SSRN Id1919805

Deviations from the Mandatory Adoption of IFRS in the European Union:
Implementation, Enforcement, Incentives, and Compliance
by
Grace Pownall*
And
Maria Wieczynska**
January 2017
*Corresponding author, Professor of Accounting, Goizueta Business School, Emory University,

1300 Clifton Road NE, Atlanta, GA 30322; tel. 404-727-0775; email grace.pownall@emory.edu.
**Assistant Professor of Accounting, W. P. Carey School of Business, Arizona State University;
tel. 480-965-7159; email maria.w@asu.edu. We appreciate research assistance from Ron Harris,
Katherine Putnam, Xi Wang, Anastasia Kopita, Woo Jeong Byun, Stefan Styk, and Hyeon Ju
Lee, and generous research support from the Goizueta Business School, the Jagdish and Madhuri
Sheth Foundation, and the W.P. Carey School of Business. We also appreciate helpful comments
and suggestions from Suman Chattopadhyay, Mary Curtis, Peter Demerjian, Lisa Eiler, Carol
Ann Frost, Curtis Hall, Steve Kaplan, Karen Ton, Xue Wang, Jacob Zureich, participants and a
reviewer for the 2012 AAA Financial and Reporting Section Midyear Meeting, the 2012 AAA
International Accounting Section Midyear Meeting, the 2012 AAA Annual Meeting, the 2013
European Accounting Association Annual Symposium, the 2017 AAA International Accounting
Section Doctoral Consortium, and workshop participants at the Universities of Cyprus and North
Texas, and Emory University.
Electronic copy available at: https://ssrn.com/abstract=1919805

Abstract
In this paper, we evaluate the common assumption that EU firms began using IFRS in
2005 when the EU formally adopted IFRS. Although the incidence of firms using local (or some
other) GAAP declined between 2005 and 2012, it is still nontrivial. By 2012 the incidence of
non-IFRS financial statements was still in excess of 17% (87% of which were fully
consolidated). We estimate a model of the non-adoption of IFRS as a function of implementation
features of the IFRS regulation, country-specific enforcement, and firm-specific reporting
incentives. As expected, being specifically required by EU-wide and country-specific rules to
adopt IFRS is positively associated with IFRS adoption but does not constitute a complete
explanation. Proxies for enforcement are significantly associated with non-adoption, but the
marginal effects of the enforcement variables are weak. We find that larger firms, firms with
foreign operations and more analyst following, and firms that issue new debt and equity were
more likely to adopt IFRS, both when the regulation was initially imposed and in subsequent
years. We conclude that many EU firms do not use IFRS; that some firms exploited definitions,
exemptions, and deferrals to avoid adopting IFRS while some firms simply failed to comply with
the regulation; and that firms responded to their incentives in deciding whether to adopt IFRS.
Key Words: EU, IFRS, enforcement, reporting incentives.
JEL Classification: financial; empirical/archival

Deviations from the Mandatory Adoption of IFRS in the European Union:
Implementation, Enforcement, Incentives, and Compliance
1. Introduction
It is commonly asserted that the European Union (EU) mandated adoption of IFRS in
2005. 1 However, not all EU firms were required to adopt IFRS in 2005, and in fact many firms
availed themselves of exemptions, deferrals, and lack of monitoring and enforcement to continue
reporting in domestic (or other) GAAP as recently as 2012. For instance, among firms from
Portugal, Belgium, France, and the Netherlands listed on Euronext, Pownall, Vulcheva, and
Wang (2014) found that adoption of IFRS as of December 31, 2009 ranged from 72% (for the
Euronext firms without the special designation of being listed on the named segments) to 96%
(for the firms initially listed on the higher-quality named segments of the exchange for which
IFRS adoption was mandatory). 2 In addition, some EU countries required firms to use IFRS for
both consolidated and single entity financial statements, but other EU countries allowed or
required domestic GAAP for single entity financial statements. Finally, some EU firms were
permitted rather than required to use IFRS from 2005. See table 1 for a summary of country-
specific IFRS adoption options.
In this paper, we document the incidence of non-adoption of IFRS in the EU in 2005
when the regulation came into effect, in 2007 when most exemptions and deferrals from IFRS
adoption expired, in 2009 during the financial crisis, and in 2012.3 We find that in 2005, 2,110
1
See, for instance, Ramanna (2011), p. 9. IFRS refers to International Financial Reporting Standards as promulgated by the
International Accounting Standards Board, which include any IAS (International Accounting Standards) promulgated by the
predecessor standard-setter, the International Accounting Standards Committee, which have not been replaced or rescinded.
2
In this paper, we use the phrase “mandatory adoption” to refer to the rule that required EU firms to adopt IFRS. We are not
using “mandatory” to refer to behavior subject to a rule with which some agent has the ability to monitor compliance and the
same or some other agent has an incentive to enforce compliance. In this stricter sense of “mandatory”, the evidence suggests
that EU IFRS adoption was not mandatory.
3
We use the terms non-adoption and non-compliance to indicate reporting under non-IFRS accounting standards. Although de
facto non-compliance may be argued to be a characteristic of firms which were specifically required to adopt IFRS, we focus on
perceived non-compliance as we compare IFRS adoption incidence to the assumption that all EU firms or all EU firms preparing
consolidated reports follow IFRS.

