss our research design.

Measuring IFRS adoption
Below, we describe the construction of our database of IFRS adoption by country-year.
While our research question concerns the role of network effects in countries’ adoption
decisions, we are unable to obtain reliable information on the decision dates of IFRS adoption for
a broad sample of countries. Consequently, we use actual adoption dates as a proxy for adoption
decision dates. That is, we compile information on the degree of a country’s IFRS response in
every year between 2003 and 2008. We begin our tests in 2003 because we are interested in
IFRS as developed and sponsored by the IASB, and 2002 was the first full year of the IASB’s
existence.
12
We end our sample in 2008, because required macroeconomic data to construct the
independent variables in our study were not available beyond 2008 at the time we initiated our

12
We exclude standards promulgated by the IASB’s predecessor the International Accounting Standards Committee
(IASC) because there is evidence to suggest the IASC was culturally quite different from the IASB. In particular,
while the IASB’s standards are influenced by Pan-European economic interests (given the IASB’s implicit charter
from the EU), the IASC’s work was perceived as relatively more Anglo-centric. The IASC was established in 1973,
the year the UK joined the European Community. Benston, Bromwich, Litan, and Wagenhofer (2006, p. 229) argue
that by this time, existing European Community countries had made significant progress towards accounting
harmonization, and the IASC was created to help the UK have a voice in future cross-country standardization.
11

study. Some countries have implemented IFRS since 2008, but our database, being censored at
year-end 2008, will correctly classify these countries as non-adopters for years 2003–2008.
We use three primary sources of data on IFRS adoption: (1) Deloitte & Touche’s
IASplus.com website; (2) a similar internet database from PriceWaterhouseCoopers; and (3) data
from the World Bank’s country Reports on Observance of Standards and Codes (ROSC reports).
Deloitte’s website lists IFRS adoption information for 153 legal jurisdictions (including 30
jurisdictions in the EU/ European Economic Area, EEA), although the information for several
countries is not up-to-date. PriceWaterhouseCoopers’ website provides similar adoption
information as of the end of 2008 for 109 countries (including 26 jurisdictions in the EU/ EEA).
The ROSC reports are comprehensive reviews of individual countries’ accounting and auditing
regulations, and also include discussions of other related issues such as accounting education and
enforcement. The ROSC reports are available for 74 developing countries (the reports are usually
prepared for World Bank client countries), but some of the reports date as far back as 2001 and
cannot be fully relied on for more current information.
In coding a country’s IFRS adoption we use information from all three data sources,
when available. Each data source covers a slightly different set of countries, and their
assessments of the extent of IFRS adoption occasionally differ for those countries they cover in
common.
13
For countries with discrepancies among data sources, we opt for the adoption status
suggested by the majority (two) of these sources or, when only two sources are available, we
determine the status using the source that provides more supporting information for its
assessment. When the available information is not sufficient to determine the extent of IFRS

13
While the IASB itself relies on IASplus.com as a data source (IASB, 2008a, b), there are a few cases in which
other sources disagree with the website’s assessment of the country’s adoption status. For example, Egypt and Peru
are listed on IASplus.com as requiring IFRS for all listed companies, but the PriceWaterhouseCoopers website, the
ROSC reports, and at least one (non Deloitte) Big-4 audit partner in each country disagreed with IASplus.com. In
these circumstances, we err in favor of the other data sources.
12

adoption or the relevant dates, we supplement it with information from the official websites of
national standard setters, securities exchanges, associations of accountants, and web searches of
newswire archives. Our searches are limited to websites available in English. Finally, we obtain
some additional information from correspondence with the investor relations departments of
national securities exchanges and country managing partners at Big-4 audit firms.
A qualitative analysis of the extent of each country’s IFRS adoption leads us to conclude
that this process cannot be described with a simple binary variable. Consequently, we classify
countries into five different groups based on their degree of IFRS harmonization as described
below. First, following the adoption classification on the IASplus.com website, we create four
groups: full adopters (when IFRS as issued by the IASB is required for all listed companies);
IFRS required for some listed companies; IFRS permitted for (at least some) listed companies;
and non-adopters (when IFRS is not permitted for any listed companies). We then refine this
classification to include an additional category for countries with an IFRS “convergence” project
as discussed in Appendix A.
For the purposes of our primary empirical analysis, we reclassify the five categories of
IFRS harmonization described above into three ordinal levels: (1) non-adopters; (2) countries
with convergence projects, countries allowing voluntary IFRS adoption, and countries requiring
IFRS for some listed companies; and (3) full IFRS adopters. The ordinal levels represent
distance from full adoption of IFRS as issued by the IASB. We agglomerate the middle three
categories into a single level (“partial adopters”) because it is difficult to objectively rank these
categories relative to each other. Our primary dependent variable, the three-level ordinal
estimated for every country-year in the dataset, is denoted, AJoption
ì,t
.
13

To test the robustness of our ordinal rankings, in additional analyses we estimate both
multinomial logit regressions, where we compare each harmonization category to IFRS non-
adopters, and hazard regressions, where we treat only countries fully embracing IASB standards
as IFRS adopters. Further, in subsequent OLS-based robustness tests, we explore the sensitivity
of our results to a five-level ordinal classification as follows: (1) non-adopters, (2) convergence
project, (3) voluntary adoption, (4) required for some listed firms, and (5) full adopters.
Since we are interested in the determination of financial reporting requirements for listed
companies, we exclude from our database all jurisdictions that do not have stock exchanges. We
also exclude those jurisdictions for which the World Bank does not report gross domestic
product (GDP) data. The World Bank’s World Development Indicators (WDI) database is our
source for GDP data. Additionally, we exclude jurisdictions without dyadic trade data as
reported by the International Monetary Fund (IMF). These data are required to calculate our
measure of network benefits (in the following subsection). In our final sample, the 27
jurisdictions that compose the member states of the EU are treated as one observation.
14
The
reason for this treatment is that in 2002 the EU made a joint decision to adopt IFRS by 2005 (EC,
2008) i.e., adoption of IFRS by EU member states was not made country-by-country. The data
selection procedure described above yields a final sample of 92 countries and 552 country-years.
The countries are listed in Appendix B.

Measuring perceived network benefits
As noted earlier, the network benefits from IFRS harmonization for a given country i in
year t are the economic benefits perceived from commercial relations with the existing base of

14
EU countries are coded as being full adopters between 2005 and 2008, and as having convergence projects with
IFRS in 2003 and 2004. Our coding is based on the extent of IFRS harmonization for the majority of EU members.
14

countries already harmonized with IFRS. We determine “the existing base of countries already
harmonized with IFRS” using the country-year data on IFRS adoption described in the previous
sub-section. Measuring “the economic benefits perceived from commercial relations” with this
base of countries is more challenging. One relatively simple proxy for the perceived benefits is
the aggregated value of existing trade with the subset of IFRS adopting countries. This
aggregated value can be constructed from dyadic (bilateral) trade data obtained in panel form
from the IMF’s Direction of Trade Statistics (DOTS) database. Under this approach,
Nctwork
ì,t
= `IroJc
ì],t-1
]∈]
…(1)
Where IroJc
ì],t-1
is the dyadic trade volume between country i and country j in year t-1,
i ∉ J, and J is the subset of all jurisdictions that have mandated IFRS for all listed firms (i.e., full
adoption), as of year t-1.
15

The problem with this approach is that existing trade data incorporate the effects of
country i’s imminent IFRS harmonization as well. That is, since we measure harmonization
effective of the implementation date, rather than the announcement date, existing trade data are
likely to reflect at least some of the realized consequences of country i’s impending
implementation.
16
For our purposes, we ideally want to separate these realized effects from any
measure of economic benefits perceived prior to the harmonization decision. The realized effects
can result in either a boost or a decline in existing trade from its latent level (i.e., its level absent

15
Conceptually, one can also measure network benefits using foreign direct investment or foreign equity portfolio
investment. We do not use these measures because dyadic-level data on these measures are available for only a
handful of very large countries. Moreover, the use of trade in measuring perceived IFRS network benefits is
consistent with accounting’s role in contracting. For example, Ramanna et al. (2009) identify “anti-dumping”
lawsuits over exports by Chinese manufacturers as a major reason for China’s decision to converge with IFRS.
These lawsuits usually allege that Chinese manufacturers are selling (or “dumping”) goods at prices below cost in
overseas markets. By adopting IFRS, Chinese manufacturers hoped to provide more reliable data on their costs, thus
justifying their low prices on exports and accordingly boosting exports.
16
E.g., Márquez-Ramos (2009) finds evidence of bilateral exports in the E.U. increasing after IFRS adoption.
15

impending implementation), depending on the country’s institutional features that facilitate
contracting efficiency, including auditing, securities laws, courts, and financial intermediaries.
For example, if IFRS harmonization decreases contracting efficiency, imports will decrease
because customers in country i will suffer worse credit terms (anticipating deteriorating
reporting) and exports will decrease because of less reliable measures of financial strength
among country i’s suppliers. This situation will result in a decrease in overall trade.
Alternatively, if IFRS harmonization increases contracting efficiency, countries can similarly
experience an increase in overall trade.
17,18

In order to obtain a cleaner measure of perceived benefits, we construct a proxy that is
based on the lagged value of trade and, thus is less likely to include the real effects of a country’s
impending IFRS harmonization. Specifically, we regress existing dyadic trade on its lagged
value in a panel with country and year fixed effects and use the predicted value of trade from the
regression as our measure of perceived network benefits. That is, we estimate the following
regression in the panel of all country-dyad-years in our dataset.
IroJc
ì],t-1
= o
1
∗ IroJc
ì],t-2
+ o
ì
∗ {Country i ¡. c. ] +o
]
∗ {Country ] ¡. c. ] + o
t-1
∗ {¥cor t -1 ¡. c. ] + e
ì],t-1
…(2)

Where IroJc
ì],t-1
is the dyadic trade volume between country i and country j in year t-1
(scaled by country i’s total trade in year t-1), and ] = i. The predicted value of existing dyadic
trade from this regression, IroJc
¯
ì],t-1
, accounts for secular increases in trade from year t-2,
controlling for country- and year-specific effects. Assuming anticipated IFRS harmonization in

17
Evidence in DeFond et al. (2011) supports this intuition, albeit in the context of investment flows. In studying
U.S. mutual fund ownership among 14 IFRS adopting countries, the authors find either increases or decreases in
fund ownership depending on the “credibility” of IFRS implementation across those countries.
18
Confounding the realized and perceived benefits from IFRS harmonization is especially troublesome if the
realized effects are negative (i.e., decrease trade) because a country is unlikely to adopt IFRS unless it expects a net
benefit from the adoption. In other words, measuring network benefits using existing trade data is particularly
problematic for countries with weak monitoring and information processing institutions, where harmonization is
likely to decrease contracting efficiency.
16

year t does not confound trade data from year t-2, the measure IroJc
¯
ì],t-1
is a better proxy for
IFRS network benefits than the raw trade value IroJc
ì],t-1
for the reasons discussed above. As
in equation (1), we estimate the actual network benefits for a given country i in year t as the
aggregated value of IroJc
¯
ì],t-1
across the subset of countries already fully adopting IFRS.
Nctwork
ì,t
= `IroJc
¯
ì],t-1
…(S)
]∈]

Where i ∉ J and J is the subset of all jurisdictions that have mandated IFRS for all listed
firms (i.e., full adoption), as of year t-1.
In calculating Nctwork
ì,t
, trade with countries pursuing convergence, countries
permitting voluntary adoption, and countries requiring only partial adoption are not included. As
noted earlier, “convergence” is a loosely defined term that can result in different sets of standards
in different countries. Further, voluntary and partial adoption efforts are not equivalent to full
adoption because they require different levels of adaptation to IFRS among complementary
institutions such as auditing. Nevertheless, in robustness tests we explore the sensitivity of our
measure of network benefits to including trade with countries harmonizing less than fully with
IFRS. Specifically, we define an alternative network benefits measure Nctwork_Con:
ì,t
.
Nctwork_Con:
ì,t
= `IroJc
¯
ì],t-1
…(4)
]∈]

Where i ∉ J and J is the subset of all jurisdictions that have: (i) converged with IFRS; (ii)
made IFRS available for voluntary use; (iii) mandated IFRS for at least some listed firms; or (iv)
mandated IFRS for all listed firms (i.e., full adoption), as of year t-1.
Additionally, we define another measure of network benefits that restricts the set J
(where i ∉ J) to only non-EU countries mandating full IFRS adoption. Specifically,
17

Nctwork_NonEu
ì,t
= `IroJc
¯
ì],t-1
…(S)
]∈]

Nctwork_NonEu
ì,t
excludes trade with EU countries and allows us to test whether
economic relations with non-EU countries can explain the impact of network benefits on IFRS
adoption. The EU had a dominant role in the establishment of the IASB (EC, 2000) and EU
countries continue to exercise discretion over the Board.
19
Moreover, EU countries adopted IFRS
jointly, potentially providing the critical mass of commitment to IFRS needed to generate
network benefits. Given the EU’s central status vis-à-vis IFRS, it is possible that benefits
perceived from relations with the EU are overriding in explaining network effects.
20


Research design based on OLS
Our primary tests are ordinary least squares (OLS) regressions of the three-level ordinal
ranking of IFRS harmonization on network benefits. The regressions are estimated in the panel
of all countries i and years t. Standard errors are clustered by country. We predict o
1
to be
positive and statistically significant.
AJoption
ì,t
= o
0
+ o
1
∗ Nctwork
ì,t
+ o
ì
∗ {Country i ¡. c. ] + e
ì,t
…(6)
We expect a country’s economic size and its relative dependence on trade to qualify the
relation between IFRS harmonization and network benefits (i.e., o
1
in equation (6)). We measure
economic size using the quartile rank of a country’s GDP (in constant year 2000 U.S. dollars);
the data are obtained from the WDI. Trade dependence is measured as the quartile rank of the
ratio of total foreign trade to GDP; total foreign trade data are obtained from the IMF’s DOTS

19
For example, the IASB, in the wake of declining financial markets in 2008, allowed financial institutions using
IFRS to opt for a one-time reclassification of certain investment assets, thus avoiding write-downs. Some in the
financial press have suggested the IASB made this decision in response to pressure from the EU (e.g., Leone, 2008).
20
Because of their joint decision to adopt IFRS, EU countries are represented as a single observation among 92
countries in the sample. However, a country may trade with some EU members and not others. In order to reflect
this, all measures of network benefits discussed above include trade with individual EU countries.
18

database. The economic size and trade dependence variables are denoted q(GDP) and
q(Trade/GDP), respectively. The formal statement of the OLS regression with size and trade
cross-sectional effects estimated over the dataset of all countries i and years t is as follows.
AJoption
ì,t
= o
0
+o
1
∗ Nctwork
ì,t
+o
2
∗ Nctwork
ì,t
∗ o(0ÐP) +o
3
∗ Nctwork
ì,t
∗ o(IroJc¡0ÐP) +o
ì
∗ {Country i ¡. c. ] +e
ì,t
…(7)
We predict o
1
and o
3
to be positive and statistically significant, and o
2
to be negative and
statistically significant. Regression (7) does not include main effects for q(GDP) and
q(Trade/GDP) since we include country fixed effects.
As noted earlier, we define alternative measures of network benefits: specifically,
Nctwork_Con:
ì,t
and Nctwork_NonEu
ì,t
. Accordingly, we also estimate regression (7) replacing
Nctwork
ì,t
with these measures.
The use of country fixed effects in equations (6) and (7) allows us to hold constant the
institutions that influence a country’s choice of accounting standards. In the initial set of tests,
we exclude year fixed effects because the regressions are intended to test whether our measure of
network benefits explains part of the intertemporal variation in IFRS adoption. More specifically,
since network benefits are in part determined by which countries have adopted IFRS in the past,
and are thus correlated with the average level of adoption over time, the inclusion of time-based
controls can extract that part of the variation in IFRS adoption that is attributable to network
effects. That said, it is important to establish that our results on network effects are robust to the
inclusion of time-based controls, particularly since there are numerous possible time-based
explanations for the increasing IFRS adoption by countries over our sample period. Accordingly,
we also estimate equations (6) and (7) with year fixed effects. In doing so, we note that, even
after including such time-based controls, the network effect can still be identified by our network
19

variable because, both conceptually and empirically, network effects are cross-sectional and
time-series in nature (as discussed earlier).

Alternative explanations
While a number of factors likely contribute to IFRS adoption by countries, our focus in
this study is network effects. Thus, in this subsection, we focus on explanations that potentially
confound our inferences on network effects (explanations likely captured by variables associated
with our measure of network effects). Moreover, in the context of testing the network effects
hypothesis with country and year fixed effects, the alternative explanations we examine are those
that, like network effects, are at least partially panel-based. We identify five such explanations.
The first focuses on the role of the World Bank in encouraging its client countries to
embrace IFRS. The World Bank, through its periodic ROSC reports, evaluates the status of a
country’s corporate governance institutions (including accounting institutions), and then makes
recommendations on how that country can progress towards more internationally consistent
governance practices (including through IFRS harmonization). The incidence of an ROSC report
may thus result in both IFRS adoption and changes in trade, which will be captured by our
network effects variable. If so, an association between IFRS adoption and the network effects
variable can be due to World Bank pressure rather than network effects. To control for this
possibility, we include in robustness tests an indicator variable wB_Rcport
ì,t
to denote whether a
World Bank ROSC report was issued for a given country “i” prior to the year “t” in question
(i.e., in year t-1 or before).
The second alternative explanation we test is based on the idea that IFRS adoption can be
part of a country’s broader policy response to globalization. That is, as a country’s economy
20

becomes increasingly global over our sample period, the country may initiate associated policy
responses such as IFRS harmonization. In this case, the association between IFRS adoption and
our network effects measure can be attributed to the growing internationalization of an economy.
To address this possibility, we include as a control variable the ex-ante share of international
trade in a country’s GDP. This variable, Trade/GDP, is already described in the previous sub-
section since quartile ranks of Trade/GDP are used in our cross-sectional tests of the effect of
trade dependence on network effects.
21

The third alternative explanation is also related to globalization: individual countries’
policy responses to globalization (including IFRS harmonization) may vary in time due to
differential exposure to international information resources. Implicitly, the greater the exposure
to international information, the more likely constituents in a country become interested in
globalization. Moreover, differential exposure to international information may affect trade, thus
confounding the interpretation of our network effects measure. To mitigate this possibility, we
include a variable that proxies for countries’ access over time to international information
resources: the prevalence of Internet usage in a country-year (Info_Globalization
i,t
). The data are
from the WDI database.
Fourth, we examine whether countries’ IFRS adoption decisions can be explained by
changes in national governments. That is, the adoption of IFRS and corresponding changes in
our network effects variable can simply reflect the policy of a new government to be more
global. To address this explanation, we rerun our regressions with government fixed effects in
lieu of country fixed effects. Each new government in our panel dataset, as denoted by a new
“head of government” in the CIA World Factbook, is identified by a unique fixed effect (the CIA

21
In the presence of country fixed effects, the coefficient on Trade/GDP captures the impact of the variable’s by-
country mean-adjusted value on IFRS adoption. This can, in essence, be interpreted as the impact of the growing
internationalization of an economy on IFRS adoption.
21

identifies “heads of governments” as presidents in executive republics, prime ministers in
Westminster-style governments, and sovereigns in absolute monarchies).
The fifth alternative explanation we test is based on the hypothesis that a country’s IFRS
adoption and concurrent changes in trade are related to the decision of the Big 4 auditors to enter
that jurisdiction. The entrance of the Big 4 into a country can be associated with IFRS adoption
either because the firms lobby for such outcome, or because the implementation costs of IFRS
for that country decrease with the presence of auditors experienced in IFRS. We address this
hypothesis by including in our regressions an indicator variable, BigAuditor, equal to one for
country-years in which all three of the following Big 4 audit firms have offices located in the
country: Ernst & Young, KPMG, and PWC. The data are collected from the firms’ websites and
through private correspondence with the firms. We have been unable to collect similar
information from Deloitte.
22


Research design based on the multinomial logit and hazard models
Our method of coding harmonization levels for the OLS regressions has its limitations: it
requires that we determine the relative gaps between the levels a priori rather than a posteriori,
as would be possible using multinomial logit or other models. We use OLS in the main tests
because country fixed effects are not feasible in the other models. We test the robustness of our
ordinal harmonization levels by estimating both multinomial logit and hazard regressions. In the
multinomial logit regressions, we use IFRS non-adopters as the base case and estimate the
probabilities that countries choose each of two other IFRS harmonization categories (i.e., partial

22
Our results are robust to an alternative measure of BigAuditor: the proportion of the three audit firms (Ernst &
Young, KPMG, and PWC) with offices located in a given country in a given year.
22

adoption or full adoption). We also interact network benefits with the economic size and trade
dependence proxies to test the cross-sectional hypotheses on network effects.
In the hazard regressions, full adoption of IFRS is modeled as the “failure” event, i.e., the
dependent variable is the time to full IFRS adoption. The hazard regressions estimate the impact
of network benefits on full adoption, accounting for the relative timing of that adoption. Let “T”
be the “survival” time, i.e., the number of years until full IFRS adoption. Then, T=1 if a country
adopts IFRS in 2003, T=2 if for adoption in 2004, and so on. Since the data are censored in 2008,
the highest possible value for T is six. For countries that do not adopt by 2008 or that harmonize
only partially with IFRS, T is set to six and the dependent variable is treated as censored. In
additional hazard tests, we relax the latter assumption and treat any harmonization effort at
convergence or above (e.g., voluntary adoption) as a “failure” event. We estimate two different
versions of the hazard model: the counting process hazard model (Therneau and Grambsch,
2000) and the more-familiar Cox proportional hazard model. On average, the two methods are
expected to, and do in our case, yield similar results; thus, we only report results based on the
counting process model.
23
A positive coefficient on a covariate in the hazard model implies that
the likelihood of IFRS full adoption is increasing in the covariate. The primary independent
variables in the hazard analyses are variously: one measure of network benefits (e.g., Nctwork
ì,t
,
Nctwork_Con:
ì,t
, etc.) and its interactions with the economic size and trade dependence proxies.
Both in the hazard and in the multinomial logit regressions, parameter estimates are
obtained from MLE, so these specifications do not include country fixed effects (due to the
limited number of observations, models with country fixed effects do not converge). We do,

23
The counting-process method is based on a discrete formulation of the dependent variable (i.e., survival time T),
which is likely to be more appropriate for our data since we measure T in years (the Cox model assumes T is
continuous). Moreover, in situations where the range of possible values for T is low (as in the case of our data where
T varies between 1 and 6), Box-Steffensmeier and Jones (2004) argue the counting-process method is likely to be
more appropriate for hazard analyses.
23

however, include year fixed effects and variables that control for alternative explanations.
Standard errors are clustered at the country level; in the case of the hazard model we use the
process described in Lin and Wei (1989).

IV. Results
Descriptive results
Table 1 presents the distribution of IFRS harmonization categories across the 552
observations in the country-year panel. The rows in the table correspond to the three different
adoption statuses described in Section III: (1) non-adopters, (2) countries with convergence
projects, countries allowing voluntary IFRS use, countries requiring IFRS for some listed
companies, and (3) full adopters. Countries across the three sub-categories in (2) are presented
separately. The columns represent the six years in the panel, 2003–2008.
INSERT TABLE 1 HERE.
The proportion of non-adopters, 61 countries, is highest in 2003; the proportion decreases
to 30 countries by 2008. In contrast, the number of full adopters, i.e., countries requiring IFRS
(as issued by the IASB) for all listed firms in their jurisdictions, grows from 18 countries in 2003
to 32 countries in 2008. The EU, having adopted IFRS fully in 2005, is represented as a single
observation in this category effective 2005. The number of countries with IFRS convergence
projects is also increasing through the time-series, from six in 2003 to 15 in 2008. The proportion
of countries permitting voluntary IFRS use and the proportion of countries requiring IFRS for
some listed companies are non-monotonic in the time-series. For example, there are five
countries permitting voluntary IFRS use in 2003, 10 in 2006 and 2007, and eight in 2008. These
proportions are likely to vary over time because countries may choose to “ease in” to IFRS
24

harmonization by first allowing voluntary IFRS use and/or requiring IFRS for some listed
companies, before moving to full-scale IFRS adoption.
INSERT TABLE 2 HERE.
Table 2 provides descriptive statistics for our measures of perceived network value by
adoption year and by the three levels of IFRS harmonization. Panel A reports mean and median
values of our primary measure of network benefits Nctwork
ì,t
, i.e., economic benefits perceived
from countries that fully adopted IFRS. Nctwork
ì,t
has increased substantially between 2003 and
2008 across all categories of IFRS harmonization, although the increase is not always consistent
or monotonic. The average values of Nctwork
ì,t
differ across the various categories of IFRS
harmonization, although no pattern is apparent in these differences. To interpret the average
values in Table 2, consider for example, the mean Nctwork
ì,t
for non-adopters in 2003: 0.019.
This value implies that 1.9% of total trade among non-adopters in 2003 came from countries that
fully adopted IFRS as of 2002. Table 2, Panel B, reports mean and median values of the
alternative measures of perceived network benefits, Nctwork_Con:
ì,t
and Nctwork_NonEu
ì,t
.
The average values of Nctwork_Con:
ì,t
are generally higher than those of Nctwork
ì,t
, while the
average values of Nctwork_NonEu
ì,t
are the same or lower than those of Nctwork
ì,t
.
INSERT TABLE 3 HERE.
In Table 3, we report the mean and median values of GDP and Trade/GDP. These
variables are used to generate the in-sample quartile rank variables q(GDP) and q(Trade/GDP)
that are the bases for the cross-sectional tests of network effects using country size and economic
dependence. Trade/GDP is also used to test the alternative hypothesis that IFRS adoption can be
attributed to the internationalization of a country’s economy. In addition to GDP and
Trade/GDP, we report the average values of countries’ foreign-equity portfolio investments to
GDP, i.e., FEPI/GDP. This variable can also be used as a proxy for a country’s economic
25

dependence in cross-sectional tests; however, poor availability in the panel limits its use. The
means and medians of GDP, Trade/GDP, and FEPI/GDP in Table 3 are reported by the three
levels of IFRS harmonization and years. The values corresponding to a given year are lagged
values, i.e., the mean GDP value for non-adopters in 2003 is actually the mean from year 2002.
This is because lagged-values are used in the regression analyses, i.e., to explain IFRS
harmonization in 2003, we use size and economic dependence from 2002 (and so on). In Table 3,
the average values of GDP appear to vary across time within the IFRS harmonization categories.
This phenomenon is driven more by countries’ movements across harmonization categories (due
to changes in their harmonization responses) than by changes in the values of GDP for a given
country over time. Unlike with GDP, there appears to be no consistent through-time relation
between Trade/GDP and IFRS harmonization status.
Table 3 also shows the mean and median values of WB_Report, Info_Globalization, and
BigAuditor—three independent variables used in subsequent tests of the alternative explanations
to network effects. By construction, the average values of WB_Report increase over time; but
there is no discernible difference between its average values across the three IFRS harmonization
categories. Info_Globalization is also increasing over time, but only among non-adopters and full
adopters; the decreasing trend in Info_Globalization across partial adopters is likely due to
countries in this category transitioning to full adoption. The median value of BigAuditor is one
across all categories in Table 3, which is expected given the international presence of the Big 4.

OLS regression results
Table 4 presents the results of OLS regressions of the ordinal IFRS harmonization status
on network benefits. The OLS regressions in Panel A include country fixed effects, and
26

statistical inferences are based on country-clustered standard errors (inferences are robust to
clustering by country and year). There are four columns to Table 4. The first column in Panel A
is the result of the regression specified in equation (6) in Section III, i.e., without interactive
effects for country size and economic dependence. The next three columns present the results of
regressions specified by equation (7), i.e., with interactive effects. Panel B is organized similarly,
except all regressions include year fixed effects.
INSERT TABLE 4 HERE.
In column (1) of Table 4 Panel A, the coefficient on the network benefits proxy,
Nctwork
ì,t
, is positive and statistically significant. The interpretation is that the degree of IFRS
harmonization is increasing in perceived network benefits, after controlling for institutional
determinants through fixed effects.
24
In columns (2) through (4) of Table 4, we test for the cross-
sectional effects of country size and country economic dependence on the relation between IFRS
harmonization and network benefits. Across the three columns, the proxies for network benefits
are Nctwork
ì,t
, Nctwork_Con:
ì,t
, and Nctwork_NonEu
ì,t
, respectively. The coefficient on the
non-interacted network benefits proxy in Table 4 is positive and statistically significant in
columns (2) and (3). A similar result is obtained on the coefficient of network benefits interacted
with q(Trade/GDP) only in column (3). The interpretation is that a country’s dependence on
foreign trade accentuates the impact of network benefits on IFRS harmonization only when such
benefits are defined to include trade with countries converging with IFRS. In contrast, the
interaction of network benefits with q(GDP) yields a negative and statistically significant
coefficient across both columns (2) and (3), consistent with country size attenuating the impact

24
The same inferences as the ones from column (1) of Table 4, using Nctwork
ì,t
as the network benefits proxy, can
also be drawn using Nctwork_Con:
ì,t
, and Nctwork_NonEu
ì,t
(results not reported).
27

of network benefits on IFRS harmonization when such benefits are defined to include economic
relations with EU member states.
To evaluate the economic significance of network benefits for countries’ IFRS
harmonization choices, we calculate the change in IFRS adoption status due to shifting the value
of Nctwork
ì,t
from the 25
th
to 75
th
percentile. We use our primary model with interaction terms
(reported in column (2)) for this analysis (not tabulated). For a country with average size and
average trade dependency, the shift in Nctwork
ì,t
from the 25
th
to 75
th
percentile leads to a 0.34
increase in IFRS adoption status (i.e., 34% of the shift from no IFRS-related activities to some
harmonization efforts or from some harmonization efforts to full IFRS adoption). However, our
cross-sectional results show that this effect is stronger (weaker) for countries that are smaller
(larger): for a country in the lowest (highest) size quartile with average trade dependency, a shift
of two quartiles in the value of Nctwork
ì,t
leads to a 61% (6%) increase in IFRS adoption status.
Perceived network benefits, when defined to exclude economic relations with the EU,
i.e., Nctwork_NonEu
ì,t
in column (4) of Table 4, are not significantly associated with countries’
ordinal IFRS harmonization responses. Moreover, there is no differential association between
IFRS harmonization and network benefits for larger countries. However, among countries more
dependent on foreign trade, non-EU network effects significantly predict IFRS harmonization
responses. Overall, results from the OLS regressions suggest network benefits expected to accrue
from economic relations with the EU are dominant in explaining IFRS harmonization, especially
among more economically independent countries.
25


25
The anecdotal evidence on Japan’s motivation to harmonize its GAAP with IFRS is consistent with this finding:
for example, Skinner (2008, p. 220) notes that harmonization attempts in Japan arose from pressure to “convince”
the EU “that Japanese GAAP was ‘equivalent’ to IFRS,” since “Japanese companies rely heavily on European
capital markets for external debt financing.”
28

Panel B of Table 4 is equivalent in all respects to Panel A, except that it also includes
year fixed effects. As discussed earlier, the inclusion of year fixed effects is likely to weaken the
power of our network effects measure, but is necessary to show that our network effects results
are not simply due to time-based explanations.
26
As seen in Panel B, the inclusion of time-based
controls dampens, but does not eliminate, the explanatory power of network effects. In the partial
model (column 1), the inclusion of time-based controls renders network effects insignificant; but
in the full models, with the interactions on size and trade dependency (columns (2) and (3)), the
coefficients on network effects remain statistically significant after including time-based
controls. Moreover, in the full models, the interaction of network effects with size is also
significant; the interaction of network effects with trade dependency is significant in column (3),
but not in column (2) (as in Panel A). Although not directly reported in Panel B, the year fixed
effects are also themselves statistically significant in the regressions. To evaluate the economic
significance of network benefits in Panel B, consider the model in column (2). For a country with
average size and average trade dependency, the shift in Nctwork
ì,t
from the 25
th
to 75
th

percentile leads to a 23% increase in IFRS adoption status. For a country in the lowest (highest)
size quartile with average trade dependency, a shift of two quartiles in the value of Nctwork
ì,t
leads to a 44% (1.5%) increase in IFRS adoption status. Overall, the results suggest that network
effects can explain, in part, decisions to adopt IFRS, and that the effect can be identified even
after controlling for other time-based explanations.

Robustness to alternative explanations
Table 5 presents the results of tests of the five alternative explanations discussed in
Section III. Table 5 has two panels: the panels are identical in all respects other than that Panel A

26
The results reported hereafter are robust to using a time-trend variable in lieu of year fixed effects.
29

excludes year fixed effects and Panel B includes them. There are six columns to each panel of
Table 5. In each successive column, we test one of the five alternative explanations discussed
earlier; in the sixth column, we test all five alternative explanations simultaneously. The
regression specification being tested throughout Table 5 is the full model, i.e., including the
interactive effects of size and trade dependency on perceived network benefits. The proxy for
network benefits throughout Table 5 is Nctwork
ì,t
.
INSERT TABLE 5 HERE.
The coefficient on Nctwork
ì,t
throughout Table 5 is positive and statistically significant,
suggesting that the main effect of perceived network benefits is robust to the various alternative
explanations discussed in Section III. Also, the interaction of network benefits with q(GDP)
yields a negative and statistically significant coefficient throughout Table 5, consistent with
country size attenuating the impact of network benefits on IFRS harmonization. In contrast, the
coefficient of network benefits interacted with q(Trade/GDP) is positive and statistically
significant in only one column of Table 5, providing weak evidence, at best, for the hypothesis
on trade dependency. In untabulated tests, we re-estimate all models from Table 5 adding the
interaction of the network benefits measure with the square of q(Trade/GDP). The goal of these
tests is to examine whether there are nonlinearities in the ability of trade dependency to explain
cross-sectional variation in network effects: countries with the highest levels of trade dependency
may have idiosyncratic competitive advantages in world trade (e.g., being natural-resource rich)
that make them less sensitive to IFRS network effects. We find the first-order effect of
q(Trade/GDP) is significantly positive, while the second-order effect is significantly negative,
consistent with diminishing importance of IFRS network benefits in trade-heavy economies.
Turning back to the results reported in Table 5, in particular, the alternative hypotheses,
wB_Rcport
ì,t
and Info_Globalization are positive and statistically significant only when year
30

fixed effects are excluded, lending only modest support to the World Bank hypothesis and the
hypothesis on countries’ differential access to international information sources. In contrast,
BigAuditor is positive and statistically significant even with the inclusion of year fixed effects.
Further, in the model that includes all proxies for alternative hypotheses and year fixed effects
(column 6 of Panel B), BigAuditor remains statistically significant. In that model, Trade/GDP is
also positive and statistically significant. A propos the inclusion of government fixed effects in
lieu of country fixed effects, such fixed effects do not affect inferences on network effects.
Overall, the evidence in Table 5 is consistent with network effects being significant determinants
of the intertemporal shift from domestic accounting standards to IFRS after controlling for
alternative explanations. To evaluate the economic significance of network benefits after
controlling for alternative explanations, consider the full model in column (6) of Panel B. For a
country with average size and average trade dependency, the shift in Nctwork
ì,t
from the 25
th
to
75
th
percentile leads to a 21% increase in IFRS adoption status. For a country in the lowest
(highest) size quartile with average trade dependency, a shift of two quartiles in the value of
Nctwork
ì,t
leads to a 44% increase (2% decrease) in IFRS adoption status.