EU firms (33%) in our sample had not adopted IFRS. Among the non-adopters, 88% of the non-
IFRS financial statements were fully consolidated. In 2007 the percentage of non-adopters had
fallen to 19%, of which 84% presented consolidated financial statements. By 2009 (2012), the
percentage of non-adopters was still 18% (17%), of which 85% (87%) presented consolidated
financial statements.
The non-adoption of IFRS was not confined to the emerging markets in Eastern Europe
or to jurisdictions known for lax regulation and supervision. For instance, of the British firms in
our sample, 56% presenting consolidated financial statements did not use IFRS in 2005, falling
to 14% in 2012. Of the German firms, 31% did not adopt IFRS for consolidated financial
statements in 2005, and that percentage fell only to 29% in 2012. Of the French firms, 29% did
not use IFRS for consolidated reports in 2005, and that percentage fell only slightly to 27% as of
2012. We conclude that although the incidence of EU firms using standards other than IFRS has
fallen since the EU’s mandatory adoption of IFRS, it is still nontrivial.
Next, we test whether common proxies for EU-wide and country-specific
implementation features, country-specific enforcement, and firm-specific reporting incentives
can explain why some EU firms adopted IFRS while some failed to adopt IFRS. In other words,
we ask whether firms chose to combine flexibility in the rules, weak enforcement, and their
reporting incentives to continue using domestic GAAP or other non-IFRS reporting standards.
To focus on the incremental effects of enforcement and reporting incentives on adoption
of IFRS, we specify a variable that indicates firms that were specifically required by the EU and
their home jurisdictions to adopt IFRS. These firms had equity securities traded on EU-regulated
tiers of EU stock exchanges, presented consolidated financial statements, and did not have access
to exemptions or deferrals from the regulation as implemented in their jurisdiction (COM 2012,

2013). This variable controls for features of the regulation, since it is equal to one only for firms
for which adoption of IFRS was specifically required.
Not surprisingly, being specifically required to adopt IFRS as well as having a more
diverse corporate structure are positively associated with adopting IFRS. However, many of our
reporting incentives proxies are also significantly associated with IFRS adoption after controlling
for the regulation’s implementation features. For instance, larger firms with foreign operations,
firms issuing equity or debt, and those followed by analysts are more likely to use IFRS. The
level of resources devoted to securities regulation in an EU country is not associated with IFRS
adoption, but the improvement in local securities regulations enforcement is negatively related to
non-adoption. This may be because countries that have traditionally been strong enforcers of
securities regulation were both more likely to adopt specific IFRS enforcement mechanisms, and
expected to be stronger enforcers of rigorous application of IFRS, creating both greater
likelihood of enforcement and higher benefits of adoption (see Christensen, Hail, and Leuz
2016). Firms in these environments may have chosen strategies to avoid adopting IFRS other
than disregard for the regulation, such as delisting, avoiding consolidation, or moving to a non-
regulated EU exchange segment or to a non-EU country (see Vulcheva 2012, Brüggemann, Hitz,
and Selhorn 2013, Hitz and Muller-Bloch 2016, and Gutierrez, Vulcheva, and Wieczynska
2016).
We also compare the mandatory 2005 IFRS adopters to both voluntary 2005 IFRS
adopters and non-adopters, and find significant differences between the three groups of firms.
For instance, mandatory adopters were larger and more profitable. In supplemental analyses,
reported in the appendix B, we also find that mandatory 2005 IFRS adopters presented different
accounting quality levels and experienced different changes in reporting incentives after 2005

than the other two sets of firms. Therefore, the studies that examine IFRS adopters from the EU
should be careful not only about separating adopters from non-adopters, but also about
separating 2005 mandatory adopters from 2005 voluntary adopters.
We conclude that many EU firms do not use IFRS; that some firms exploited definitions,
exemptions, and deferrals to avoid adopting IFRS and others simply failed to comply with the
regulation; and that firms responded to their reporting incentives and the probability of
enforcement in making the decision to adopt IFRS. We believe our results are important for
investors and researchers making assumptions about EU firms’ choice of GAAP, to EU
regulators evaluating the efficacy of IFRS adoption, and to the US standard-setting community
considering whether and how to adopt IFRS.
2. The EU Adoption of IFRS and Hypothesis Development
2.1. Mandatory IFRS Regulation in the EU
Regulation No. 1606/2002, Article 4, requires that consolidated financial statements of
firms with equity securities traded on EU-regulated markets be prepared in accordance with
IFRS starting in 2005 (OJ 2002). 4 There are two parts to this requirement. The first part
specifically requires consolidated financial statements to be prepared using IFRS, exempting
firms with only single-entity financial reports from this requirement. The Seventh Council
Directive (OJ 2009), originally adopted in 1983, specifies requirements the EU member
countries should impose on firms operating within their borders. Article 1 mandates EU
members to require all companies with majority rights in other firms to prepare consolidated
financial statements. The directive further specifies that the consolidation requirement applies to
4
The regulation requires the financial statements for fiscal years beginning January 1, 2005 be prepared in accordance with
IFRS. Thus, throughout the paper, when we refer to year 2005 we mean the fiscal year starting on or after January 1, 2005 and
ending before December 31, 2006. The same treatment applies to other sample years.