Hazard and multinomial logit regression results
Table 6 presents the results from the counting-process hazard model estimated with
standard errors clustered at the country level. In columns (1), (2), and (3) we measure network
benefits with Nctwork
ì,t
. In columns (4) and (5) we examine the robustness of the results in
column (2) to using different measures of network benefits, specifically: Nctwork_Con:
ì,t
, and
Nctwork_NonEu
ì,t
. In the hazard regressions presented in columns (1), (2), (4), and (5) we
define the “failure” event as full adoption of IFRS, i.e., the dependent variable is the time to full
31

IFRS adoption. To examine the sensitivity of our results to an alternative definition of “failure,”
in column (3) we recode the dependent variable to represent the time to IFRS harmonization at
any level at or above a convergence project. Since we cannot estimate the hazard model with
country fixed effects, we supplement as regression controls the un-interacted variables q(GDP)
and q(Trade/GDP). This latter variable is used in lieu of Trade/GDP to test the alternative
hypothesis on the impact of internationalization of a country’s economy on IFRS adoption (the
results are invariant to using Trade/GDP instead).
INSERT TABLE 6 HERE.
Table 6 provides evidence that the likelihood of IFRS harmonization (at full adoption or
at or above a convergence project) increases in perceived network benefits. Moreover, consistent
with our predictions, the effect of network benefits on the likelihood of IFRS harmonization is
weaker for larger countries, as demonstrated by the statistically significant negative coefficient
on Nw*q(GDP) in columns (2) and (3). We find no statistically significant coefficients on the
network variables in column (4), where network effects are defined to include trade with all
countries that at a minimum initiated an IFRS convergence project. Thus, full adopters of IFRS
seem to perceive network benefits as arising mostly from sharing standards with countries that
adopt actual IFRS (as developed by the IASB), rather than a modified set of standards (as is the
case in convergence projects). Our inferences regarding the value of IFRS network excluding EU
countries (column (5)) are similar to those based on the OLS regression. In Table 6, we do not
find any evidence that a country’s trade dependence affects the importance of perceived network
benefits for a country’s IFRS adoption. Finally, as indicated by a statistically significant
coefficient on BigAuditor in columns (1) through (5), IFRS harmonization is positively
associated with the presence of Big 4 audit firms.
32

Table 7 reports results from the multinomial logit analysis with standard errors clustered
at the country level. The dependent variable in our multinomial logit model is IFRS
harmonization. Harmonization is coded as one of three categories: non-adoption, partial
adoption, and full adoption. The multinomial logit model does not assume any ordering among
the harmonization levels. Instead, it compares the partial adoption and full adoption categories to
the base-line decision, non-adoption. Consequently, the results from the multinomial logit allow
us to assess the importance of network effects for each category of adopters. As with the hazard
model, multinomial logit regressions exclude country fixed effects, but include the un-interacted
variables q(GDP) and q(Trade/GDP). Also as before, the latter variable is used in lieu of
Trade/GDP to test the alternative hypothesis on the impact of an economy’s internationalization
on IFRS adoption (results are invariant to using Trade/GDP instead). The results from the basic
model excluding interaction terms of Nw with q(GDP) and q(Trade/GDP) and using our primary
measure of network benefits (Nctwork
ì,t
) can be found in column (1) of Table 7. In this model
we find that the likelihood of full IFRS harmonization increases in perceived network benefits;
the coefficient on Nctwork
ì,t
is positive and statistically significant only for full IFRS adopters.
INSERT TABLE 7 HERE.
Columns (2) through (4) of Table 7 contain the results from regressions of the expanded
model that, in addition to the main effect of network benefits, allows us to test our cross-
sectional hypotheses. In the three columns, we report the results of estimating this expanded
model using alternative measures of network benefits based on different definitions of
“incorporating” IFRS: specifically, Nctwork
ì,t
, Nctwork_Con:
ì,t
,, and Nctwork_NonEu
ì,t
.
Our results from the cross-sectional models show that perceived network benefits
generally increase the probability a country fully adopts IFRS. Column 3, where we define
33

network benefits to include trade with countries that at least converge with IFRS, is an exception:
here, we find that the coefficient on Nctwork_Con:
ì,t
is not significant for full adoptions. This
result is consistent with inferences obtained from the hazard model and suggests that countries
adopting IFRS fully are more discriminating in their perception of network benefits. Such
countries are less likely to expect harmonization benefits from partial adoptions, including IFRS
converging countries, because the nature of such adoptions is likely idiosyncratic. The evidence
in Table 7 suggests network effects do not play a significant role in partial IFRS adoption.
On the cross-sectional variables, we find some evidence that network effects play a
weaker role in full adoption decisions of larger countries. In particular, the coefficient on
Nw*q(GDP) is statistically significant and negative for full adoptions in column (2). For full
adoptions, there is no evidence that the importance of perceived network benefits to a country
varies with its trade dependence as measured by Nw*q(Trade/GDP). Finally, we find that both
partial and full IFRS adoptions are positively related to the presence of Big 4 audit firms in all
four specifications of Table 7.
Overall, the evidence from our multinomial logit analysis indicates that perceived
network effects impact the likelihood of a country fully adopting IFRS. Our hazard model tests
further confirm these insights. Both models provide some support for our cross-sectional
prediction that the impact of network effects on IFRS harmonization is mitigated for larger
countries, but there is no evidence that network effects vary with a country’s trade dependence.

Robustness tests: OLS regressions with five levels of IFRS adoption status
In untabulated tests, we examine the robustness of our OLS regression results to using an
ordinal with five (rather than three) levels of IFRS adoption as the dependent variable. The five
34

levels are discussed in Section III. These robustness tests confirm our inferences from Tables 4
and 5: perceived network benefits are positively and significantly associated with IFRS adoption
status and more important for smaller countries. Inferences from the robustness tests are
unaffected by the inclusion of year fixed effects and controls for alternative explanations.

V. Conclusion
We develop and test the hypothesis that network effects are a significant factor in the
time-series growth in IFRS harmonization across countries. Network effects refer to perceived
lower transactions costs given the community of IFRS adopters worldwide. We find the degree
of IFRS harmonization in a country is an increasing function of the perceived value of its IFRS
network, particularly when network benefits are defined to include relations with EU member
states. The results suggest IFRS adoption is self-reinforcing. In cross-sectional tests, we explore
how the nature of a country’s economy, specifically its economic size and trade dependence, is
likely to affect the relation between network benefits and IFRS harmonization. We find evidence
consistent with network effects mattering less to countries with larger GDPs and, only in some
cases, to countries where trade accounts for a smaller fraction of GDP. These findings suggest
that the role of perceived network benefits in countries’ IFRS harmonization decisions is weaker
for countries with more bargaining power (larger countries).
The presence of network effects in the adoption of IFRS is significant because it means a
country can adopt IFRS even if its domestically developed accounting standards are particularly
well-suited to its domestic institutions. Moreover, if network effects contribute to the adoption of
IFRS, they can sustain its eventual dominance even in the presence of technologically superior
35

innovations (David, 1985).
27
The evidence in this paper can also complement the growing
literature on the determinants and consequences of firms’ IFRS adoption. Firms’ adoption
decisions are conditional on countries’ decisions to harmonize with IFRS, suggesting that the
analysis of why countries adopt IFRS is important. Our evidence also implies that countries with
low bargaining power are more susceptible to adopting IFRS because others are doing so,
consistent with such countries being less distinctive in their approach to IFRS harmonization.
Ironically, low bargaining power countries also tend to have weak market institutions, implying
IFRS implementation in these countries is less likely to be effective.
The concept of network effects has recently been used to explain several accounting-
related phenomena, such as the adoption of stock-option compensation plans (Kedia and
Rajgopal, 2009) and the decision to expense options in the income statement (Reppenhagen
2010). We document that network effects influence accounting-related decisions more generally,
suggesting network theory can be used broadly in the literature on accounting and corporate
governance choice. For example, the theory of IFRS network benefits tested herein in the context
of countries can equivalently be applied to firms. Firm-level research on the determinants of
IFRS adoption may consider how perceived network benefits interact with economic incentives
in shaping adoption choices. Future firm-level research can also investigate whether network
benefits increase the attractiveness of voluntary IFRS adoptions to multinational as opposed to
domestic corporations.

27
For example, David notes how the QWERTY keyboard has remained the world standard despite longstanding
experimental evidence (dating back to at least the 1940s) supporting alternative keyboard designs as superior.
36

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39

Appendix A, Defining the category for countries with an IFRS “convergence” project

Through a qualitative analysis of IFRS adoption patterns across countries, we encounter
jurisdictions that have made some progress towards IFRS harmonization, but whose domestic
standards continue to differ from IFRS as issued by the IASB. In particular:

1. Some countries develop national accounting standards that are based on, but not
identical to, IFRS. For example, the Institute of Chartered Accountants of Nepal lists
the various Nepalese Accounting Standards (NAS) together with their corresponding
IFRS equivalents. NAS are produced in English and appear to be derived from IFRS;
however, not every IFRS has an equivalent NAS and extant NAS differ in wording
from IFRS.
2. Other countries claim to have adopted IFRS but carve out certain standards or rules,
often supplementing IFRS with local exceptions. For example, Ramanna et al. (2010)
describe various exceptions to IFRS that China has carved out as a condition to
converging with the global standards, including standards around consolidated
financial reporting, fair-value accounting, and reversal of impairments.
3. Still other countries rely on “static” IFRS—that is, they use a version of IFRS that
was effective as of some prior year. For example, PriceWaterhouseCoopers reports
that current IFRS is neither required nor permitted for listed companies in Thailand,
but that “Thai GAAP follows the 2005 version of IFRS,” with certain exceptions.

The countries described above cannot be properly classified as having adopted IFRS as
issued by the IASB. Accordingly, we reclassify the countries as IFRS “convergence” countries,
where “convergence” represents a country’s efforts to reconcile its domestic accounting
standards with IFRS, in lieu of directly adopting IFRS as issued by the IASB. Creating the
“convergence” category results in differences between our score of IFRS adoption and that on
Deloitte’s IASplus.com: for example, Nepal is classified as a “full adopter” on IASplus.com.

40

Appendix B, List of countries in the dataset

Argentina Guyana Niger
Armenia Haiti Oman
Australia Honduras Pakistan
Azerbaijan Hong Kong Panama
Bahamas India Papua New Guinea
Bahrain Indonesia Paraguay
Bangladesh Iran Peru
Barbados Israel Philippines
Belarus Ivory Coast Qatar
Benin Jamaica Russia
Bermuda Japan Saudi Arabia
Bolivia Jordan Singapore
Bosnia and Herzegovina Kazakhstan South Africa
Brazil Kenya Sri Lanka
Burkina Faso Korea (South) Switzerland
Canada Kuwait Syria
Chile Kyrgyzstan Tajikistan
China Laos Tanzania
Colombia Lebanon Thailand
Costa Rica Macedonia Togo
Croatia Malawi Trinidad and Tobago
Cuba Malaysia Tunisia
Dominican Republic Mali Turkey
Ecuador Mauritius Ukraine
Egypt Mexico United Arab Emirates
El Salvador Moldova United States
European Union Morocco Uruguay
Fiji Mozambique Venezuela
Georgia Nepal Zambia
Ghana New Zealand Zimbabwe
Guatemala Nicaragua


41

Appendix C, Variable definitions



Variable Description
Dependent variable: IFRS adoption status
1. Non adopter Countries with no IFRS harmonization activity
A. Convergence project Countries attempting to reconcile their domestic accounting standards
with IFRS, without directly adopting IFRS
B. Voluntary adoption Countries permitting at least some listed firms in their jurisdiction to
adopt IFRS as issued by the IASB
C. Required for some Countries requiring IFRS as issued by the IASB for some listed firms
in their jurisdiction
3. Full adoption Countries requiring IFRS as issued by the IASB for all listed firms in
their jurisdiction
Primary independent variable: Network value of IFRS
Network Predicted prior-year fraction of a country's trade with all countries
that have IFRS adoption status "3"
Network_Conv Predicted prior-year fraction of a country's trade with all countries
that have IFRS adoption status "2A", "2B", "2C" or above
Network_Non-EU Predicted prior-year fraction of a country's trade with all non-EU
countries that have IFRS adoption status "3" or above
Other independent variables
q(GDP) In-sample quartile rank of gross domestic product
q(Trade/GDP) In-sample quartile rank of the ratio of foreign trade to GDP
FEPI/GDP Ratio of foreign equity portfolio investment to gross domestic product
WB_Report Time-series indicator to denote whether a World Bank ROSC report
was issued for the given country prior to the year in question
Info_Globalizaion Percentage of Internet users
BigAuditor Indicator equal to one for country-years in which Ernst & Young,
KPMG, and PWC have offices located in the country.
2. Partial adoption
42

Table 1, IFRS adoption status in the country-year panel
“Non adopter” refers to countries with no IFRS harmonization activity. “Partial adoption” refers to applying IFRS with exception or only for some firms in the
economy and includes: “Convergence project,” “Voluntary adoption,” and “Required for some.” “Convergence project” refers to countries attempting to
reconcile their domestic accounting standards with IFRS, without directly adopting IFRS. “Voluntary adoption” refers to countries permitting at least some listed
firms in their jurisdiction to adopt IFRS as issued by the IASB. “Required for some” refers to countries requiring IFRS as issued by the IASB for some listed
firms in their jurisdiction. “Full adoption” refers to countries requiring IFRS as issued by the IASB for all listed firms in their jurisdiction.

Adoption Status 2003 2004 2005 2006 2007 2008 Total
1. Non adopter 61 54 48 44 36 30 273
2. Partial adoption
A. Convergence project 6 8 8 11 14 15 62
B. Voluntary adoption 5 7 9 10 10 8 49
C. Required for some 2 4 3 3 4 7 23
3. Full adoption 18 19 24 24 28 32 145
Total 92 92 92 92 92 92 552

43

Table 2, Descriptive statistics for measures of perceived network benefits
“Non adopter” refers to countries with no IFRS harmonization activity. “Partial adoption” refers to applying IFRS with exception or only for some firms in the
economy and includes: “Convergence project,” “Voluntary adoption,” and “Required for some.” “Convergence project” refers to countries attempting to
reconcile their domestic accounting standards with IFRS, without directly adopting IFRS. “Voluntary adoption” refers to countries permitting at least some listed
firms in their jurisdiction to adopt IFRS as issued by the IASB. “Required for some” refers to countries requiring IFRS as issued by the IASB for some listed
firms in their jurisdiction. “Full adoption” refers to countries requiring IFRS as issued by the IASB for all listed firms in their jurisdiction. Network is the
predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “3” (i.e., full adoption). Network_Conv is the predicted fraction
of a country’s prior-year trade with all countries that have IFRS adoption status “2” or above. Network_Non-EU is the predicted fraction of a country’s prior-year
trade with all non-EU countries that have IFRS adoption status “3.” Med. denotes median.

Panel A
2003 2004 2005 2006 2007 2008
Adoption Status Variable Mean Med. Mean Med. Mean Med. Mean Med. Mean Med. Mean Med.
1. Non adopter Network 0.019 0.010 0.024 0.013 0.025 0.014 0.086 0.060 0.082 0.059 0.092 0.059
2. Partial adoption Network 0.015 0.011 0.027 0.019 0.026 0.019 0.117 0.060 0.129 0.106 0.124 0.079
3. Full adoption Network 0.039 0.015 0.048 0.041 0.047 0.046 0.095 0.072 0.087 0.072 0.097 0.079

Panel B
2003 2004 2005 2006 2007 2008
Adoption Status Variable Mean Med. Mean Med. Mean Med. Mean Med. Mean Med. Mean Med.
1. Non adopter Network_Conv 0.112 0.082 0.119 0.093 0.136 0.103 0.158 0.108 0.157 0.112 0.213 0.125
Network_Non-EU 0.019 0.010 0.023 0.011 0.024 0.012 0.033 0.016 0.032 0.017 0.038 0.023
2. Partial adoption Network_Conv 0.145 0.080 0.158 0.077 0.163 0.105 0.175 0.128 0.210 0.159 0.222 0.155
Network_Non-EU 0.015 0.011 0.025 0.018 0.023 0.013 0.032 0.021 0.037 0.024 0.041 0.027
3. Full adoption Network_Conv 0.063 0.045 0.073 0.063 0.104 0.076 0.121 0.087 0.120 0.091 0.149 0.115
Network_Non-EU 0.039 0.015 0.047 0.041 0.047 0.046 0.063 0.065 0.054 0.050 0.052 0.056

44

Table 3, Descriptive statistics for other independent variables
“Non adopter” refers to countries with no IFRS harmonization activity. “Partial adoption” refers to applying IFRS with exception or only for some firms in the
economy and includes: “Convergence project,” “Voluntary adoption,” and “Required for some.” “Convergence project” refers to countries attempting to
reconcile their domestic accounting standards with IFRS, without directly adopting IFRS. “Voluntary adoption” refers to countries permitting at least some listed
firms in their jurisdiction to adopt IFRS as issued by the IASB. “Required for some” refers to countries requiring IFRS as issued by the IASB for some listed
firms in their jurisdiction. “Full adoption” refers to countries requiring IFRS as issued by the IASB for all listed firms in their jurisdiction. GDP is gross domestic
product. Trade/GDP is the ratio of foreign trade to gross domestic product. FEPI/GDP is the ratio of foreign equity portfolio investment to gross domestic
product. WB_Report is a time-series indicator to denote whether a World Bank ROSC report was issued for the given country prior to the year in question.
Info_Globalization is the percentage of Internet users. BigAuditor is an indicator equal to one for country-years in which Ernst & Young, KPMG, and PWC have
offices located in the country. Med. denotes median.



Adoption Status Variable Mean Med. Mean Med. Mean Med. Mean Med. Mean Med. Mean Med.
1. Non adopter GDP 360.86 17.77 415.19 21.69 451.72 22.73 507.43 23.76 573.34 24.97 708.79 52.17
Trade/GDP 0.607 0.527 0.699 0.569 0.822 0.674 0.933 0.779 1.053 0.806 1.198 0.870
FEPI/GDP -0.0006 0.0000 0.0007 0.0000 0.0022 0.0000 0.0024 0.0002 0.0016 0.0002 . .
WB_Report 0.033 0 0.094 0 0.255 0 0.302 0 0.314 0 0.379 0
Info_Globalization 11.09 3.36 13.57 4.58 13.37 6.58 14.92 8.45 17.39 7.91 21.01 14.33
BigAuditor 0.644 1 0.654 1 0.617 1 0.605 1 0.600 1 0.552 1
2. Partial adoption GDP 155.03 80.68 127.64 24.92 178.07 59.15 164.37 60.33 244.23 99.59 228.76 52.02
Trade/GDP 0.731 0.599 0.757 0.655 0.824 0.722 0.858 0.754 0.943 0.805 1.081 0.879
FEPI/GDP 0.0004 0.0000 0.0009 0.0000 0.0009 0.0000 0.0030 0.0000 0.0060 0.0042 . .
WB_Report 0.025 0 0.087 0 0.200 0 0.292 0 0.407 0 0.483 0
Info_Globalization 31.26 28.02 32.26 28.69 24.04 12.86 23.88 15.88 25.35 18.03 26.31 21.40
BigAuditor 0.846 1 0.842 1 0.895 1 0.913 1 0.926 1 0.897 1
3. Full adoption GDP 15.27 9.17 17.72 10.71 38.94 11.67 40.72 12.53 35.02 10.53 53.17 11.47
Trade/GDP 0.743 0.709 0.788 0.727 0.933 0.764 1.048 0.882 1.190 1.228 1.362 1.343
FEPI/GDP -0.0024 0.0000 0.0006 0.0000 0.0025 0.0000 0.0076 0.0002 0.0071 0.0000 . .
WB_Report 0.056 0 0.235 0 0.224 0 0.286 0 0.347 0 0.442 0
Info_Globalization 10.71 10.29 11.94 11.69 32.68 30.13 35.69 33.68 37.92 38.07 40.11 38.99
BigAuditor 0.882 1 0.875 1 0.905 1 0.905 1 0.800 1 0.833 1
2008 2003 2004 2005 2006 2007
45

Table 4, OLS regressions of IFRS adoption status
The dependent variable is IFRS adoption status which takes the value of 1 for non-adopters, 2 for partial adoption, and 3 for full adoption. Panel A presents OLS
regressions including country fixed effects, while Panel B presents similar regressions including both country and year fixed effects. In columns (1) and (2), Nw
is Network. In column (3), Nw is Network_Conv. In column (4), Nw is Network_Non-EU. Network is the predicted fraction of a country’s prior-year trade with all
countries that have IFRS adoption status “3” (i.e., full adoption). Network_Conv is the predicted fraction of a country’s prior-year trade with all countries that
have IFRS adoption status “2” or above. Network_Non-EU is the predicted fraction of a country’s prior-year trade with all non-EU countries that have IFRS
adoption status “3.” q(GDP) is the in-sample quartile rank of gross domestic product. q(Trade/GDP) is the in-sample quartile rank of the ratio of foreign trade to
gross domestic product. Standard errors are clustered by country (inferences are robust to clustering by country and year). Numbers in italics are p-values (two-
tailed).

Panel A – OLS regressions with country fixed effects



***, **, and * denote statistical significance at the two-tail 99%, 95%, and 90% confidence levels, respectively.
The reported R Square is the Incremental R Square not accounting for explanatory power from country fixed effects.

(1) (2) (3) (4)
Nw 1.696 *** 10.619 *** 7.908 *** 3.974
0.000 0.000 0.000 0.341
Nw*q(GDP) . -2.644 *** -2.008 *** -1.273
0.000 0.000 0.233
Nw*q(Trade/GDP) . 0.315 0.507 *** 2.434 ***
0.118 0.000 0.000
Constant 1.660 *** 1.488 *** 1.298 *** 1.494 ***
0.000 0.000 0.000 0.000
Country F.E. Yes Yes Yes Yes
Year F.E. No No No No
N Obs. 552 514 514 508
R Square 0.079 0.178 0.192 0.126
46



Panel B - OLS regressions with country and year fixed effects



***, **, and * denote statistical significance at the two-tail 99%, 95%, and 90% confidence levels, respectively.
The reported R Square is the Incremental R Square not accounting for explanatory power from country fixed effects.
(1) (2) (3) (4)
Nw 0.424 7.750 *** 5.382 ** 4.916
0.226 0.008 0.036 0.283
Nw*q(GDP) . -2.007 *** -1.578 ** -2.216 *
0.005 0.013 0.086
Nw*q(Trade/GDP) . 0.197 0.291 ** 1.232 *
0.310 0.040 0.075
Constant 1.523 *** 1.408 *** 1.371 *** 1.438 ***
0.000 0.000 0.000 0.000
Country F.E. Yes Yes Yes Yes
Year F.E. Yes Yes Yes Yes
N Obs. 552 514 514 508
R Square 0.208 0.258 0.257 0.233
47

Table 5, OLS regression of IFRS adoption status – including tests of alternative explanations
The dependent variable is IFRS adoption status which takes the value of 1 for non-adopters, 2 for partial adoption, and 3 for full adoption. Panel A presents OLS
regressions including either country or government fixed effects (as specified in the table), while Panel B presents similar regressions including year fixed effects
and either country or government fixed effects. In all columns Nw is Network. Network is the predicted fraction of a country’s prior-year trade with all countries
that have IFRS adoption status “3” (i.e., full adoption). q(GDP) is the in-sample quartile rank of gross domestic product. q(Trade/GDP) is the in-sample quartile
rank of the ratio of foreign trade to gross domestic product. WB_Report is a time-series indicator to denote whether a World Bank ROSC report was issued for
the given country prior to the year in question. Info_Globalization is the percentage of Internet users. BigAuditor is an indicator equal to one for country-years in
which Ernst & Young, KPMG, and PWC have offices located in the country. Standard errors are clustered by country or government depending on the type of
fixed effects included (inferences are robust to clustering by country and year). Numbers in italics are p-values (two-tailed).

Panel A - OLS regressions with country (or government) fixed effects


***, **, and * denote statistical significance at the two-tail 99%, 95%, and 90% confidence levels, respectively.
The reported R Square is the Incremental R Square not accounting for explanatory power from country/government fixed effects.
(1) (2) (3) (4) (5) (6)
Nw 9.507 *** 8.109 *** 8.583 *** 10.618 *** 10.989 *** 7.639 ***
0.000 0.002 0.001 0.000 0.000 0.008
Nw*q(GDP) -2.433 *** -1.917 *** -2.260 *** -2.612 *** -2.787 *** -1.870 **
0.000 0.005 0.001 0.000 0.001 0.012
Nw*q(Trade/GDP) 0.365 * 0.028 0.255 0.271 0.287 -0.258
0.068 0.901 0.205 0.163 0.308 0.331
WB_Report 0.178 ** 0.029
0.014 0.761
Trade/GDP 0.380 ** 0.581 **
0.030 0.011
Info_Globalization 0.019 *** 0.016
0.001 0.201
BigAuditor 0.514 *** 0.424 **
0.002 0.020
Constant 1.467 *** 1.215 *** 1.234 *** 1.107 *** 1.485 *** 0.512 **
0.000 0.000 0.000 0.000 0.000 0.015
Government F.E. No No No No Yes Yes
Country F.E. Yes Yes Yes Yes No No
Year F.E. No No No No No No
N Obs. 514 514 512 514 508 506
R Square 0.195 0.224 0.215 0.200 0.140 0.267
48

Panel B - OLS regressions with country (or government) and year fixed effects



***, **, and * denote statistical significance at the two-tail 99%, 95%, and 90% confidence levels, respectively.
The reported R Square is the Incremental R Square not accounting for explanatory power from country/government fixed effects.

(1) (2) (3) (4) (5) (6)
Nw 7.736 *** 7.660 *** 7.743 *** 8.265 *** 8.949 *** 9.175 ***
0.009 0.009 0.008 0.005 0.004 0.004
Nw*q(GDP) -2.006 *** -1.924 *** -2.014 *** -2.089 *** -2.348 *** -2.146 ***
0.005 0.008 0.005 0.004 0.003 0.006
Nw*q(Trade/GDP) 0.204 0.115 0.192 0.163 0.092 -0.332
0.298 0.603 0.328 0.399 0.699 0.224
WB_Report 0.021 0.033
0.787 0.710
Trade/GDP 0.122 0.605 **
0.508 0.012
Info_Globalization 0.003 0.016
0.725 0.295
BigAuditor 0.359 * 0.460 **
0.058 0.014
Constant 1.407 *** 1.330 *** 1.375 *** 1.148 *** 1.351 *** 0.454 *
0.000 0.000 0.000 0.000 0.000 0.087
Government F.E. No No No No Yes Yes
Country F.E. Yes Yes Yes Yes No No
Year F.E. Yes Yes Yes Yes Yes Yes
N Obs. 514 514 512 514 508 506
R Square 0.258 0.261 0.259 0.268 0.217 0.274
49

Table 6, Counting-process hazard regression of IFRS adoption status
In column (1) and (2), Nw is Network and full adoption is defined as the failure event. In column (3), Nw is Network and convergence and higher levels of
adoption are defined as the failure event. In column (4), Nw is Network_Conv and full adoption is defined as the failure event. In column (5), Nw is
Network_Non-EU and full adoption is defined as the failure event. Network is the predicted fraction of a country’s prior-year trade with all countries that have
IFRS adoption status “3” (i.e., full adoption). Network_Conv is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption
status “2” or above. Network_Non-EU is the predicted fraction of a country’s prior-year trade with all non-EU countries that have IFRS adoption status “3.”
q(GDP) is the in-sample quartile rank of gross domestic product. q(Trade/GDP) is the in-sample quartile rank of the ratio of foreign trade to gross domestic
product. WB_Report is a time-series indicator to denote whether a World Bank ROSC report was issued for the given country prior to the year in question.
Info_Globalization is the percentage of Internet users. BigAuditor is an indicator equal to one for country-years in which Ernst & Young, KPMG, and PWC have
offices located in the country. Standard errors are clustered by country. Numbers in italics are p-values (two-tailed).



***, **, and * denote statistical significance at the two-tail 99%, 95%, and 90% confidence levels, respectively.


(1) (2) (3) (4) (5)
Nw 5.028 *** 22.185 ** 11.059 * 6.548 21.102
0.001 0.014 0.072 0.419 0.165
q(GDP) -0.854 *** -0.596 *** -0.292 ** -0.539 ** -0.667 *
0.000 0.003 0.029 0.045 0.075
Nw*q(GDP) -4.175 ** -2.714 * -1.906 -4.477
0.029 0.062 0.265 0.696
q(Trade/GDP) 0.214 0.332 -0.009 0.202 0.307
0.235 0.161 0.952 0.470 0.327
Nw*q(Trade/GDP) -0.807 0.729 0.103 1.410
0.633 0.346 0.944 0.871
WB_Report 0.461 0.484 0.270 0.350 0.650 *
0.159 0.151 0.181 0.284 0.077
Info_Globalization 0.001 -0.001 0.007 0.002 0.003
0.942 0.951 0.231 0.860 0.777
BigAuditor 1.305 ** 1.013 ** 1.306 *** 1.243 ** 0.970 *
0.013 0.043 0.001 0.024 0.067
N Obs 512 512 512 512 506
pseudo R Square 0.172 0.200 0.140 0.153 0.250
50

Table 7, Multinomial logit of IFRS adoption status with non-adoption as the base case
In columns (1) and (2), Nw is Network. In column (3), Nw is Network_Conv. In column (4), Nw is Network_Non-
EU. Network is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption
status “3” (i.e., full adoption). Network_Conv is the predicted fraction of a country’s prior-year trade with all
countries that have IFRS adoption status “2” or above. Network_Non-EU is the predicted fraction of a country’s
prior-year trade with all non-EU countries that have IFRS adoption status “3.” q(GDP) is the in-sample quartile rank
of gross domestic product. q(Trade/GDP) is the in-sample quartile rank of the ratio of foreign trade to gross
domestic product. WB_Report is a time-series indicator to denote whether a World Bank ROSC report was issued
for the given country prior to the year in question. Info_Globalization is the percentage of Internet users. BigAuditor
is an indicator equal to one for country-years in which Ernst & Young, KPMG, and PWC have offices located in the
country. Standard errors are clustered by country. Numbers in italics are p-values (two-tailed).

***, **, and * denote statistical significance at the two-tail 99%, 95%, and 90% confidence levels, respectively.
(1) (2) (3) (4)
Nw 1.768 4.021 -5.816 20.833
0.525 0.778 0.530 0.427
q(GDP) -0.145 -0.086 -0.115 0.176
0.597 0.765 0.732 0.630
Nw*q(GDP) -2.204 0.281 -9.624
0.517 0.901 0.148
q(Trade/GDP) 0.009 -0.179 -0.348 -0.094
0.968 0.504 0.250 0.761
Nw*q(Trade/GDP) 2.100 1.812 * 1.328
0.208 0.096 0.797
WB_Report -0.034 -0.032 -0.096 -0.064
0.941 0.944 0.839 0.894
Info_Globalization 0.010 0.011 0.013 0.010
0.471 0.391 0.280 0.439
BigAuditor 1.847 ** 1.839 ** 1.998 ** 1.693 **
0.014 0.015 0.022 0.033
Constant -2.816 *** -2.640 *** -2.182 ** -3.305 ***
0.004 0.010 0.019 0.004
Nw 7.732 *** 30.517 ** 4.678 43.579 **
0.004 0.012 0.669 0.032
q(GDP) -1.162 *** -0.832 ** -0.815 ** -0.767 *
0.000 0.013 0.043 0.073
Nw*q(GDP) -6.626 ** -1.736 -10.403
0.020 0.470 0.136
q(Trade/GDP) 0.330 0.334 0.167 0.379
0.223 0.306 0.656 0.337
Nw*q(Trade/GDP) 0.424 0.873 1.252
0.866 0.661 0.840
WB_Report 0.659 0.634 0.471 0.846
0.238 0.260 0.389 0.135
Info_Globalization 0.005 0.006 0.009 0.005
0.753 0.744 0.604 0.752
BigAuditor 2.124 *** 1.798 *** 2.086 *** 1.687 **
0.001 0.007 0.003 0.014
Constant -1.430 * -2.081 ** -1.737 * -2.422 **
0.063 0.016 0.084 0.029
Year F.E. Yes Yes Yes Yes
N Obs. 512 512 512 506
Pseudo R Square 0.159 0.177 0.154 0.206
Pr(Partial
adoption)
Pr(Full
adoption)

Network Effects in Countries’ Adoption of IFRS*

Karthik Ramanna Harvard Business School kramanna@hbs.edu and Ewa Sletten MIT Sloan School of Management esletten@mit.edu

This draft: June 20, 2011

Abstract If the differences in accounting standards across countries reflect relatively stable institutional differences (e.g., auditing technology, the rule of law, etc.), why did several countries rapidly, albeit in a staggered manner, adopt IFRS over local standards in the 2003–2008 period? We test the hypothesis that perceived network benefits from the extant worldwide adoption of IFRS can explain part of countries’ shift away from local accounting standards. That is, as more jurisdictions with economic ties to a given country adopt IFRS, perceived benefits from lowering transactions costs to foreign financial-statement users increase and contribute significantly towards the country’s decision to adopt IFRS. We find that perceived network benefits increase the degree of IFRS harmonization among countries, and that smaller countries have a differentially higher response to these benefits. The results, robust to numerous alternative hypotheses and specifications, suggest IFRS adoption is self-reinforcing, which, in turn, has implications for the consequences of IFRS adoption.

We thank Michelle Hanlon, Bob Holthausen, S.P. Kothari, Christian Leuz, Sugata Roychowdhury, Doug Skinner, Thor Sletten, Eugene Soltes, Rodrigo Verdi, Ross Watts, Joe Weber, Gwen Yu, and seminar participants at Arizona State, Boston College, Emory, the Harvard Applied Statistics Workshop, Minnesota, MIT, Oregon, UCLA, the 2010 European Accounting Association Annual Meeting, the 2011 Harvard Business School International Research Conference, and the 2010 Penn State Accounting Conference for helpful suggestions and comments on this paper. The paper is based in part on our manuscript, “Why do countries adopt IFRS,” and has also benefited from comments we received on that manuscript, including from John Core, David Hawkins, Paul Healy, Shiva Rajgopal, Eddie Riedl, Terry Shevlin, D. Shores, Suraj Srinivasan, Steve Zeff, and seminar participants at Boston University, UC–Boulder, HBS, the 2009 GIA Conference at UNC–Chapel Hill, Rice, Toronto, and the University of Washington. Any errors are our responsibility.

*

Electronic copy available at: http://ssrn.com/abstract=1590245

I. Introduction The International Accounting Standards Board (IASB) was established in 2001 to develop International Financial Reporting Standards (IFRS). In the period from 2003 through 2008, nearly 50 countries (including the EU countries) mandated IFRS for all listed companies in their jurisdictions. Further, in that period, another 15 countries either mandated IFRS for some listed companies or allowed listed companies to voluntarily adopt IFRS. Another group of 16 countries initiated “convergence” projects with IFRS through 2008, and the list of states with convergence projects planned beyond 2008 includes some of the world’s largest economies such as China and the U.S.1 There has been considerable research into the consequences of a country’s IFRS adoption for firms in its jurisdiction (e.g., Armstrong, Barth, Jagolinzer, and Riedl, 2010; Daske, Hail, Leuz, and Verdi, 2008; DeFond, Hu, Hung, and Li, 2011; and Lang, Maffett, and Owens, 2010); but less is known about why countries themselves adopt IFRS.2 We develop and test the hypothesis that the intertemporal shift towards IFRS over local standards can be explained, in part, by perceived network benefits, i.e., perceived lower transactions costs, given the network of IFRS adopters. If true, the implication is that worldwide IFRS acceptance is self-reinforcing, i.e., adoption begets adoption. Prior literature argues that financial reporting standards have co-developed with a country’s economic, political, and cultural institutions (e.g., Ball, Kothari, and Robin, 2000; Ball, Robin, and Wu, 2003; Bushman and Piotroski, 2006; Bradshaw and Miller, 2008; and Hail, Leuz, and Wysocki, 2010). In particular, the nature of standards comprising a reporting regime reflects the monitoring and information processing capabilities of existing market institutions
Throughout the paper, “convergence” refers to a country’s efforts to reconcile its domestic accounting standards with IFRS, in lieu of directly adopting IFRS as issued by the IASB. Convergence projects often result in adopting IFRS with modifications and exceptions. 2 Hope, Jin, and Kang (2006) provide some preliminary evidence on the determinants of IFRS adoption through 2005 in a sample of 38 countries (including 14 EU countries).
1

1

Electronic copy available at: http://ssrn.com/abstract=1590245

such as auditing, securities laws, courts, and financial intermediaries. Under this view of “institutional complementarities” (Leuz, 2010), a change in a country’s financial reporting standards should accompany complementary changes in monitoring and information processing institutions. However, the rapid proliferation in IFRS adoption across countries in the 2003–2008 period has seldom been accompanied by substantial changes in enforcement institutions.3 Holding institutions constant, the staggered adoption of IFRS over time can be due, in part, to changing perceptions across countries of the benefits of IFRS. IFRS, as a globally recognized body of standards, is expected to lower transaction costs associated with foreign users of financial statements. By adopting IFRS, a country trades off status quo national standards that reflect its market institutions for (in part) a perceived decrease in transactions costs from using internationally recognized standards. As more jurisdictions with economic ties to a given country adopt IFRS, the perceived benefits to that country from lowering transactions costs, and thus from adopting IFRS, increase. Thus, we hypothesize that a country’s adoption of IFRS is related to the magnitude of its economic relations with other countries that have adopted IFRS through that date. We refer to this magnitude as the IFRS network value to a country at a given time. The first step in an empirical test of IFRS network effects is identifying IFRS adoption among countries. The nature of IFRS adoption by a country (e.g., converging local standards with IFRS, permitting firms to voluntarily adopt IFRS, full IFRS adoption, etc.) varies across jurisdictions and time. Thus, our primary IFRS adoption variable is an ordinal reflecting the variety of possible adoption states. The variable takes three values: “1” for country-years with no IFRS-related activities; “2” for country-years with convergence projects, country-years in which voluntary IFRS adoption is permitted, and country-years in which IFRS is required for some
See for example, the discussions in Ball, 2006; and Leuz, 2010. Further, the World Bank cites inadequate enforcement as a key challenge for nearly every emerging market that is harmonizing with IFRS (as catalogued in its country-level Reports on Observance of Standards and Codes).
3

2

listed firms; and “3” for country-years with full IFRS adoption for listed firms. The variable is constructed for each country-year in a sample of 92 countries for the period 2003–2008.4 To measure the perceived network benefits to a country from adopting IFRS in a given year, we construct a variable based on the country’s trade with IFRS-incorporating jurisdictions. Because “trade” is expected to vary with anticipated IFRS adoption, we compute our measure of perceived network benefits using the predicted value of trade from an autoregressive model with controls. Our primary empirical tests involve regressing, in a country-year panel, the IFRS adoption status on perceived network benefits. Because network effects are measured at the country-year level, we can include country and year fixed effects in the regression. The country fixed effects allow us to control for cross-sectional variation in country-specific institutional features that influence the choice of accounting standards (e.g., enforcement institutions). The use of country fixed effects assumes that these institutions have not systematically changed across sample countries over our regression period, 2003–2008, as several scholars and the World Bank have argued (although, we caution that some institutional changes have likely occurred). The year fixed effects control for time-based explanations that might lead to a spurious correlation between IFRS harmonization and our network-effects variable. The inclusion of country and year fixed effects means that our regressions test whether perceived network benefits can explain some of the intertemporal variation in IFRS harmonization across countries, holding constant countries’ institutions and overall worldwide trends. We find that a country’s IFRS adoption status, as measured by our ordinal dependent variable, is an increasing function of the perceived value of its IFRS network. We expect a country’s economic size and its relative economic dependence on other countries to respectively temper and intensify the perceived effects of a growing IFRS network
4

The EU is represented as a single observation among the 92 countries since EU members adopted IFRS jointly.