all publicly traded firms domiciled in the EU, including firms listed on exchanges not regulated
by the EU. The European Commission’s (EC) report on implementation of the Seventh Directive
shows that the requirements with respect to preparation of the consolidated financial statements
had been fulfilled by the EU member countries before mandatory IFRS adoption (COM 2000).
The second part of Regulation No. 1606/2002, Article 4, limits mandatory IFRS adoption
to firms listed on EU-regulated markets, i.e., “admitted to trading on a regulated market of any
Member State within the meaning of Article 1(13) of Council Directive 93/22/EEC” (OJ 2002).
Markets regulated by the EU are those markets which are subject to all of the EU’s directives
and financial market regulations, e.g., Main Market at London Stock Exchange and Euronext
segments at Euronext exchange. Markets not regulated by the EU are overseen by local
authorities or by stock exchanges but not by the EU, e.g., Alternative Investment Market at
London Stock Exchange and Alternext at Euronext exchange. Regulatory authorities from
individual countries provide the EU Commission with a list of EU-regulated markets and firms
listed on such markets.5
Aside from mandating IFRS for a subset of EU firms, Regulation No. 1606/2002 gave
options for companies to defer or avoid IFRS adoption. Paragraph 17 explicitly allows firms
trading only debt securities and firms listed outside the EU and already using “internationally
accepted standards” to defer IFRS adoption until 2007 (OJ 2002). In addition, Article 5 of
Regulation No. 1606/2002 allows EU countries to mandate IFRS for individual annual financial
reports and for non-listed firms (COM 2013). According to the EC’s reports on the use of IFRS
adoption options, many countries deferred IFRS adoption for certain types of firms and many
5
Individual stock exchanges may have multiple trading segments and either none, or all, or only selected segments may be
regulated by the EU. Financial databases do not differentiate between the segments of the exchange but only provide exchange
names. An exception is Datastream, which in recent years started providing names of segments where a company is listed;
however the value of the data item equals the most recently available value.

countries allowed voluntary IFRS adoption prior to 2005 and/or required non-listed firms and
firms with single-entity financial statements to adopt IFRS in 2005 (COM 2013, 2012, 2008A,
2008B, 2008C, and 2007). Table 1 summarizes the country-specific implementation of the
regulation and shows considerable diversity in the extent to which IFRS adoption was effectively
mandatory. Panel A shows which companies were required or permitted to adopt IFRS and
when, and Panel B shows which countries allowed certain types of firms to defer the adoption of
IFRS or to adopt IFRS before 2005. Figure 1 provides a timeline of the EU’s IFRS adoption.
[Insert Table 1 and Figure 1 About Here]
2.2. EU Enforcement Mechanisms
In this section, we describe expected penalties for non-compliance and the enforcement
measures available to the EU and its member countries, based on excerpts of enforcement
actions periodically published by European Securities and Markets Authority (ESMA). There
have been 18 such excerpts published so far with 197 enforcement cases reviewed, but none of
the cases involved non-adoption of IFRS. This may be because ESMA is concerned with proper
implementation once IFRS is adopted by the firms specifically required by the 2002 regulation to
adopt IFRS. Companies that are required to adopt IFRS by country-level IFRS implementation
options or companies using individual exemptions provided by their jurisdictions are not
necessarily ESMA’s concern. 6
We also searched for evidence of penalties for noncompliance with IFRS at the country
level, starting with a search of websites of national authorities responsible for enforcement in EU
countries. We found penalties for two Polish firms that did not adopt IFRS: MNI SA in 2005 and
ATM SA in 2006 (KNF 2011). The firms paid 30,000 and 100,000 zloty (about USD 10,000 and
6
IFRS mandating regulation (OJ 2002) and subsequent EU regulations do not mention IFRS adoption enforcement.

USD 30,000), respectively. Relative to the total assets of MNI SA (USD 126 million in 2005),
and ATM SA (USD 58 million in 2006), these penalties are quite small (data from Worldscope).
We examined the rules concerning securities law enforcement and found that sanctions
for violations are limited. Article 41 of Directive 2004/39/EC (on sanctions and penalties for EU
regulated firms) states that a firm may be sanctioned “unless such a step would be likely to cause
significant damage to the investors’ interests or the orderly functioning of the market” (OJ 2004,
p. 29). Furthermore, extracts from ESMA’s enforcement database (ESMA 2015b) and reports on
enforcement activities of EU countries’ regulatory organizations (ESMA 2015a) show that the
EU does not require country-level regulators to apply sanctions or penalties, but rather allows
them to choose actions appropriate for their markets. These actions are usually minimal. 7
Next, we searched EU reports on the strength of enforcement of securities laws. The 2009
report shows that 45 percent of EU countries had fully developed enforcement authorities. Six
percent had no enforcement authorities and the rest had only partially developed enforcement
mechanisms (CESR 2009). In 2014 ESMA published a list of basic guidelines for local
regulators with respect to overall IFRS implementation enforcement rules. While most EU
countries indicated compliance with these guidelines, six countries (Bulgaria, Germany, Ireland,
Austria, Slovenia, and Sweden) stated that they are not and do not intend to be in compliance,
while three countries do not but intend to comply with all of the recommendations (Denmark,
Croatia, and Poland) (ESMA 2016). Given low probability of enforcement and low penalties for
noncompliance, firms with little to gain from adopting IFRS may rationally choose not to incur
7
Following a material misstatement in annual or periodic financial statements, regulators in different countries require
misreporting companies to: (1) restate financial statements correcting the error, (2) issue a press release announcing
misstatement, or (3) correct comparable amounts in the following period or provide “additional disclosures not requiring the
restatement of comparatives” instead (ESMA 2014, p. 23). In 2014, among 1,533 IFRS financial statements examined across the
EU, 306 were found to contain material misstatements. Of these, only 21 companies were required to restate their financials, 90
were required to publicly correct the misstatements, and 195 were required to correct their mistake in future periods.

the adoption costs. Thus, in our paper we focus on the joint effects of reporting incentives,
country-level enforcement quality, and country-specific IFRS implementation options on the
choice of reporting standards in the mandatory IFRS adoption period.
2.3. Research Questions
Our empirical design seeks to address the following research questions:
RQ1: Did all or most EU firms adopt IFRS in 2005 as commonly assumed? What was
the rate of non-adoption, defined as using accounting standards other than IFRS as promulgated
by the IASB or IFRS as adopted by the EU?
RQ2: Why did non-IFRS users fail to comply with the requirement to adopt IFRS? Was
it associated with: (a) IFRS implementation issues, such as non-consolidation and country-
specific or EU-wide exemptions, deferrals, and firm characteristic requirements; (b) country-
specific weak enforcement; and/or (c) firm-specific reporting incentives?
We examine these questions at four points in time: in 2005, when the IFRS requirement
came into force; in 2007, when the exemptions and deferrals expired; in 2009 during the
financial crisis; and in 2012. We answer the first research question by reporting the number of
firms using IFRS and non-IFRS reporting standards across time. Examining EU companies’
reporting practices allows us to assess the general assumption that all EU firms adopted IFRS.
We answer the second question using statistical tests on coefficients from a model of the firm-
specific non-adoption of IFRS as a function of implementation, enforcement, and incentive
proxies. We examine these relationships in a sample of all EU firms, using a variable to indicate
those that were and were not specifically required to adopt IFRS by the EU and by the country-
specific IFRS implementation rules.

To determine the firms that were specifically required to adopt IFRS, we use the EU-
wide and country-specific rules for mandatory IFRS adoption. Regulation EC 1606/2002
requires IFRS for consolidated financial statements, but grants exemptions or deferrals for firms
with only debt securities traded, using US GAAP, or traded on stock exchanges not regulated by
the EU (OJ 2002). In addition to EU-wide exemptions and deferrals, EU countries could choose
between IFRS adoption options, as summarized in table 1. Several countries allowed early
adoption of IFRS, some extended the IFRS mandate to individual financial statements and to
non-listed firms, and some required all financial and insurance companies to use IFRS,
regardless of listing or consolidation status. 8 Not all countries chose more stringent
implementation. Many countries deferred IFRS adoption for some firms, and countries that
joined the EU in 2007 did not require IFRS until January 1, 2007.
If all firms required to adopt IFRS adopted the standards, then the variable indicating the
requirement to adopt IFRS should be perfectly negatively correlated with non-adoption.
However, if some of the firms required to adopt IFRS did not, then the implementation variable
will leave room for other factors to explain the likelihood of non-adoption.
Each country determines not only which companies have to adopt IFRS but also how
strictly the rule will be enforced, so next we focus on country-specific differences in monitoring
and enforcement, part (b) of our second research question. Many researchers find significant
differences in accounting regulation outcomes associated with country-specific enforcement. For
example, firms experience lower cost of capital and higher liquidity after new regulations are
implemented in EU countries with stronger enforcement (Christensen et al. 2016).
8
For example, Estonia, Italy, Latvia, Lithuania, Poland, and Slovenia require financial firms to use IFRS. Finland requires
insurance firms to prepare IFRS consolidated reports. Other countries permit (rather than require) IFRS for consolidated reports,
or all reports by financial institutions, or firms listed on regulated exchanges (COM 2013, 2012, 2008A, 2008B, and 2007).

We expect countries’ enforcement capabilities to affect companies’ willingness to adopt
IFRS. If firms adopting IFRS in strong-enforcement jurisdictions experience more benefits from
IFRS adoption (Christensen et al. 2016), then they may be more willing to incur the costs of
adopting and implementing IFRS. However, the costs of adopting IFRS are significant, the costs
of continuing to report using IFRS may increase over time (COM 2014, COM 2015), and strict
oversight may increase these costs even further, discounting the value of potential benefits. A
study by Gutierrez et al. (2016) shows that firms listed in strong-enforcement IFRS-adopting
countries are more likely to delist from domestic stock exchanges in the post-adoption period.
However, these firms are also more likely to delist due to mergers and acquisitions, which
frequently result in firms staying listed as a part of a newly formed entity. The authors suggest
that these results are caused by high IFRS adoption costs and benefits that induce companies to
seek economy-of-scale cost savings by merging with other firms. All in all, firms in strong
enforcement countries may or may not be more likely to adopt IFRS.
Countries with fewer resources devoted to enforcement may be more willing to provide
exemptions and deferrals to individual companies, due to greater leniency in implementing the
EU rules, but also from a need to conserve resources by allowing local GAAP reports that are
lower cost to monitor.9 Furthermore, if countries do not enforce proper IFRS application,
companies may adopt IFRS as a label without actually incurring the costs of following the
standards (Glaum et al. 2013, COM 2014). If so, companies in weak enforcement jurisdictions
may be more likely to adopt IFRS. Finally, our findings from researching the regulatory
consequences of non-adoption, discussed in section 2.2, suggest that enforcement quality may
have little impact on the choice of whether to adopt IFRS.
9
COM (2014) survey results indicate that enforcement of appropriate application of IFRS is more difficult than enforcement of
proper application of local reporting standards. The main reasons for burdensome enforcement relate to the principle-based
approach of IFRS and to increasing complexity of IFRS standards and required disclosures.
10