3

we focus on explanations captured by variables associated with our measure of network effects (and thus. Thus. we expect network effects to be of greater importance to countries where trade accounts for a higher proportion of GDP.5% of the shift from no IFRS-related activities (level “1”) to some harmonization efforts (level “2”). are likely to attract foreign capital and maintain international trade even if they continue using domestic standards. an inter-quartile increase in perceived network benefits is associated with 1. and Dai (2009) describe various exceptions to IFRS China has carved out as a condition to converging with the global standards.” These findings suggest that a country’s relative economic power shapes its response to the increasing worldwide adoption of IFRS: economically powerful countries are more likely to restrain from adopting IFRS or tailor their harmonization with IFRS to the capabilities of domestic institutions. an inter-quartile increase in perceived network benefits is associated with 44% of the shift from level “1” to level “2. by contrast. the explanations we consider are those that. 5 4 . Greater dependence on foreign trade accentuates benefits from lowered transactions costs perceived from IFRS adoption. due to the size of their markets. we expect larger (higher GDP) countries to be less swayed towards IFRS adoption by the value of their IFRS networks. Donovan. The evidence from multivariate tests accounting for country and year fixed effects is consistent with network effects mattering less to countries with larger GDPs. Since our results are robust to country and year fixed effects. For countries in the largest size quartile. Moreover. like network effects.5 We address several potential alternative explanations for our results on network effects.on the choice of accounting standards. for countries in the smallest size quartile. Larger countries. potentially confounding the interpretation of our Anecdotal evidence from China’s process of converging with IFRS is consistent with this finding: Ramanna. are at least partially panel-based (as opposed to purely crosssectional or time-based). On relative economic dependence. the evidence on countries where foreign trade accounts for a larger fraction of GDP is mixed.

since IFRS adoption can be part of a new government’s broader political-economic strategy.empirical tests). recognizing that since the early 2000s the World Bank has encouraged its client countries to embrace IFRS (World Bank.g. hazard and multinomial logit models). We examine whether IFRS adoption is related to the extent of internationalization of a country’s economy. and equal distances between.. 2008) of the IASB. First. we test the sensitivity of our results to restricting the definition of a country’s network benefits to trade with only non-EU countries adopting IFRS. We also perform a number of sensitivity tests. but the evidence is not mutually exclusive to network effects: network effects remain statistically and economically significant determinants of IFRS adoption after the inclusion of these variables. we expand the ordinal characterization of 5 . Leone. 2000) and subsequent direction (e. First. and whether our results can be attributed to countries’ differential exposure over time to global information resources. The fourth test examines whether countries’ IFRS adoption decisions can be explained by changes in national governments. so economic relations with the EU can be overriding in explaining the impact of network benefits on IFRS adoption. We identify five such explanations. Finally. Our second and third alternative-explanation tests are based on the idea that IFRS harmonization can be part of a country’s broader policy response to globalization. because our adoption status variable inherently assumes an order among. we perform robustness tests using non-ordinal regressands (e. the various levels of IFRS adoption. we include in our tests a variable capturing panel variation in the World Bank’s pressure. We find some evidence consistent with each of the five alternative explanations above.. Second. Finally. we test whether a country’s decision to adopt IFRS is related to the entry of the Big 4 auditors into that jurisdiction. 1998–2008). The EU had a dominant role in the establishment (EC. recognizing the role of the Big 4 audit firms in promoting and lowering the implementation costs of IFRS adoption.g.

likely impeding effective implementation and enforcement of IFRS.. 1985. First. Finally. our findings related to network effects are important for at least four reasons. Overall.. (2008) show that real capital-market benefits from IFRS adoption occur only in countries with welldeveloped information and monitoring institutions.6 Nevertheless.g. we find that smaller and. as a determinant (not consequence) of IFRS adoption. World Bank.e.. David. the QWERTY keyboard. Third. the evidence on network effects suggests a country can adopt IFRS even if its domestically developed accounting standards are particularly well-suited to its domestic institutions. i. The remainder of this paper is organized as follows. Since we conceptualize and measure network benefits ex ante. 1998–2008). in some cases. Second. suggesting firm-level studies examine the second stage in what is at least a two-stage process. they add context to findings from existing firm-level studies on IFRS adoption. Their evidence suggests that the “perceived” network benefit we show as being a determinant of IFRS adoption is likely to actualize in only some countries. a literature in economics has shown that when network effects contribute to the dominance of a standard. Firm-level studies are conditional on countries’ decisions to mandate IFRS. Such countries also tend to have weaker market institutions (e. Section III describes the cross-country dataset on IFRS adoption and our measures of IFRS Daske et al. the evidence in this paper suggests that perceived network benefits are an important determinant of IFRS adoption over time. the evidence is germane in the context of prior research on network effects. our evidence does not speak to whether these network benefits are realized. While our evidence cannot establish this will be the case with IFRS. more economically dependent countries are more likely to adopt IFRS because others are doing so. Katz and Shapiro.g. Section II develops our hypotheses. We discuss the results of these sensitivity tests in Section IV.our IFRS adoption variable from three levels to five to explore differences between countries’ IFRS “convergence” projects and other partial adoption strategies. 6 6 . 1985). even superior innovations in the future may not be implemented (e.

In this vein. adopt or not). Ramanna and Sletten (2009) describe a number of institutional hypotheses for why countries do not adopt IFRS. and financial intermediaries. A well-developed theoretical literature in economics explores the notion of network effects. including our tests of alternative explanations.8 The value to a user from adopting Facebook as a communication portal is driven by three distinct sources: (1) the demand for a communication portal. and cultural distance from the EU. II. and culture of its institutions like auditing. Assuming the institutions that shape the accounting standards in a country have not changed substantially over the 2003–2008 period.e. Notwithstanding institutional differences. The first two sources are direct Währisch (2001) describes how network effects can motivate firms to adopt international accounting systems. it remains to be explained why so many countries adopted IFRS so quickly. We hypothesize that network benefits from extant worldwide adoption of IFRS are significant determinants in the time-series decision on IFRS harmonization by any given country.network values. politics. Facebook. including quality of local governance standards. Hypotheses development Prior literature argues that a country’s financial reporting standards co-develop with the economics. applications and customizability). One implication from this literature is that institutional differences across societies can explain countries’ choices on IFRS (i. (2) the features on Facebook (e. it is helpful to consider in parallel the example of a popular network-dependent product.7 To understand the role of network benefits in IFRS adoption. securities laws.. Liebowitz and Margolis (1994.g. That section also describes the research design. Section IV describes the results and Section V concludes.. international influence. 8 7 7 . IFRS has grown in popularity over six years. See for example. and (3) the number of other Facebook users. as seen by the increasing number of countries attempting to harmonize with IFRS between 2003 and 2008. courts. Katz and Shapiro (1985). 1998).

. The role of network benefits in adopting Facebook can be explained by perceived lower transactions costs. is expected to lower transactions costs for foreign users of financial statements. as a globally recognized body of standards.e. given the extant group of Facebook adopters. is likely to temper or intensify the perceived effects of a growing value of its IFRS network on accounting standards.benefits from adopting Facebook. and thus from adopting IFRS. foreign financial statement users already familiar with IFRS through their own adoption of the standards are expected to incur lower barriers in analyzing overseas financials prepared under IFRS. which in turn can result in benefits accruing to entities reporting under these standards. On economic size. The nature of a country’s economy. As more jurisdictions with economic ties to a given country adopt IFRS. the perceived benefits to that country from lowering transactions costs to foreign users. in part. the analogy of direct benefits in the case of countries’ IFRS adoption is the institutional complementarities discussed earlier. We refer to this magnitude as the value of the IFRS network to a country at a given time. can increase. by the magnitude of its economic relations with other countries that have adopted IFRS through that date. We exploit this argument and examine how a country’s economic size and its relative economic dependence on other countries affect its sensitivity to perceived network benefits. we expect larger countries (i. A similar argument can be made with respect to IFRS and we elaborate on this point below. Consequently. we hypothesize that a country’s adoption of IFRS (holding constant institutional determinants) can be explained. That is. countries with higher GDP) to be 8 . The role of direct benefits in adopting Facebook can be explained by idiosyncratic preference functions that capture an individual’s demand for a communication portal and its user features. IFRS. specifically as it relates to that of other countries. while the third source is the value from Facebook’s network.

2008.. rather. we begin this section by laying out the basic assumptions implicit in our empirical tests at the country level. for a recent review).9 III. 10 More specifically. the prediction is that perceived network benefits matter less to larger countries. such decisions are the result of actions by special-interest lobbyists and ideology-driven regulators (see Kothari. for an analysis of political-economic theories as they apply to accounting standard setting). 2010.11 The equivalent assumption in our study would be that Note the prediction on size is not that it is inversely related to network effects (countries are likely to perceive network benefits regardless of size). 11 Every firm-level study makes a similar assumption vis-à-vis the decision making process within a firm. Ramanna. Larger countries are likely to have greater bargaining power due to the size of their markets. opposing groups are more likely to get a voice in the United States than in Zimbabwe). Lopez-de-Silanes. its use remains relatively rare in the accounting literature. The predictions on size and relative economic dependence generate crosssectional tests that can help validate the hypothesis on network effects and provide additional context to the question why countries adopt IFRS. Nevertheless. and as a result. Greater dependence on foreign trade increases benefits from reduced transactions costs expected through IFRS adoption. and Skinner. Accordingly. are likely to attract foreign capital and maintain international trade even if they continue using domestic standards. La Porta. A similar argument applies to relative economic dependence. 9 9 .less swayed towards IFRS adoption by the value of their IFRS networks. Country-level decisions reflect a country’s domestic political economy. we predict that network effects are of greater importance to countries where trade accounts for a higher proportion of GDP. Metrics and research design The use of countries as a unit of empirical analysis is common in research in international finance and corporate governance (see for example. and Shleifer. The relative power of lobbyists and regulators in country-level decision making is likely to vary based on the extent of equitable representativeness within countries (e. researchers must assume that the domestic political economies that generated such decisions are not correlated with their independent variables.g. On relative economic dependence.10 In using country-level decisions as the unit of empirical analysis.

we describe the construction of our database of IFRS adoption by country-year. we use by-country time-series measures of both IFRS harmonization and network benefits. while the IASB’s standards are influenced by Pan-European economic interests (given the IASB’s implicit charter from the EU). However. Litan. in our study. the IASC’s work was perceived as relatively more Anglo-centric. The IASC was established in 1973. Further. Bromwich. To test our hypotheses on network effects. That is. The first two sub-sections of Section III describe these measures. we use actual adoption dates as a proxy for adoption decision dates. existing European Community countries had made significant progress towards accounting harmonization. In the remaining sub-sections. We begin our tests in 2003 because we are interested in IFRS as developed and sponsored by the IASB. Benston. While our research question concerns the role of network effects in countries’ adoption decisions. and Wagenhofer (2006.12 We end our sample in 2008. In particular. 229) argue that by this time. if we assume the nature of a country’s domestic political economy remains static through our six-year sample period. our use of country fixed effects controls for cross-sectional variation in domestic political economies. p. the year the UK joined the European Community.variation in countries’ perceived networks benefits is not systematically related to variation in their domestic political economies. because required macroeconomic data to construct the independent variables in our study were not available beyond 2008 at the time we initiated our 12 We exclude standards promulgated by the IASB’s predecessor the International Accounting Standards Committee (IASC) because there is evidence to suggest the IASC was culturally quite different from the IASB. our use of government fixed effects in robustness tests can also address changing political economies as new governments introduce new policies into their jurisdictions. Consequently. 10 . and the IASC was created to help the UK have a voice in future cross-country standardization. and 2002 was the first full year of the IASB’s existence. Measuring IFRS adoption Below. we are unable to obtain reliable information on the decision dates of IFRS adoption for a broad sample of countries. we discuss our research design. we compile information on the degree of a country’s IFRS response in every year between 2003 and 2008.

but the PriceWaterhouseCoopers website.study. When the available information is not sufficient to determine the extent of IFRS 13 While the IASB itself relies on IASplus. Some countries have implemented IFRS since 2008. but some of the reports date as far back as 2001 and cannot be fully relied on for more current information. the ROSC reports. EEA).com as a data source (IASB. The ROSC reports are available for 74 developing countries (the reports are usually prepared for World Bank client countries). when only two sources are available. b). 2008a. In coding a country’s IFRS adoption we use information from all three data sources. and also include discussions of other related issues such as accounting education and enforcement. and at least one (non Deloitte) Big-4 audit partner in each country disagreed with IASplus. We use three primary sources of data on IFRS adoption: (1) Deloitte & Touche’s IASplus. Each data source covers a slightly different set of countries.13 For countries with discrepancies among data sources. being censored at year-end 2008. although the information for several countries is not up-to-date.com.com as requiring IFRS for all listed companies. but our database. we opt for the adoption status suggested by the majority (two) of these sources or. and their assessments of the extent of IFRS adoption occasionally differ for those countries they cover in common. (2) a similar internet database from PriceWaterhouseCoopers.com website. there are a few cases in which other sources disagree with the website’s assessment of the country’s adoption status. The ROSC reports are comprehensive reviews of individual countries’ accounting and auditing regulations. we determine the status using the source that provides more supporting information for its assessment. 11 . Egypt and Peru are listed on IASplus. when available. Deloitte’s website lists IFRS adoption information for 153 legal jurisdictions (including 30 jurisdictions in the EU/ European Economic Area. For example. we err in favor of the other data sources. In these circumstances. PriceWaterhouseCoopers’ website provides similar adoption information as of the end of 2008 for 109 countries (including 26 jurisdictions in the EU/ EEA). and (3) data from the World Bank’s country Reports on Observance of Standards and Codes (ROSC reports). will correctly classify these countries as non-adopters for years 2003–2008.

is denoted. and non-adopters (when IFRS is not permitted for any listed companies). Finally. We then refine this classification to include an additional category for countries with an IFRS “convergence” project as discussed in Appendix A. and (3) full IFRS adopters.com website. securities exchanges. A qualitative analysis of the extent of each country’s IFRS adoption leads us to conclude that this process cannot be described with a simple binary variable. following the adoption classification on the IASplus. countries allowing voluntary IFRS adoption. the three-level ordinal estimated for every country-year in the dataset. IFRS permitted for (at least some) listed companies. we classify countries into five different groups based on their degree of IFRS harmonization as described below. For the purposes of our primary empirical analysis. we create four groups: full adopters (when IFRS as issued by the IASB is required for all listed companies). Consequently. 12 . First. We agglomerate the middle three categories into a single level (“partial adopters”) because it is difficult to objectively rank these categories relative to each other. . we reclassify the five categories of IFRS harmonization described above into three ordinal levels: (1) non-adopters. . associations of accountants. The ordinal levels represent distance from full adoption of IFRS as issued by the IASB. we obtain some additional information from correspondence with the investor relations departments of national securities exchanges and country managing partners at Big-4 audit firms. IFRS required for some listed companies. and countries requiring IFRS for some listed companies. (2) countries with convergence projects. Our primary dependent variable.adoption or the relevant dates. Our searches are limited to websites available in English. and web searches of newswire archives. we supplement it with information from the official websites of national standard setters.

In our final sample. We also exclude those jurisdictions for which the World Bank does not report gross domestic product (GDP) data. 2008) i.e. the network benefits from IFRS harmonization for a given country i in year t are the economic benefits perceived from commercial relations with the existing base of 14 EU countries are coded as being full adopters between 2005 and 2008. and hazard regressions. in subsequent OLS-based robustness tests. These data are required to calculate our measure of network benefits (in the following subsection). The countries are listed in Appendix B. adoption of IFRS by EU member states was not made country-by-country. in additional analyses we estimate both multinomial logit regressions. and as having convergence projects with IFRS in 2003 and 2004.To test the robustness of our ordinal rankings.. Our coding is based on the extent of IFRS harmonization for the majority of EU members. and (5) full adopters. Additionally. we exclude from our database all jurisdictions that do not have stock exchanges. where we compare each harmonization category to IFRS nonadopters. we exclude jurisdictions without dyadic trade data as reported by the International Monetary Fund (IMF). 13 . Since we are interested in the determination of financial reporting requirements for listed companies. The data selection procedure described above yields a final sample of 92 countries and 552 country-years.14 The reason for this treatment is that in 2002 the EU made a joint decision to adopt IFRS by 2005 (EC. we explore the sensitivity of our results to a five-level ordinal classification as follows: (1) non-adopters. where we treat only countries fully embracing IASB standards as IFRS adopters. (2) convergence project. the 27 jurisdictions that compose the member states of the EU are treated as one observation. The World Bank’s World Development Indicators (WDI) database is our source for GDP data. Further. (3) voluntary adoption. Measuring perceived network benefits As noted earlier. (4) required for some listed firms.