Another factor that may affect IFRS adoption is firm-specific reporting incentives, the
subject of part (c) of our second research question. Weak enforcement may allow firms to choose
not to adopt IFRS, but the reason for the choice is likely to be related to firm characteristics that
determine reporting incentives. The firm may foresee insufficient benefits from or high costs of
IFRS adoption. The COM (2014) survey of IFRS preparers, users, and auditors suggests that
while some firms benefit from IFRS, others receive no benefits and/or incur higher costs. The
survey suggests that firms benefitting from IFRS are those that engage in mergers and
acquisitions and/or have multinational operations, firms with foreign shareholders, and firms
with a need for external capital. However, firms may find it more difficult to raise funds locally
after adopting IFRS since local investors are less familiar with IFRS than with local GAAP
(COM 2014). In 2015, European Commission conducted another survey evaluating IFRS and its
appropriateness for the European preparers and users of financial statements. Generally, the
survey results have shown that the adoption of IFRS had a positive impact on the EU. However,
many respondents brought up increasing IFRS compliance costs as an growing burden (since
2005 thirty new pronouncements were issued and more than 120 changes were made to existing
standards or interpretations [Gutierrez et al. 2016]) for companies from certain industries or for
smaller entities (COM 2015). At the same time, more countries around the world have adopted
IFRS, allowing EU companies easier conduct of business with firms from non-EU economies
and providing IFRS standards with even more recognition. Finally, while prior research has
shown that IFRS is associated with lower cost of capital and increased liquidity in certain types
of firms, the benefits of IFRS adoption seem to be related to firm-specific reporting incentives
(see De George et al. 2016 for a survey of IFRS literature).
11

Prior research shows that IFRS-adopting firms implement the standards consistently with
their reporting incentives. For example, Liao et al. (2012) show that German firms implement
IFRS more conservatively than French firms and Glaum et al. (2013) show that firms fail to
comply with individual reporting standards based on their reporting incentives. Using a Swiss
setting Fiechter et al. (2014) show that firms follow reporting standards consistent with their
incentives. Taken together, prior evidence suggests that reporting incentives drive firms’ IFRS
reporting choices, so we expect the same incentives drive some firms to avoid adopting IFRS,
and we examine whether and how reporting incentives are related to the decision not to adopt
IFRS.
3. Initial Sample of Publicly Traded EU Firms and IFRS Adoption Status
Table 2 describes our initial sample of publicly traded EU firms, selected using the
following criteria: firms that (a) were included in Thomson ONE Worldscope (WS); (b) were
domiciled in the EU; (c) were publicly traded; and (d) had nonzero total assets in at least one of
the years 2001-2013. 10 Panel A shows there are 8,996 firms from 26 countries in the initial
sample for which we have at least some data.11 There is considerable diversity in each country’s
share of the sample, with the UK contributing one third of the sample but less than 1%
contributed by each of the Czech Republic, Estonia, Hungary, Lithuania, Luxembourg, Latvia,
Malta, Portugal, Slovakia, and Slovenia.
[Insert Table 2 About Here]
10
175 pairs of firm observations fell within the same fiscal year. We kept the more recent observation. Of the 175 pairs, 155 had
the same standards associated with a given fiscal year. Of the 20 with different standards, we kept four with Local (used IFRS in
the earlier report), 15 with IFRS (used Local in the earlier report), and one with US GAAP (used Local in the earlier report).
11
We include as many firms as we can in each test to maximize the generalizability of the inferences to all publicly traded EU
firms. We exclude Romania because we have no data for Romanian firms (Romania joined the EU in 2007).
12

Next, based on the WS data item “Accounting Standards Followed” we code each firm-
year observation as local GAAP, US GAAP, IFRS, or “other”. Panels B, C, and D answer our
first research question, whether all or most EU firms adopt IFRS in 2005 as commonly assumed.
Both panels show substantial non-adoption rates, defined as preparing financial statements under
accounting standards other than IFRS as promulgated by the IASB or IFRS as adopted by the
EU. Panel B groups firm-year observations by consolidation status and by accounting standards
(IFRS, local GAAP, US GAAP, and “other”). 12 Panel B describes the data from 2001 and 2003
(prior to the EU’s adoption of IFRS), from 2005 (the year customarily denoted as the adoption
year), 2007 (the year most exemptions and deferrals expired), 2009 (during the financial crisis),
and 2012 (the most current year for which we had complete data in 2014). In 2001, only 317 of
4,960 EU firms used IFRS, of which 313 presented consolidated financial statements. The EC
mandated IFRS for publicly listed firms preparing consolidated financial statements starting on
or after Jan 1, 2005 (OJ 2002). In 2005, 4,328 firms used IFRS, of which 4,116 presented
consolidated reports, while 2,039 EU firms used local GAAP, including 1,801 with consolidated
reports. In 2007, 1,238 EU firms still used local GAAP, including 1,031 that presented
consolidated reports; and in 2009 (2012), 1,139 (986) EU firms still used local GAAP, including
954 (853) with consolidated financial statements.
Although it is commonly assumed that IFRS became mandatory for the consolidated
financial statements of EU-regulated firms in 2005, that assumption ignores exemptions and
deferrals as well as country-specific implementation that required single entity financial
statements in some countries to be presented using IFRS. To assess the sensitivity of our
comparisons in panel B to these exemptions, deferrals, and country-specific requirements, panel
12
We are aware of the limitations of the WS database for accounting standards in use (Daske et al., 2013). However, our data
collection examining possible data errors suggests that the noise in the data is random. We conjecture that any miscoding by WS
works against our hypotheses. See Section 5.2 for the details of our extensive data verification procedures.
13

C presents the same comparison between firms that were actually required to use IFRS in a given
year by the country-specific options for the implementation of IFRS regulation vs. those that
were not (see appendix A for a detailed definition of Mandatory) in the post-adoption period. We
find that the share of non-adopters is smaller among firms that were mandated to adopt IFRS, but
it is above eight percent in our 2012 fiscal year sample (above 13 percent in the 2005 sample).
Panel D further breaks these data down by country, and shows substantial use of local
GAAP for consolidated financial statements even in 2012 for Germany (212 firms), France (191
firms), the UK (254 firms), Poland (52 firms), and Sweden (88 firms). 13 No firms in our sample
used local GAAP for consolidated financial reporting in Bulgaria, Cyprus, the Czech Republic,
Estonia, Lithuania, or Malta. The last two columns report the number of firm-years using IFRS
and non-IFRS standards from 2005 to 2012 for firms specifically required to adopt IFRS by EU
and/or country-specific IFRS regulation. This panel provides clear evidence that many EU firms
did not adopt IFRS when it was initially required or in later years. Finally, although
noncompliance declined from 2005 through 2012, it is still nontrivial.
4. Data, Empirical Design, and Multivariate Analysis
4.1 Sample Selection and Data
We retain from our initial sample all EU, WS firms with nonzero, non-missing total asset
values at any fiscal year end from 1/1/2005 to 12/31/2012 ( N= 8,107). Our sample from the
“mandatory” IFRS period covers fiscal year ends from 12/31/2005 to 12/30/2013. 14 We create
four subsamples: fiscal year ends (a) between 12/31/05 and 12/30/06 (the 2005 sample); (b)
13
The large number of German firms following German GAAP in the later years may be related to easing of the process for
“downlisting”, i.e., moving from an EU-regulated exchange segment to a non-regulated segment on the same exchange. Hitz and
Muller-Bloch (2016) show that many German firms move to non-regulated markets and switch to non-IFRS reporting standards.
14
In our main analyses, we remove firms from eight countries for which we are missing country-level data. These countries are
Bulgaria, Cyprus, Estonia, Latvia, Lithuania, Malta, Slovakia, and Slovenia.
14

between 12/31/07 and 12/30/08 (the 2007 sample); (c) between 12/31/09 and 12/30/10 (the 2009
sample); and (d) between 12/31/11 and 12/30/12 (the 2012 sample). We have 6,438 (6,763;
6,575; 6,306) firms in the 2005 (2007; 2009; 2012) subsample. 15 We exclude firm-years with
missing accounting standards, consolidation, and industry codes in WS, and firms with missing
data for the regression variables. See table 3 for the effects of these selection filters.
4.2 Empirical Design
To answer our research questions, we estimate the following logit regression model:
Pr(NoIFRS it ) = α + Σβ Κ (Implementation Proxies) + Σχ J (Enforcement proxies)
+ Σδ L (Incentive Proxies) + ε it , (1)
where i indexes firms, t indexes fiscal years, j indexes countries, and standard errors are clustered
by industry. NoIFRS it is an indicator variable taking the value of one if firm i in year t was not
using IFRS and zero otherwise. Our models include independent variables based on the EU IFRS
regulations (COM 2013, 2012, 2008A, 2008B, 2008C, 2007, and 2002) and prior research,
including Ashbaugh (2001), Cuijpers and Buijink (2005), Gassen and Sellhorn (2006), Bae et al.
(2008), Jackson and Roe (2009), and Christensen et al. (2016, 2013). Specifically, we include the
following implementation proxies16:
Mandatory it = 1if firm i is specifically required to adopt IFRS by the EU and/or by country-
specific IFRS implementation options (summarized in table 1) and 0 otherwise. If
all firms required to adopt IFRS did so, then this variable should explain all of the
variation in the dependent variable. However, if this is not the case, we expect
that Mandatory it will have a negative coefficient indicating that firms specifically
required to adopt IFRS are more likely to do so. (See appendix A for a detailed
description of how we quantified this variable.)
Diverse i = the number of SIC codes in which the firm operates. While this variable does not
capture consolidation status, which we include in Mandatory it , it captures the
need to consolidate diverse operations. We expect this variable to be negatively
15
See section 5.1 for a diagnostic replication using a sample of firms that are present in years 2005 through 2012.
16
See appendix A for more details on the specification and source of the variables.
15