∈ . is the dyadic trade volume between country i and country j in year t-1.e. the use of trade in measuring perceived IFRS network benefits is consistent with accounting’s role in contracting. full adoption). (2009) identify “anti-dumping” lawsuits over exports by Chinese manufacturers as a major reason for China’s decision to converge with IFRS. By adopting IFRS. we ideally want to separate these realized effects from any measure of economic benefits perceived prior to the harmonization decision.16 For our purposes.g. For example. i ∉ J. rather than the announcement date. Moreover. and J is the subset of all jurisdictions that have mandated IFRS for all listed firms (i. These lawsuits usually allege that Chinese manufacturers are selling (or “dumping”) goods at prices below cost in overseas markets. The realized effects can result in either a boost or a decline in existing trade from its latent level (i. One relatively simple proxy for the perceived benefits is the aggregated value of existing trade with the subset of IFRS adopting countries.U.e. since we measure harmonization effective of the implementation date.. increasing after IFRS adoption.countries already harmonized with IFRS. Under this approach. Chinese manufacturers hoped to provide more reliable data on their costs. That is. We determine “the existing base of countries already harmonized with IFRS” using the country-year data on IFRS adoption described in the previous sub-section. Ramanna et al. its level absent 15 Conceptually. Márquez-Ramos (2009) finds evidence of bilateral exports in the E. existing trade data are likely to reflect at least some of the realized consequences of country i’s impending implementation. 16 E.. … 1 Where . We do not use these measures because dyadic-level data on these measures are available for only a handful of very large countries. This aggregated value can be constructed from dyadic (bilateral) trade data obtained in panel form from the IMF’s Direction of Trade Statistics (DOTS) database.. thus justifying their low prices on exports and accordingly boosting exports. Measuring “the economic benefits perceived from commercial relations” with this base of countries is more challenging. one can also measure network benefits using foreign direct investment or foreign equity portfolio investment. .15 The problem with this approach is that existing trade data incorporate the effects of country i’s imminent IFRS harmonization as well. 14 . as of year t-1.

including auditing. accounts for secular increases in trade from year t-2. .S.and year-specific effects. countries can similarly experience an increase in overall trade. (2011) supports this intuition. measuring network benefits using existing trade data is particularly problematic for countries with weak monitoring and information processing institutions. decrease trade) because a country is unlikely to adopt IFRS unless it expects a net benefit from the adoption. if IFRS harmonization decreases contracting efficiency. we construct a proxy that is based on the lagged value of trade and. is the dyadic trade volume between country i and country j in year t-1 .18 In order to obtain a cleaner measure of perceived benefits. In studying U. thus is less likely to include the real effects of a country’s impending IFRS harmonization. mutual fund ownership among 14 IFRS adopting countries. . the authors find either increases or decreases in fund ownership depending on the “credibility” of IFRS implementation across those countries. . . courts. we regress existing dyadic trade on its lagged value in a panel with country and year fixed effects and use the predicted value of trade from the regression as our measure of perceived network benefits. ∗ . Alternatively. The predicted value of existing dyadic (scaled by country i’s total trade in year t-1). imports will decrease because customers in country i will suffer worse credit terms (anticipating deteriorating reporting) and exports will decrease because of less reliable measures of financial strength among country i’s suppliers. 18 Confounding the realized and perceived benefits from IFRS harmonization is especially troublesome if the realized effects are negative (i. This situation will result in a decrease in overall trade. That is. and financial intermediaries. .impending implementation). 17 15 . 17. In other words. For example.. albeit in the context of investment flows. 1 . ∗ ∗ . Assuming anticipated IFRS harmonization in Evidence in DeFond et al. controlling for country. . . Where . and trade from this regression. where harmonization is likely to decrease contracting efficiency. securities laws. if IFRS harmonization increases contracting efficiency. … 2 ∗ . depending on the country’s institutional features that facilitate contracting efficiency. we estimate the following regression in the panel of all country-dyad-years in our dataset. Specifically.e.

Further. “convergence” is a loosely defined term that can result in different sets of standards in different countries. In calculating .. we estimate the actual network benefits for a given country i in year t as the aggregated value of .e. . . (ii) made IFRS available for voluntary use. full adoption). _ . in robustness tests we explore the sensitivity of our measure of network benefits to including trade with countries harmonizing less than fully with IFRS. full adoption). we define an alternative network benefits measure _ . and countries requiring only partial adoption are not included.year t does not confound trade data from year t-2. as of year t-1. ∈ . … 4 Where i ∉ J and J is the subset of all jurisdictions that have: (i) converged with IFRS. or (iv) mandated IFRS for all listed firms (i. Specifically. … 3 Where i ∉ J and J is the subset of all jurisdictions that have mandated IFRS for all listed firms (i. trade with countries pursuing convergence. we define another measure of network benefits that restricts the set J (where i ∉ J) to only non-EU countries mandating full IFRS adoption. the measure IFRS network benefits than the raw trade value . As noted earlier. ∈ . Additionally. (iii) mandated IFRS for at least some listed firms.. As in equation (1). Nevertheless. across the subset of countries already fully adopting IFRS. is a better proxy for for the reasons discussed above. voluntary and partial adoption efforts are not equivalent to full adoption because they require different levels of adaptation to IFRS among complementary institutions such as auditing.e. 16 . Specifically. countries permitting voluntary adoption. as of year t-1. . .

Trade dependence is measured as the quartile rank of the ratio of total foreign trade to GDP. it is possible that benefits perceived from relations with the EU are overriding in explaining network effects. EU countries adopted IFRS jointly. We predict positive and statistically significant. 17 .e. … 6 We expect a country’s economic size and its relative dependence on trade to qualify the relation between IFRS harmonization and network benefits (i. 2000) and EU countries continue to exercise discretion over the Board. thus avoiding write-downs. … 5 _ . Leone. dollars). excludes trade with EU countries and allows us to test whether economic relations with non-EU countries can explain the impact of network benefits on IFRS adoption. all measures of network benefits discussed above include trade with individual EU countries.S. The regressions are estimated in the panel of all countries i and years t. total foreign trade data are obtained from the IMF’s DOTS 19 For example. Given the EU’s central status vis-à-vis IFRS. ∗ . ..19 Moreover. allowed financial institutions using IFRS to opt for a one-time reclassification of certain investment assets.. the IASB. Some in the financial press have suggested the IASB made this decision in response to pressure from the EU (e. . to be ∗ . EU countries are represented as a single observation among 92 countries in the sample. . Standard errors are clustered by country. We measure economic size using the quartile rank of a country’s GDP (in constant year 2000 U. 20 Because of their joint decision to adopt IFRS. in the wake of declining financial markets in 2008. In order to reflect this. However. in equation (6)). ∈ . The EU had a dominant role in the establishment of the IASB (EC._ . a country may trade with some EU members and not others. potentially providing the critical mass of commitment to IFRS needed to generate network benefits.20 Research design based on OLS Our primary tests are ordinary least squares (OLS) regressions of the three-level ordinal ranking of IFRS harmonization on network benefits. 2008). the data are obtained from the WDI.g.

We predict and to be positive and statistically significant. particularly since there are numerous possible time-based explanations for the increasing IFRS adoption by countries over our sample period. since network benefits are in part determined by which countries have adopted IFRS in the past. the inclusion of time-based controls can extract that part of the variation in IFRS adoption that is attributable to network effects. the network effect can still be identified by our network 18 . ∗ ∗ . _ . The use of country fixed effects in equations (6) and (7) allows us to hold constant the institutions that influence a country’s choice of accounting standards. ∗ ∗ / . In the initial set of tests. we define alternative measures of network benefits: specifically. . As noted earlier. Accordingly. and to be negative and statistically significant. ∗ … 7 . we also estimate regression (7) replacing with these measures. Regression (7) does not include main effects for q(GDP) and q(Trade/GDP) since we include country fixed effects. respectively. ∗ . . The formal statement of the OLS regression with size and trade cross-sectional effects estimated over the dataset of all countries i and years t is as follows. That said.database. we note that. and _ . it is important to establish that our results on network effects are robust to the inclusion of time-based controls. More specifically. . we exclude year fixed effects because the regressions are intended to test whether our measure of network benefits explains part of the intertemporal variation in IFRS adoption. even after including such time-based controls. and are thus correlated with the average level of adoption over time. The economic size and trade dependence variables are denoted q(GDP) and q(Trade/GDP). In doing so. . Accordingly. . we also estimate equations (6) and (7) with year fixed effects.

We identify five such explanations. The World Bank. to denote whether a World Bank ROSC report was issued for a given country “i” prior to the year “t” in question (i. which will be captured by our network effects variable. in this subsection. The incidence of an ROSC report may thus result in both IFRS adoption and changes in trade. our focus in this study is network effects. the alternative explanations we examine are those that. and then makes recommendations on how that country can progress towards more internationally consistent governance practices (including through IFRS harmonization). The second alternative explanation we test is based on the idea that IFRS adoption can be part of a country’s broader policy response to globalization.variable because. through its periodic ROSC reports. we include in robustness tests an indicator variable _ . If so. both conceptually and empirically. like network effects. we focus on explanations that potentially confound our inferences on network effects (explanations likely captured by variables associated with our measure of network effects). Thus.. Alternative explanations While a number of factors likely contribute to IFRS adoption by countries. Moreover. in the context of testing the network effects hypothesis with country and year fixed effects. To control for this possibility. are at least partially panel-based. evaluates the status of a country’s corporate governance institutions (including accounting institutions). an association between IFRS adoption and the network effects variable can be due to World Bank pressure rather than network effects. network effects are cross-sectional and time-series in nature (as discussed earlier). The first focuses on the role of the World Bank in encouraging its client countries to embrace IFRS. That is.e. in year t-1 or before). as a country’s economy 19 .

That is. the adoption of IFRS and corresponding changes in our network effects variable can simply reflect the policy of a new government to be more global. thus confounding the interpretation of our network effects measure. To address this explanation. This can. in essence. 20 . be interpreted as the impact of the growing internationalization of an economy on IFRS adoption. Fourth. we include as a control variable the ex-ante share of international trade in a country’s GDP. This variable. the country may initiate associated policy responses such as IFRS harmonization. is already described in the previous subsection since quartile ranks of Trade/GDP are used in our cross-sectional tests of the effect of trade dependence on network effects. the more likely constituents in a country become interested in globalization. Implicitly. the coefficient on Trade/GDP captures the impact of the variable’s bycountry mean-adjusted value on IFRS adoption. Each new government in our panel dataset. the greater the exposure to international information. Trade/GDP. we rerun our regressions with government fixed effects in lieu of country fixed effects. The data are from the WDI database. is identified by a unique fixed effect (the CIA 21 In the presence of country fixed effects. In this case. To mitigate this possibility. differential exposure to international information may affect trade. as denoted by a new “head of government” in the CIA World Factbook. the association between IFRS adoption and our network effects measure can be attributed to the growing internationalization of an economy. we include a variable that proxies for countries’ access over time to international information resources: the prevalence of Internet usage in a country-year (Info_Globalizationi.t).21 The third alternative explanation is also related to globalization: individual countries’ policy responses to globalization (including IFRS harmonization) may vary in time due to differential exposure to international information resources. Moreover. To address this possibility. we examine whether countries’ IFRS adoption decisions can be explained by changes in national governments.becomes increasingly global over our sample period.

We use OLS in the main tests because country fixed effects are not feasible in the other models. and sovereigns in absolute monarchies). equal to one for country-years in which all three of the following Big 4 audit firms have offices located in the country: Ernst & Young. and PWC) with offices located in a given country in a given year. BigAuditor. prime ministers in Westminster-style governments. 22 21 . We address this hypothesis by including in our regressions an indicator variable. In the multinomial logit regressions. The fifth alternative explanation we test is based on the hypothesis that a country’s IFRS adoption and concurrent changes in trade are related to the decision of the Big 4 auditors to enter that jurisdiction.e. We have been unable to collect similar information from Deloitte. and PWC.. KPMG.22 Research design based on the multinomial logit and hazard models Our method of coding harmonization levels for the OLS regressions has its limitations: it requires that we determine the relative gaps between the levels a priori rather than a posteriori. partial Our results are robust to an alternative measure of BigAuditor: the proportion of the three audit firms (Ernst & Young.identifies “heads of governments” as presidents in executive republics. The entrance of the Big 4 into a country can be associated with IFRS adoption either because the firms lobby for such outcome. or because the implementation costs of IFRS for that country decrease with the presence of auditors experienced in IFRS. We test the robustness of our ordinal harmonization levels by estimating both multinomial logit and hazard regressions. The data are collected from the firms’ websites and through private correspondence with the firms. we use IFRS non-adopters as the base case and estimate the probabilities that countries choose each of two other IFRS harmonization categories (i. as would be possible using multinomial logit or other models. KPMG.

2000) and the more-familiar Cox proportional hazard model.. which is likely to be more appropriate for our data since we measure T in years (the Cox model assumes T is continuous).adoption or full adoption).e.. Both in the hazard and in the multinomial logit regressions..g. and so on. models with country fixed effects do not converge). Then.23 A positive coefficient on a covariate in the hazard model implies that the likelihood of IFRS full adoption is increasing in the covariate. parameter estimates are obtained from MLE.g. In additional hazard tests. In the hazard regressions. etc. T is set to six and the dependent variable is treated as censored. _ . we only report results based on the counting process model. T=2 if for adoption in 2004. so these specifications do not include country fixed effects (due to the limited number of observations. full adoption of IFRS is modeled as the “failure” event. thus. the highest possible value for T is six. the number of years until full IFRS adoption. i. Box-Steffensmeier and Jones (2004) argue the counting-process method is likely to be more appropriate for hazard analyses. in situations where the range of possible values for T is low (as in the case of our data where T varies between 1 and 6). i.) and its interactions with the economic size and trade dependence proxies. . We estimate two different versions of the hazard model: the counting process hazard model (Therneau and Grambsch. we relax the latter assumption and treat any harmonization effort at convergence or above (e. Moreover. T=1 if a country adopts IFRS in 2003. 23 The counting-process method is based on a discrete formulation of the dependent variable (i.e. We do. On average. The hazard regressions estimate the impact of network benefits on full adoption. accounting for the relative timing of that adoption. . For countries that do not adopt by 2008 or that harmonize only partially with IFRS..e. yield similar results. the dependent variable is the time to full IFRS adoption. 22 .. We also interact network benefits with the economic size and trade dependence proxies to test the cross-sectional hypotheses on network effects. The primary independent variables in the hazard analyses are variously: one measure of network benefits (e. and do in our case. survival time T). . voluntary adoption) as a “failure” event. Since the data are censored in 2008. the two methods are expected to. Let “T” be the “survival” time.

Standard errors are clustered at the country level. The proportion of non-adopters. having adopted IFRS fully in 2005. countries allowing voluntary IFRS use. and eight in 2008. i. In contrast. INSERT TABLE 1 HERE. IV. in the case of the hazard model we use the process described in Lin and Wei (1989). the proportion decreases to 30 countries by 2008. is highest in 2003. 61 countries. countries requiring IFRS (as issued by the IASB) for all listed firms in their jurisdictions. from six in 2003 to 15 in 2008. For example. The number of countries with IFRS convergence projects is also increasing through the time-series. include year fixed effects and variables that control for alternative explanations. The columns represent the six years in the panel. there are five countries permitting voluntary IFRS use in 2003. The proportion of countries permitting voluntary IFRS use and the proportion of countries requiring IFRS for some listed companies are non-monotonic in the time-series. is represented as a single observation in this category effective 2005.e. The EU. Countries across the three sub-categories in (2) are presented separately. grows from 18 countries in 2003 to 32 countries in 2008. Results Descriptive results Table 1 presents the distribution of IFRS harmonization categories across the 552 observations in the country-year panel. and (3) full adopters. countries requiring IFRS for some listed companies.however. 10 in 2006 and 2007. (2) countries with convergence projects.. The rows in the table correspond to the three different adoption statuses described in Section III: (1) non-adopters. These proportions are likely to vary over time because countries may choose to “ease in” to IFRS 23 . the number of full adopters. 2003–2008.

INSERT TABLE 2 HERE. To interpret the average values in Table 2.harmonization by first allowing voluntary IFRS use and/or requiring IFRS for some listed companies.. Panel A reports mean and median values of our primary measure of network benefits from countries that fully adopted IFRS. for non-adopters in 2003: 0. . _ . _ . i.9% of total trade among non-adopters in 2003 came from countries that fully adopted IFRS as of 2002. before moving to full-scale IFRS adoption.. Panel B. we report the mean and median values of GDP and Trade/GDP. Table 2. the mean . consider for example.019. The average values of average values of _ _ . This value implies that 1. . economic benefits perceived has increased substantially between 2003 and 2008 across all categories of IFRS harmonization. . . These variables are used to generate the in-sample quartile rank variables q(GDP) and q(Trade/GDP) that are the bases for the cross-sectional tests of network effects using country size and economic dependence. Trade/GDP is also used to test the alternative hypothesis that IFRS adoption can be attributed to the internationalization of a country’s economy. reports mean and median values of the alternative measures of perceived network benefits. In addition to GDP and Trade/GDP. In Table 3. are generally higher than those of . we report the average values of countries’ foreign-equity portfolio investments to GDP. . FEPI/GDP.e. The average values of . This variable can also be used as a proxy for a country’s economic 24 . and . although no pattern is apparent in these differences. . i.e. while the are the same or lower than those of INSERT TABLE 3 HERE. differ across the various categories of IFRS harmonization. Table 2 provides descriptive statistics for our measures of perceived network value by adoption year and by the three levels of IFRS harmonization. although the increase is not always consistent or monotonic. .

and 25 .e. but there is no discernible difference between its average values across the three IFRS harmonization categories. the average values of WB_Report increase over time. but only among non-adopters and full adopters. we use size and economic dependence from 2002 (and so on). OLS regression results Table 4 presents the results of OLS regressions of the ordinal IFRS harmonization status on network benefits. Trade/GDP. poor availability in the panel limits its use. The means and medians of GDP. This phenomenon is driven more by countries’ movements across harmonization categories (due to changes in their harmonization responses) than by changes in the values of GDP for a given country over time. and FEPI/GDP in Table 3 are reported by the three levels of IFRS harmonization and years. the mean GDP value for non-adopters in 2003 is actually the mean from year 2002. Table 3 also shows the mean and median values of WB_Report. Info_Globalization is also increasing over time. however. and BigAuditor—three independent variables used in subsequent tests of the alternative explanations to network effects. there appears to be no consistent through-time relation between Trade/GDP and IFRS harmonization status. The OLS regressions in Panel A include country fixed effects.. the average values of GDP appear to vary across time within the IFRS harmonization categories. i. to explain IFRS harmonization in 2003. In Table 3. The median value of BigAuditor is one across all categories in Table 3. Unlike with GDP. By construction.dependence in cross-sectional tests. the decreasing trend in Info_Globalization across partial adopters is likely due to countries in this category transitioning to full adoption. which is expected given the international presence of the Big 4.e. This is because lagged-values are used in the regression analyses.. The values corresponding to a given year are lagged values. Info_Globalization. i.

i. respectively. The first column in Panel A is the result of the regression specified in equation (6) in Section III. Panel B is organized similarly. In column (1) of Table 4 Panel A. we test for the crosssectional effects of country size and country economic dependence on the relation between IFRS harmonization and network benefits. and _ . and . . as the network benefits proxy. . The interpretation is that a country’s dependence on foreign trade accentuates the impact of network benefits on IFRS harmonization only when such benefits are defined to include trade with countries converging with IFRS. the interaction of network benefits with q(GDP) yields a negative and statistically significant coefficient across both columns (2) and (3).e. . .. using . except all regressions include year fixed effects. .statistical inferences are based on country-clustered standard errors (inferences are robust to clustering by country and year). Across the three columns. i. The coefficient on the non-interacted network benefits proxy in Table 4 is positive and statistically significant in columns (2) and (3). _ . There are four columns to Table 4.e. 26 . the coefficient on the network benefits proxy. The next three columns present the results of regressions specified by equation (7).24 In columns (2) through (4) of Table 4. can _ also be drawn using _ . without interactive effects for country size and economic dependence. consistent with country size attenuating the impact 24 The same inferences as the ones from column (1) of Table 4. the proxies for network benefits are . is positive and statistically significant. INSERT TABLE 4 HERE. . after controlling for institutional determinants through fixed effects. (results not reported). with interactive effects.. A similar result is obtained on the coefficient of network benefits interacted with q(Trade/GDP) only in column (3). In contrast. The interpretation is that the degree of IFRS harmonization is increasing in perceived network benefits.