related to non-adoption, as firms with more diverse operations may prepare
consolidated reports in the future.
Not_allow j = 1if firm i is from a country prohibiting the use of IFRS for some firms after 2005
and 0 otherwise. We expect this variable to be positively related to non-adoption.
Permit_Pre j = 1 if firm i is from a country permitting IFRS adoption before 2005 and 0
otherwise. If countries that allow multiple accounting standards before 2005 are
more tolerant of non-adoption of IFRS after it became mandatory, we expect this
variable to be positively related to non-adoption. However, if the cost of IFRS
adoption is lower in countries where other firms already follow IFRS and auditors
are prepared to audit IFRS financial statements (Wieczynska 2016), we expect
this variable to be negatively related to non-adoption.
According to the CESR (2007) report, 14 of 25 EU members did not have effective IFRS
enforcement mechanisms in 2006, and according to ESMA (2016), nine countries’ regulators
were not meeting EU enforcement guidelines in 2015. 17 We use four proxies to test whether
firms are more likely to use local GAAP in weak- than in strong-enforcement countries:
RegQ jt = the regulatory quality variable from Kaufmann et al. (2009). We expect this
variable to be negatively related to non-adoption, as countries that are better at
implementing regulations, should be better at implementing the IFRS mandate.
JR_enf j = the natural logarithm of the enforcement agency’s budget per billion of USD
GDP, from Jackson and Roe (2009). Regulators with fewer resources may be less
likely to enforce IFRS adoption. Presumably, it is less costly to oversee
companies reporting under local GAAP (COM 2014), so agencies that have
insufficient resources to monitor application of IFRS may grant more exemptions
or deferrals and may allow listed firms to adopt IFRS as a label. Thus, we expect
this variable to be negatively related to non-adoption.
IFRS_enf j = 1 for countries which implemented enforcement reforms around IFRS adoption
(Christensen et al. 2013). We expect firms from countries that invest in improving
regulations and oversight are more likely to experience more benefits from
adopting IFRS.
SS_feasible j = 1 for countries in which short-selling is feasible, from Charoenrook and Daouk
(2005). The feasibility of short-selling is a proxy for the local capital market’s
ability to monitor and enforce reporting and governance norms. Firms may be
more likely to adopt IFRS if the market can penalize them for non-adoption. On
the other hand, following arguments from COM (2014), if short-sellers are
predominantly local investors, they may prefer the firm to retain local GAAP.
17
In weak-enforcement countries, auditors may adopt the role of accounting rule enforcers. The auditor enforcement role has
been recognized in prior research. DeAngelo (1981) suggests that big auditors provide higher quality auditing than non-big
auditors. Wieczynska (2016) shows that strong-enforcement country firms switching to IFRS are more likely to switch from
small to global audit firms. If auditors refuse to risk their reputations to audit non-compliant firms, we expect firms using big
auditors during the mandatory-IFRS period to be less likely to report using local GAAP. We test this conjecture in section 5.3.
16

Finally, we include several proxies for firm-specific reporting incentives, based on
Christensen, Lee, and Walker (2007), Christensen, Lee, Walker, & Zeng (2015), and Daske,
Hail, Leuz, and Verdi (2013), as these studies examine firm-specific IFRS adoption incentives.
We expect public interest in a firm, represented by size, international exchange listings, and
analyst following, as well as the intention to issue new debt and equity, is positively associated
with IFRS adoption, consistent with ESMA (2014), because highly visible firms are likely to
benefit more from adopting IFRS.
Ln_size it = the natural logarithm of market capitalization for firm i at the end of year t, in
USD. Firm size is related to firms’ reporting incentives and reporting quality, and
larger firms are more visible to the market and are subject to more strict oversight
by regulators (ESMA 2015a).
Stock_iss it = 1 if firm i issued stock in year t and zero otherwise;
Debt_iss it = 1 if firm i issued debt in year t and zero otherwise. Based on Christensen et al.
(2015) firms issuing debt or stock are more likely to switch to IFRS. Moreover, if
IFRS provides more reliable information for debt contracting, debt issuance
should be negatively related to non-adoption (Beneish et al. 2015). Thus, we
expect debt and equity issuance to be negatively related to non-adoption.
Num_cross i = the number of countries in which firm i is listed; individual countries have
different regulatory requirements and cross-listing firms have to abide by host
country rules. A firm may keep local GAAP if it cross-lists in countries with non-
IFRS reporting standards as IFRS adoption costs are high, or it may be more
likely to adopt IFRS if the firm cross-lists in IFRS-using countries.
US_list i = 1 if firm i is cross-listed on a US stock exchange and zero otherwise. Firms
following US GAAP were originally allowed to postpone IFRS adoption until
2007. Until 2008, cross-listed firms had to file both local GAAP financial
statements and US GAAP reconciliations with the SEC, so US-listed firms may
be less likely to adopt IFRS, and instead follow US GAAP. Some EU securities
regulators’ reports indicate that US GAAP may still be allowable.
Foreign_ops it = 1 if firm i reported foreign assets, sales or income in year t. ESMA (2014)
reports that multinational firms experience the greatest savings from adopting
IFRS, as prior to IFRS they prepared reports under multiple sets of standards.
Following IFRS adoption, multinational firms use the same reporting standards
across multiple countries, so we expect this variable to be negatively related to
non-adoption.
Analyst it = 1 if firm i is followed by analysts in year t and zero otherwise. Daske et al. (2013)
use the change in analyst following as a measure of changes in incentives at IFRS
adoption. Since many international firms are not followed by analysts, we use an
indicator variable to capture the presence of reporting incentives related to market
interest in the firm, and expect it to be negatively related to non-adoption.
17