Overall. p. the shift in . However. a shift of two quartiles in the value of . Skinner (2008. Perceived network benefits. are not significantly associated with countries’ ordinal IFRS harmonization responses. we calculate the change in IFRS adoption status due to shifting the value of .e. We use our primary model with interaction terms (reported in column (2)) for this analysis (not tabulated). there is no differential association between IFRS harmonization and network benefits for larger countries. in column (4) of Table 4. our cross-sectional results show that this effect is stronger (weaker) for countries that are smaller (larger): for a country in the lowest (highest) size quartile with average trade dependency. 220) notes that harmonization attempts in Japan arose from pressure to “convince” the EU “that Japanese GAAP was ‘equivalent’ to IFRS.. when defined to exclude economic relations with the EU. _ . However. 34% of the shift from no IFRS-related activities to some harmonization efforts or from some harmonization efforts to full IFRS adoption). leads to a 61% (6%) increase in IFRS adoption status. To evaluate the economic significance of network benefits for countries’ IFRS harmonization choices.” 27 . from the 25th to 75th percentile leads to a 0. non-EU network effects significantly predict IFRS harmonization responses. i.25 25 The anecdotal evidence on Japan’s motivation to harmonize its GAAP with IFRS is consistent with this finding: for example. among countries more dependent on foreign trade..” since “Japanese companies rely heavily on European capital markets for external debt financing.of network benefits on IFRS harmonization when such benefits are defined to include economic relations with EU member states. results from the OLS regressions suggest network benefits expected to accrue from economic relations with the EU are dominant in explaining IFRS harmonization. especially among more economically independent countries. Moreover.e. from the 25th to 75th percentile.34 increase in IFRS adoption status (i. For a country with average size and average trade dependency.

For a country with average size and average trade dependency.Panel B of Table 4 is equivalent in all respects to Panel A. To evaluate the economic significance of network benefits in Panel B. except that it also includes year fixed effects. but in the full models. the results suggest that network effects can explain. a shift of two quartiles in the value of . in part. Overall.5%) increase in IFRS adoption status. the inclusion of time-based controls renders network effects insignificant. 28 . with the interactions on size and trade dependency (columns (2) and (3)). Table 5 has two panels: the panels are identical in all respects other than that Panel A 26 The results reported hereafter are robust to using a time-trend variable in lieu of year fixed effects. decisions to adopt IFRS.26 As seen in Panel B. but is necessary to show that our network effects results are not simply due to time-based explanations. from the 25th to 75th percentile leads to a 23% increase in IFRS adoption status. the coefficients on network effects remain statistically significant after including time-based controls. the inclusion of time-based controls dampens. consider the model in column (2). and that the effect can be identified even after controlling for other time-based explanations. For a country in the lowest (highest) size quartile with average trade dependency. the shift in . In the partial model (column 1). the inclusion of year fixed effects is likely to weaken the power of our network effects measure. Moreover. the interaction of network effects with size is also significant. As discussed earlier. the interaction of network effects with trade dependency is significant in column (3). but not in column (2) (as in Panel A). the explanatory power of network effects. but does not eliminate. leads to a 44% (1. in the full models. Robustness to alternative explanations Table 5 presents the results of tests of the five alternative explanations discussed in Section III. Although not directly reported in Panel B. the year fixed effects are also themselves statistically significant in the regressions.

we test one of the five alternative explanations discussed earlier. consistent with country size attenuating the impact of network benefits on IFRS harmonization. we re-estimate all models from Table 5 adding the interaction of the network benefits measure with the square of q(Trade/GDP). suggesting that the main effect of perceived network benefits is robust to the various alternative explanations discussed in Section III. In untabulated tests.g. providing weak evidence. the coefficient of network benefits interacted with q(Trade/GDP) is positive and statistically significant in only one column of Table 5. INSERT TABLE 5 HERE. in particular. In contrast. The coefficient on . There are six columns to each panel of Table 5.. including the interactive effects of size and trade dependency on perceived network benefits. at best. The regression specification being tested throughout Table 5 is the full model.excludes year fixed effects and Panel B includes them. while the second-order effect is significantly negative. The goal of these tests is to examine whether there are nonlinearities in the ability of trade dependency to explain cross-sectional variation in network effects: countries with the highest levels of trade dependency may have idiosyncratic competitive advantages in world trade (e. we test all five alternative explanations simultaneously. The proxy for network benefits throughout Table 5 is . Also. the alternative hypotheses. the interaction of network benefits with q(GDP) yields a negative and statistically significant coefficient throughout Table 5. i. _ .. and Info_Globalization are positive and statistically significant only when year 29 . in the sixth column. Turning back to the results reported in Table 5. We find the first-order effect of q(Trade/GDP) is significantly positive. . throughout Table 5 is positive and statistically significant. for the hypothesis on trade dependency.e. being natural-resource rich) that make them less sensitive to IFRS network effects. In each successive column. consistent with diminishing importance of IFRS network benefits in trade-heavy economies.

the dependent variable is the time to full 30 . and (5) we define the “failure” event as full adoption of IFRS. the evidence in Table 5 is consistent with network effects being significant determinants of the intertemporal shift from domestic accounting standards to IFRS after controlling for alternative explanations. the shift in . A propos the inclusion of government fixed effects in lieu of country fixed effects. leads to a 44% increase (2% decrease) in IFRS adoption status. specifically: _ . in the model that includes all proxies for alternative hypotheses and year fixed effects (column 6 of Panel B). For a country with average size and average trade dependency. Hazard and multinomial logit regression results Table 6 presents the results from the counting-process hazard model estimated with standard errors clustered at the country level. To evaluate the economic significance of network benefits after controlling for alternative explanations. Trade/GDP is also positive and statistically significant. . i. lending only modest support to the World Bank hypothesis and the hypothesis on countries’ differential access to international information sources. In the hazard regressions presented in columns (1). (2). Further. In columns (4) and (5) we examine the robustness of the results in _ . from the 25th to 75th percentile leads to a 21% increase in IFRS adoption status. In that model. column (2) to using different measures of network benefits. and (3) we measure network benefits with . such fixed effects do not affect inferences on network effects. Overall. BigAuditor is positive and statistically significant even with the inclusion of year fixed effects. (4).e. consider the full model in column (6) of Panel B. In contrast. (2). a shift of two quartiles in the value of .fixed effects are excluded. and . In columns (1). BigAuditor remains statistically significant. For a country in the lowest (highest) size quartile with average trade dependency.. .

Since we cannot estimate the hazard model with country fixed effects. This latter variable is used in lieu of Trade/GDP to test the alternative hypothesis on the impact of internationalization of a country’s economy on IFRS adoption (the results are invariant to using Trade/GDP instead). the effect of network benefits on the likelihood of IFRS harmonization is weaker for larger countries.” in column (3) we recode the dependent variable to represent the time to IFRS harmonization at any level at or above a convergence project. IFRS harmonization is positively associated with the presence of Big 4 audit firms. To examine the sensitivity of our results to an alternative definition of “failure. full adopters of IFRS seem to perceive network benefits as arising mostly from sharing standards with countries that adopt actual IFRS (as developed by the IASB). consistent with our predictions. rather than a modified set of standards (as is the case in convergence projects). Table 6 provides evidence that the likelihood of IFRS harmonization (at full adoption or at or above a convergence project) increases in perceived network benefits. as indicated by a statistically significant coefficient on BigAuditor in columns (1) through (5).IFRS adoption. INSERT TABLE 6 HERE. In Table 6. Moreover. Finally. we supplement as regression controls the un-interacted variables q(GDP) and q(Trade/GDP). we do not find any evidence that a country’s trade dependence affects the importance of perceived network benefits for a country’s IFRS adoption. as demonstrated by the statistically significant negative coefficient on Nw*q(GDP) in columns (2) and (3). 31 . where network effects are defined to include trade with all countries that at a minimum initiated an IFRS convergence project. We find no statistically significant coefficients on the network variables in column (4). Our inferences regarding the value of IFRS network excluding EU countries (column (5)) are similar to those based on the OLS regression. Thus.

Harmonization is coded as one of three categories: non-adoption. In this model we find that the likelihood of full IFRS harmonization increases in perceived network benefits. . The dependent variable in our multinomial logit model is IFRS harmonization. _ .Table 7 reports results from the multinomial logit analysis with standard errors clustered at the country level. is positive and statistically significant only for full IFRS adopters.. Consequently. the latter variable is used in lieu of Trade/GDP to test the alternative hypothesis on the impact of an economy’s internationalization on IFRS adoption (results are invariant to using Trade/GDP instead). in addition to the main effect of network benefits. In the three columns. INSERT TABLE 7 HERE. and full adoption. ) can be found in column (1) of Table 7. As with the hazard model. where we define 32 . . Instead. and _ . the coefficient on . allows us to test our crosssectional hypotheses. . non-adoption. The results from the basic model excluding interaction terms of Nw with q(GDP) and q(Trade/GDP) and using our primary measure of network benefits ( . the results from the multinomial logit allow us to assess the importance of network effects for each category of adopters. Also as before. multinomial logit regressions exclude country fixed effects. partial adoption. . Our results from the cross-sectional models show that perceived network benefits generally increase the probability a country fully adopts IFRS. Columns (2) through (4) of Table 7 contain the results from regressions of the expanded model that. Column 3. but include the un-interacted variables q(GDP) and q(Trade/GDP). we report the results of estimating this expanded model using alternative measures of network benefits based on different definitions of “incorporating” IFRS: specifically. it compares the partial adoption and full adoption categories to the base-line decision. The multinomial logit model does not assume any ordering among the harmonization levels.

The evidence in Table 7 suggests network effects do not play a significant role in partial IFRS adoption. including IFRS converging countries. This result is consistent with inferences obtained from the hazard model and suggests that countries adopting IFRS fully are more discriminating in their perception of network benefits. For full adoptions.network benefits to include trade with countries that at least converge with IFRS. On the cross-sectional variables. Overall. Such countries are less likely to expect harmonization benefits from partial adoptions. the evidence from our multinomial logit analysis indicates that perceived network effects impact the likelihood of a country fully adopting IFRS. we find that both partial and full IFRS adoptions are positively related to the presence of Big 4 audit firms in all four specifications of Table 7. but there is no evidence that network effects vary with a country’s trade dependence. the coefficient on Nw*q(GDP) is statistically significant and negative for full adoptions in column (2). The five 33 . Robustness tests: OLS regressions with five levels of IFRS adoption status In untabulated tests. there is no evidence that the importance of perceived network benefits to a country varies with its trade dependence as measured by Nw*q(Trade/GDP). Both models provide some support for our cross-sectional prediction that the impact of network effects on IFRS harmonization is mitigated for larger countries. we find some evidence that network effects play a weaker role in full adoption decisions of larger countries. we find that the coefficient on _ . Our hazard model tests further confirm these insights. is an exception: here. is not significant for full adoptions. we examine the robustness of our OLS regression results to using an ordinal with five (rather than three) levels of IFRS adoption as the dependent variable. because the nature of such adoptions is likely idiosyncratic. In particular. Finally.

levels are discussed in Section III. Conclusion We develop and test the hypothesis that network effects are a significant factor in the time-series growth in IFRS harmonization across countries. specifically its economic size and trade dependence. V. The results suggest IFRS adoption is self-reinforcing. is likely to affect the relation between network benefits and IFRS harmonization. We find evidence consistent with network effects mattering less to countries with larger GDPs and. In cross-sectional tests. particularly when network benefits are defined to include relations with EU member states. Network effects refer to perceived lower transactions costs given the community of IFRS adopters worldwide. These robustness tests confirm our inferences from Tables 4 and 5: perceived network benefits are positively and significantly associated with IFRS adoption status and more important for smaller countries. to countries where trade accounts for a smaller fraction of GDP. These findings suggest that the role of perceived network benefits in countries’ IFRS harmonization decisions is weaker for countries with more bargaining power (larger countries). they can sustain its eventual dominance even in the presence of technologically superior 34 . if network effects contribute to the adoption of IFRS. The presence of network effects in the adoption of IFRS is significant because it means a country can adopt IFRS even if its domestically developed accounting standards are particularly well-suited to its domestic institutions. Moreover. only in some cases. We find the degree of IFRS harmonization in a country is an increasing function of the perceived value of its IFRS network. Inferences from the robustness tests are unaffected by the inclusion of year fixed effects and controls for alternative explanations. we explore how the nature of a country’s economy.

Firms’ adoption decisions are conditional on countries’ decisions to harmonize with IFRS. For example. suggesting that the analysis of why countries adopt IFRS is important. 35 . implying IFRS implementation in these countries is less likely to be effective. The concept of network effects has recently been used to explain several accountingrelated phenomena. 27 For example. We document that network effects influence accounting-related decisions more generally. suggesting network theory can be used broadly in the literature on accounting and corporate governance choice. Future firm-level research can also investigate whether network benefits increase the attractiveness of voluntary IFRS adoptions to multinational as opposed to domestic corporations. 1985). Ironically. the theory of IFRS network benefits tested herein in the context of countries can equivalently be applied to firms.27 The evidence in this paper can also complement the growing literature on the determinants and consequences of firms’ IFRS adoption.innovations (David. Our evidence also implies that countries with low bargaining power are more susceptible to adopting IFRS because others are doing so. Firm-level research on the determinants of IFRS adoption may consider how perceived network benefits interact with economic incentives in shaping adoption choices. consistent with such countries being less distinctive in their approach to IFRS harmonization. such as the adoption of stock-option compensation plans (Kedia and Rajgopal. low bargaining power countries also tend to have weak market institutions. 2009) and the decision to expense options in the income statement (Reppenhagen 2010). David notes how the QWERTY keyboard has remained the world standard despite longstanding experimental evidence (dating back to at least the 1940s) supporting alternative keyboard designs as superior.

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In particular: 1. in lieu of directly adopting IFRS as issued by the IASB. 39 .” with certain exceptions. where “convergence” represents a country’s efforts to reconcile its domestic accounting standards with IFRS. Still other countries rely on “static” IFRS—that is. 2. and reversal of impairments. however. fair-value accounting. Ramanna et al. Some countries develop national accounting standards that are based on.com. IFRS. For example. not every IFRS has an equivalent NAS and extant NAS differ in wording from IFRS. but whose domestic standards continue to differ from IFRS as issued by the IASB.Appendix A. (2010) describe various exceptions to IFRS that China has carved out as a condition to converging with the global standards. including standards around consolidated financial reporting.com: for example. The countries described above cannot be properly classified as having adopted IFRS as issued by the IASB. For example. often supplementing IFRS with local exceptions. Other countries claim to have adopted IFRS but carve out certain standards or rules. NAS are produced in English and appear to be derived from IFRS. For example. PriceWaterhouseCoopers reports that current IFRS is neither required nor permitted for listed companies in Thailand. but not identical to. Defining the category for countries with an IFRS “convergence” project Through a qualitative analysis of IFRS adoption patterns across countries. but that “Thai GAAP follows the 2005 version of IFRS. they use a version of IFRS that was effective as of some prior year. we encounter jurisdictions that have made some progress towards IFRS harmonization. 3. the Institute of Chartered Accountants of Nepal lists the various Nepalese Accounting Standards (NAS) together with their corresponding IFRS equivalents. Nepal is classified as a “full adopter” on IASplus. we reclassify the countries as IFRS “convergence” countries. Accordingly. Creating the “convergence” category results in differences between our score of IFRS adoption and that on Deloitte’s IASplus.

List of countries in the dataset Argentina Armenia Australia Azerbaijan Bahamas Bahrain Bangladesh Barbados Belarus Benin Bermuda Bolivia Bosnia and Herzegovina Brazil Burkina Faso Canada Chile China Colombia Costa Rica Croatia Cuba Dominican Republic Ecuador Egypt El Salvador European Union Fiji Georgia Ghana Guatemala Guyana Haiti Honduras Hong Kong India Indonesia Iran Israel Ivory Coast Jamaica Japan Jordan Kazakhstan Kenya Korea (South) Kuwait Kyrgyzstan Laos Lebanon Macedonia Malawi Malaysia Mali Mauritius Mexico Moldova Morocco Mozambique Nepal New Zealand Nicaragua Niger Oman Pakistan Panama Papua New Guinea Paraguay Peru Philippines Qatar Russia Saudi Arabia Singapore South Africa Sri Lanka Switzerland Syria Tajikistan Tanzania Thailand Togo Trinidad and Tobago Tunisia Turkey Ukraine United Arab Emirates United States Uruguay Venezuela Zambia Zimbabwe 40 .Appendix B.

without directly adopting IFRS B. Non adopter Countries with no IFRS harmonization activity 2. "2B". Voluntary adoption C. Convergence project Countries attempting to reconcile their domestic accounting standards with IFRS. Required for some Countries permitting at least some listed firms in their jurisdiction to adopt IFRS as issued by the IASB Countries requiring IFRS as issued by the IASB for some listed firms in their jurisdiction Countries requiring IFRS as issued by the IASB for all listed firms in their jurisdiction 3. Partial adoption A. Info_Globalizaion BigAuditor 41 . and PWC have offices located in the country. Variable definitions Variable Description Dependent variable: IFRS adoption status 1. KPMG. "2C" or above Predicted prior-year fraction of a country's trade with all non-EU countries that have IFRS adoption status "3" or above Other independent variables q(GDP) q(Trade/GDP) FEPI/GDP WB_Report In-sample quartile rank of gross domestic product In-sample quartile rank of the ratio of foreign trade to GDP Ratio of foreign equity portfolio investment to gross domestic product Time-series indicator to denote whether a World Bank ROSC report was issued for the given country prior to the year in question Percentage of Internet users Indicator equal to one for country-years in which Ernst & Young.Appendix C. Full adoption Primary independent variable: Network value of IFRS Network Predicted prior-year fraction of a country's trade with all countries that have IFRS adoption status "3" Network_Conv Network_Non-EU Predicted prior-year fraction of a country's trade with all countries that have IFRS adoption status "2A".

“Full adoption” refers to countries requiring IFRS as issued by the IASB for all listed firms in their jurisdiction.Table 1. Partial adoption A. IFRS adoption status in the country-year panel “Non adopter” refers to countries with no IFRS harmonization activity. Convergence project B. “Voluntary adoption” refers to countries permitting at least some listed firms in their jurisdiction to adopt IFRS as issued by the IASB.” “Convergence project” refers to countries attempting to reconcile their domestic accounting standards with IFRS. “Required for some” refers to countries requiring IFRS as issued by the IASB for some listed firms in their jurisdiction.” “Voluntary adoption. Required for some 3.” and “Required for some. without directly adopting IFRS. Full adoption Total 2003 61 6 5 2 18 92 2004 54 8 7 4 19 92 2005 48 8 9 3 24 92 2006 44 11 10 3 24 92 2007 36 14 10 4 28 92 2008 30 15 8 7 32 92 Total 273 62 49 23 145 552 42 . Non adopter 2. Voluntary adoption C. “Partial adoption” refers to applying IFRS with exception or only for some firms in the economy and includes: “Convergence project. Adoption Status 1.

050 2008 Mean Med. “Partial adoption” refers to applying IFRS with exception or only for some firms in the economy and includes: “Convergence project.019 0.041 2005 Mean Med.027 0. Full adoption 43 .047 0..025 0.026 0.037 0.023 0.015 2004 Mean Med.072 2008 Mean Med.013 0.119 0.011 0.023 0.059 0.039 0.052 0.” and “Required for some.” Med.010 0. Descriptive statistics for measures of perceived network benefits “Non adopter” refers to countries with no IFRS harmonization activity.155 0.027 0.073 0. full adoption).128 0.033 0.021 0. Full adoption Variable Network Network Network 2003 Mean Med. without directly adopting IFRS.080 0.108 0.032 0. 0.032 0.117 0. 0.054 0.082 0.063 0.011 0.136 0.015 0.213 0.011 0. 0. denotes median.056 2. 0.025 0.082 0.059 0. 0.158 0.045 0.047 0.158 0.103 0.079 0.087 0. Network is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “3” (i.014 0.163 0. “Required for some” refers to countries requiring IFRS as issued by the IASB for some listed firms in their jurisdiction.095 0.105 0.120 0.039 0.091 0.086 0.048 0.063 0.013 0.093 0.097 0.024 0.157 0.015 0.129 0.149 0.Table 2. Partial adoption 3.175 0.041 2005 Mean Med.159 0.115 0.010 0.060 0.019 0.222 0.125 0. “Voluntary adoption” refers to countries permitting at least some listed firms in their jurisdiction to adopt IFRS as issued by the IASB.112 0.072 2007 Mean Med. Non adopter Variable Network_Conv Network_Non-EU Network_Conv Network_Non-EU Network_Conv Network_Non-EU 2003 Mean Med.024 0.121 0.210 0.046 2006 Mean Med.065 2007 Mean Med.024 0.145 0.104 0. 0. Network_Non-EU is the predicted fraction of a country’s prior-year trade with all non-EU countries that have IFRS adoption status “3.016 0. 0.” “Convergence project” refers to countries attempting to reconcile their domestic accounting standards with IFRS. 0.038 0.e. Network_Conv is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “2” or above.023 0. Partial adoption 3.046 2006 Mean Med. 0.063 0.012 0. Non adopter 2. “Full adoption” refers to countries requiring IFRS as issued by the IASB for all listed firms in their jurisdiction.041 0.077 0.106 0. 0.112 0.076 0.017 0.018 0.124 0.060 0.092 0.047 0. Panel A Adoption Status 1. 0.079 Panel B Adoption Status 1.087 0.015 2004 Mean Med.019 0. 0.” “Voluntary adoption.019 0.

03 80.255 0 13.73 0.03 1 10. GDP is gross domestic product.0000 0. Non adopter Variable GDP Trade/GDP FEPI/GDP WB_Report Info_Globalization BigAuditor GDP Trade/GDP FEPI/GDP WB_Report Info_Globalization BigAuditor GDP Trade/GDP FEPI/GDP WB_Report Info_Globalization BigAuditor 2.094 0 13. 2003 Mean Med. “Voluntary adoption” refers to countries permitting at least some listed firms in their jurisdiction to adopt IFRS as issued by the IASB.76 52.04 12.0022 0. Partial adoption 3.68 0.552 1 228.200 0 24.53 1.0076 0.600 1 244.053 0.86 0.048 0.897 1 53. 0.39 7.0016 0. . 451.45 0. KPMG.29 0.722 0.0042 0 18.933 0.31 21.0002 0.764 0. 415.709 -0.882 1 2004 Mean Med.0025 0. “Required for some” refers to countries requiring IFRS as issued by the IASB for some listed firms in their jurisdiction.17 0.870 .846 1 15.0000 0 28.01 14.57 4.731 0.35 0.235 11.69 33.79 52.17 1.40 0.47 1.0000 0 38.905 1 2007 Mean Med.92 0.228 0.99 0.” and “Required for some.53 1.0060 0.26 28. without directly adopting IFRS.858 0.569 0. .081 0.64 0.442 0 40.43 23.” “Convergence project” refers to countries attempting to reconcile their domestic accounting standards with IFRS.654 1 127.0007 0.72 22.913 1 40.754 0.0002 0.087 32.933 0.Table 3. 0. 360.779 0.0006 0. Med.86 17.0009 0.” “Voluntary adoption.347 37.11 38.59 0.699 0.0000 0.69 1 2005 Mean Med.292 0 23.655 0.302 0 14. Full adoption 44 .02 1. Trade/GDP is the ratio of foreign trade to gross domestic product.674 0.92 8.68 0. “Partial adoption” refers to applying IFRS with exception or only for some firms in the economy and includes: “Convergence project.905 1 2006 Mean Med.842 17.0000 0.94 0. Info_Globalization is the percentage of Internet users.88 15.190 0.09 3.02 0.58 0.314 0 17.76 0.822 0.605 1 164.15 0.0024 0. 708.0006 0.943 0.617 1 178.879 .68 30.0000 0.69 1 10.13 0.77 0. 507.0000 0.91 0.0071 0.644 1 155.0000 0 11.895 1 38.800 99.0000 0.407 25.37 6.757 0. BigAuditor is an indicator equal to one for country-years in which Ernst & Young. 0.286 0 35.0000 0.33 0.0030 0.483 0 26.224 0 32.0024 0.34 24.0004 0.833 1 Adoption Status 1.0000 0.033 0 11.0002 0.805 0.19 21.743 0.27 9.36 0.0009 0.07 1 2008 Mean Med.607 0.788 0.67 0.527 -0.94 11.806 0. .056 0 10.37 60. Descriptive statistics for other independent variables “Non adopter” refers to countries with no IFRS harmonization activity. denotes median.727 0.72 0.26 0. 573.71 0.97 1.71 10.198 0.33 0.379 0 21. “Full adoption” refers to countries requiring IFRS as issued by the IASB for all listed firms in their jurisdiction.882 0.88 0.343 .72 12.362 1.69 0.23 0.92 0.07 59. and PWC have offices located in the country.824 0.875 24. WB_Report is a time-series indicator to denote whether a World Bank ROSC report was issued for the given country prior to the year in question.02 1. FEPI/GDP is the ratio of foreign equity portfolio investment to gross domestic product.17 11.599 0.025 0 31.58 0.926 35.

E.000 (3) 7. 1.000 (2) 10.000 1. Nw is Network_Conv.178 Yes No 514 0.000 2.298 *** 0.118 0. N Obs.660 *** 0. 45 . In column (3).000 -1. Network is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “3” (i.000 Country F. Numbers in italics are p-values (twotailed). Panel A – OLS regressions with country fixed effects Nw Nw*q(GDP) Nw*q(Trade/GDP) Constant (1) 1. R Square Yes No 552 0.079 Yes No 514 0. while Panel B presents similar regressions including both country and year fixed effects.192 Yes No 508 0.000 -2. respectively.908 *** 0. Network_Conv is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “2” or above. and 3 for full adoption. q(Trade/GDP) is the in-sample quartile rank of the ratio of foreign trade to gross domestic product.e. Standard errors are clustered by country (inferences are robust to clustering by country and year). and * denote statistical significance at the two-tail 99%.233 0.315 0.” q(GDP) is the in-sample quartile rank of gross domestic product. 95%.341 .434 *** 0. Nw is Network_Non-EU.974 0.000 (4) 3. The reported R Square is the Incremental R Square not accounting for explanatory power from country fixed effects. In columns (1) and (2).696 *** 0.008 *** 0. full adoption). and 90% confidence levels. OLS regressions of IFRS adoption status The dependent variable is IFRS adoption status which takes the value of 1 for non-adopters.Table 4.000 1.126 ***.507 *** 0.000 1.E.488 *** 0..619 *** 0. Year F. Nw is Network.273 0.494 *** 0.644 *** 0. In column (4).000 -2. Network_Non-EU is the predicted fraction of a country’s prior-year trade with all non-EU countries that have IFRS adoption status “3. . Panel A presents OLS regressions including country fixed effects. **. 2 for partial adoption.

013 -2.075 1.233 ***.000 -2.291 ** 0. R Square Yes Yes 552 0.007 *** 0.197 0. and 90% confidence levels.036 (4) 4.208 Yes Yes 514 0.226 (2) 7. **.E.523 *** 0.371 *** 0.086 0.438 *** 0. respectively.232 * 0.E.310 0.000 Country F.916 0.578 ** 0.008 (3) 5.258 Yes Yes 514 0. N Obs.000 1. 95%.424 0.382 ** 0. 1. 46 .408 *** 0. and * denote statistical significance at the two-tail 99%.750 *** 0.283 . .Panel B .000 1.216 * 0.OLS regressions with country and year fixed effects Nw Nw*q(GDP) Nw*q(Trade/GDP) Constant (1) 0. Year F.040 1. The reported R Square is the Incremental R Square not accounting for explanatory power from country fixed effects.257 Yes Yes 508 0.005 -1.

787 *** 0. OLS regression of IFRS adoption status – including tests of alternative explanations The dependent variable is IFRS adoption status which takes the value of 1 for non-adopters.000 (6) 7.001 -1.583 *** 0.000 0.761 0.618 *** 0.014 0.271 0.308 -0.000 1.E.215 *** 0. No No No No Yes Yes Country F.E. WB_Report is a time-series indicator to denote whether a World Bank ROSC report was issued for the given country prior to the year in question.020 1.581 ** 0. In all columns Nw is Network. Panel A .178 ** 0. 2 for partial adoption. Panel A presents OLS regressions including either country or government fixed effects (as specified in the table).001 (4) 10.989 *** 0.000 -1.019 *** 0.224 0.140 0.901 0.195 0.201 0.030 0.514 *** 0.002 0.234 *** 0.068 0. q(GDP) is the in-sample quartile rank of gross domestic product.000 1.380 ** 0..215 0.016 0.258 0. 514 514 512 514 508 506 R Square 0.005 -2. **. 95%.107 *** 0.365 * 0.e.Table 5. and PWC have offices located in the country. Network is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “3” (i.424 ** 0.001 -2.E.002 (3) 8. KPMG. and * denote statistical significance at the two-tail 99%.507 *** 0.001 0. full adoption).467 *** 0.000 (5) 10.205 0.255 0.267 ***.200 0.260 *** 0. and 3 for full adoption. and 90% confidence levels.917 *** 0.008 -2. Numbers in italics are p-values (two-tailed).000 -2.485 *** 0. Yes Yes Yes Yes No No Year F.287 0.000 Nw Nw*q(GDP) Nw*q(Trade/GDP) WB_Report Trade/GDP Info_Globalization BigAuditor Constant (2) 8. Standard errors are clustered by country or government depending on the type of fixed effects included (inferences are robust to clustering by country and year).000 1.012 0.109 *** 0.870 ** 0.512 ** 0. 47 .000 1.028 0. q(Trade/GDP) is the in-sample quartile rank of the ratio of foreign trade to gross domestic product.612 *** 0. The reported R Square is the Incremental R Square not accounting for explanatory power from country/government fixed effects. BigAuditor is an indicator equal to one for country-years in which Ernst & Young.011 0. Info_Globalization is the percentage of Internet users.639 *** 0.015 Government F.029 0.433 *** 0. while Panel B presents similar regressions including year fixed effects and either country or government fixed effects.OLS regressions with country (or government) fixed effects (1) 9. respectively.163 0. No No No No No No N Obs.331 0.

736 *** 0.330 *** 0.508 0.660 *** 0. respectively.163 0.217 Yes No Yes 506 0.454 * 0.348 *** 0.000 1.725 0.175 *** 0.146 *** 0. Country F. 48 .375 *** 0. The reported R Square is the Incremental R Square not accounting for explanatory power from country/government fixed effects.092 0.021 0.E.743 *** 0.006 *** 0.258 No Yes Yes 514 0.004 -2.087 Government F.012 0.924 *** 0.603 0.148 *** 0.407 *** 0.710 0.Panel B .268 Yes No Yes 508 0.005 -1.359 * 0.605 ** 0.295 0.005 (5) 8.058 0.332 0.OLS regressions with country (or government) and year fixed effects Nw Nw*q(GDP) Nw*q(Trade/GDP) WB_Report Trade/GDP Info_Globalization BigAuditor Constant (1) 7.261 No Yes Yes 512 0. R Square No Yes Yes 514 0. N Obs.699 -0.224 0.460 ** 0.003 0.259 No Yes Yes 514 0.000 1.351 *** 0.009 (3) 7.000 1.274 ***.192 0.004 (6) 9.014 1.008 -2.265 *** 0. **.E.008 (4) 8.033 0.000 1.014 *** 0.328 0.204 0.399 0.298 0.000 0.006 0. and 90% confidence levels.004 -2.787 0.949 *** 0.005 -2. and * denote statistical significance at the two-tail 99%.089 *** 0.003 -2. 95%.E.122 0.016 0.115 0.009 (2) 7. Year F.

175 ** 0.327 -0.102 0. BigAuditor is an indicator equal to one for country-years in which Ernst & Young.952 0.305 ** 0. In column (4).072 (4) 6.951 0.214 0. **.944 1.007 0. Nw q(GDP) Nw*q(GDP) q(Trade/GDP) Nw*q(Trade/GDP) WB_Report Info_Globalization BigAuditor (1) 5. In column (3).165 -0.077 0.202 0.970 * 0. Numbers in italics are p-values (two-tailed).045 -0.243 ** 0.151 0.181 0.307 0.013 ** 0.001 0.265 -4.172 512 0. Network_Conv is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “2” or above. and * denote statistical significance at the two-tail 99%.860 0.153 506 0.e. 95%.161 -0.075 -4. Nw is Network and full adoption is defined as the failure event.024 0.270 0.001 (2) 22.942 -0.200 512 0. Counting-process hazard regression of IFRS adoption status In column (1) and (2).807 0.548 0.633 0. q(Trade/GDP) is the in-sample quartile rank of the ratio of foreign trade to gross domestic product.001 0.906 0. WB_Report is a time-series indicator to denote whether a World Bank ROSC report was issued for the given country prior to the year in question.002 0.028 *** 0.477 0.650 * 0.410 0.854 *** 0.Table 6.484 0.470 0..059 * 0.596 *** 0.185 ** 0.014 (3) 11. KPMG.306 *** 0.013 1.419 (5) 21.067 N Obs pseudo R Square 512 0.000 -0.103 0. and PWC have offices located in the country.461 0.140 512 0. Network is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “3” (i.714 * 0.231 0.” q(GDP) is the in-sample quartile rank of gross domestic product. Info_Globalization is the percentage of Internet users.667 * 0.729 0. full adoption).029 -2. Nw is Network_Non-EU and full adoption is defined as the failure event.003 0.350 0. In column (5).871 0. Nw is Network and convergence and higher levels of adoption are defined as the failure event.346 0.250 ***.003 -0.332 0.009 0.696 0. Standard errors are clustered by country.029 -0.284 0. 49 .159 0.043 1.062 -1.539 ** 0.292 ** 0. and 90% confidence levels. Network_Non-EU is the predicted fraction of a country’s prior-year trade with all non-EU countries that have IFRS adoption status “3.001 1.235 0. respectively.777 1. Nw is Network_Conv and full adoption is defined as the failure event.

159 Yes 512 0.019 -3.798 *** 0. Network is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “3” (i. **.504 -0.768 0.471 0.177 Yes 512 0.427 -0.753 0. respectively.016 -1. Multinomial logit of IFRS adoption status with non-adoption as the base case In columns (1) and (2).004 -2.252 0.812 * 0.009 0.846 0.Table 7. In column (4).626 ** 0.439 1.761 2. Info_Globalization is the percentage of Internet users.334 0.305 *** 0.136 0.096 1.010 0.208 1. BigAuditor is an indicator equal to one for country-years in which Ernst & Young. Pseudo R Square (2) (3) (4) 1.154 Yes 506 0.901 -9.840 0.015 1.005 0.752 2. Nw is Network_NonEU. Numbers in italics are p-values (two-tailed).839 ** 0.471 0.013 0.034 0. WB_Report is a time-series indicator to denote whether a World Bank ROSC report was issued for the given country prior to the year in question.014 1.223 0.839 -0.006 0.816 *** 0.094 0. In column (3).348 0.021 0.e.422 ** 0. 95%.424 0.630 -2.” q(GDP) is the in-sample quartile rank of gross domestic product.656 0.E.337 0.669 43.470 -10.816 0.517 ** 0. full adoption). and PWC have offices located in the country.765 -0.941 -0.280 0.281 0.029 Yes 512 0.873 0. N Obs.032 0.661 1.998 ** 0.004 30.043 -0. 50 .687 ** 0. Standard errors are clustered by country.124 *** 0.182 ** 0.064 0.148 0. and 90% confidence levels.659 0. KPMG.968 -0.063 -2.797 -0. (1) Nw q(GDP) Nw*q(GDP) q(Trade/GDP) Pr(Partial adoption) Nw*q(Trade/GDP) WB_Report Info_Globalization BigAuditor Constant Nw q(GDP) Nw*q(GDP) q(Trade/GDP) Pr(Full adoption) Nw*q(Trade/GDP) WB_Report Info_Globalization BigAuditor Constant Year F.944 -0.001 1.328 0.833 0.525 4.204 0.832 ** 0.330 0.100 0.597 -0.604 0.179 0. Network_Non-EU is the predicted fraction of a country’s prior-year trade with all non-EU countries that have IFRS adoption status “3.389 0.732 0.430 * 0.115 0.167 0.579 ** 0. and * denote statistical significance at the two-tail 99%.004 7.678 0.032 -1.011 0.250 -0.084 -2.736 0.073 -6.020 -1.260 0.693 ** 0.530 20.005 0.081 ** 0.624 0.176 0. Nw is Network_Conv.403 0.033 -2.634 0.379 0.135 0.010 -2.000 -0.778 -5.010 0.012 4.238 0.086 0.145 0..206 ***.732 *** 0.894 0.086 *** 0.007 2.003 1. q(Trade/GDP) is the in-sample quartile rank of the ratio of foreign trade to gross domestic product.847 ** 0.096 0.815 ** 0.014 -1.306 0.737 * 0.744 0.391 0.767 * 0. Nw is Network.640 *** 0.866 0.517 0.162 *** 0.022 1.009 0. Network_Conv is the predicted fraction of a country’s prior-year trade with all countries that have IFRS adoption status “2” or above.013 -0.

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