SIM j = the Bae et al. (2008) index of similarity of local reporting standards and IFRS.
Local GAAP previously used by EU firms may be associated with the costs and
the benefits of IFRS adoption (Bae et al. 2008). If local standards are similar to
IFRS, firms may more easily switch to IFRS, so we expect the similarity between
local GAAP and IFRS to be negatively related to IFRS non-adoption.
Tax j = 1 for countries identified by BDO et al. (2003) as having tax-driven local GAAP.
According to the GAAP Convergence 2002 report, 47 percent of EU countries
had tax-driven local GAAP, and in those countries, firms may be more likely to
adopt IFRS so they can prepare a single set of financial statements for both tax
and financial reporting purposes. If a country’s tax authority does not update tax
reporting rules to align them with IFRS, then firms may prefer to keep local
GAAP. Thus, we do not make a directional prediction for this variable.
Table 4 describes the sample and data used in the regression analyses. Sample
characteristics in panel A and correlations in panel B are based on the firm-years used to
calculate the logistic regression coefficients. Based on panel A, most of the variables included in
the logit model are fairly stable across the four annual subsamples, and the summary statistics for
the aggregate data (2005-2012) are a reasonable approximation to each annual subsample. Panel
B presents Spearman and Pearson correlations, and shows that most of the regression variables
are significantly associated with the non-adoption of IFRS. Panel C summarizes data for IFRS
and non-IFRS firms separately in the 2005 and 2012 subsamples. The tests for differences in
means indicate that IFRS adopters differ significantly from non-adopters on most dimensions
(see appendix B for more details on subsample differences). Panel D reports the number of firms
using IFRS and non-IFRS standards for each country and for firm-years with consolidated
financial statements.
4.3. Test Results and Discussion
Table 5 presents the results from logistic regressions explaining non-adoption of IFRS
using proxies for EU-wide and country-specific implementation features, country-specific
enforcement, and firm-specific incentives. The regressions use all EU firms in each of the four
18

annual subsamples, as well as the overall sample period (2005-2012), although we urge caution
in interpreting results from the overall sample period as firms' incentives may have changed over
time.
We find that the regulatory exemptions from IFRS are only partially responsible for IFRS
non-adoption. As expected, the coefficient on Mandatory, the variable that indicates whether a
firm was specifically required to adopt IFRS by its home country’s implementation of the EU
IFRS regulation, is negative and significant in the overall sample period and in most annual
subsamples, consistent with firms being more likely to adopt IFRS when they are specifically
required to do so. The variable is not significant in 2007, which is likely driven by a large
number of firms that were not required by the EU to adopt IFRS adopting IFRS in 2007
(specifically, AIM firms adopted IFRS in 2007). 18 Likewise, the significantly negative
coefficient on Diverse i in all columns is consistent with EU firms with more diverse operations
being more likely to use IFRS, despite the table 2 evidence of significant numbers of
consolidated financial statements prepared using local GAAP in all sample years. Firms from
countries that did not allow IFRS for at least some firms were significantly less likely to adopt
IFRS after 2005, as were firms from countries that had previously permitted IFRS, consistent
with the idea that permitting early IFRS adoption can be interpreted as a country’s capital
market’s leniency with respect to accounting standardization.
Among the enforcement variables we consider, RegQ jt is significantly negatively
associated with IFRS non-adoption in post-2005 annual subsamples, suggesting that stricter
18
The variable Mandatory assumes the value of one for firms that are specifically required by the EU and country-specific
regulatory authorities to adopt IFRS in a given year. When we include an indicator variable that takes the value of one for AIM
firms (untabulated), the coefficient on that variable is significantly positive in 2005 (meaning that being listed on AIM is
positively related to not adopting IFRS), and significantly negative in 2007 and subsequent years, when the AIM firms were
required by the LSE to adopt IFRS. The coefficient is also significantly negative for the sample of all years 2005-2012.
Additionally, the coefficients on Mandatoryit are negative and significant at one percent level in all subsamples.
19

enforcement is associated with higher IFRS adoption likelihood. It is possible that the variable
becomes significant in later years because a subset of firms adopted only after they were forced
to do so by local authorities. The coefficient on JR_enf j is not significantly associated with IFRS
non-adoption in any column, perhaps because JR_enf j is time-invariant and does not capture
strength of enforcement well. Improvement in enforcement has a significantly negative
coefficient in all columns but 2012, suggesting more stringent monitoring by an expert agency
increases the benefits of adopting IFRS (Christensen et al. 2013) and increases firms’ willingness
to adopt IFRS. The feasibility of short-selling has a significantly positive coefficient in
individual year samples, suggesting that capital markets in which short-selling is more feasible
are more conducive to non-adoption of IFRS. 19
Our proxies for firm-specific reporting incentives indicate that larger firms were more
likely to use IFRS in the earlier sample periods. Lack of significance for Ln_size it in later periods
may be related to the financial crisis or to a larger number of smaller firms adopting IFRS in later
sample years. 20 Entities that issued debt or equity were more likely to use IFRS, but US cross-
listed firms were less likely to use IFRS. 21 The number of foreign exchange listings was not
associated with IFRS adoption in most samples, positively associated with non-adoption in 2005
and negatively related to non-adoption in 2009. Firms with analyst following, firms with
international operations, and firms subject to tax/book conformity were more likely to use IFRS,
19
We examine whether our results are affected if we replace regulatory quality with two other enforcement variables
from World Bank Governance Indicators: rule of law and corruption control. When we use corruption control, the
results do not change. When we use rule of law, the coefficient on this variable is negative and significant in all
subsamples. Our overall conclusions are not affected by these alternative proxies for the strength of enforcement.
20
Our proxy for size is the natural log of market capitalization (to avoid basing inferences on accounting variables that may be
measured differently under IFRS and local GAAP), so any market conditions that had impact on relative market capitalization
would decrease our ability to precisely estimate the effect of size. During the financial crisis, market price was a noisier measure
of firm size and firms’ reporting incentives. In addition, small firms with higher expected growth and therefore higher stock price
may have suffered more during the crisis because future expectations were less positive. Finally, the prices of less heavily traded
firms may not have been affected by the market crisis as much because they may already have traded at prices that were more
closely aligned with their book values.
21
When we exclude the US GAAP users from our analysis, (untabulated) results support the same general inferences as the table
5 results.
20

based on the significantly negative coefficients on Analyst it , Foreign_ops it , and Tax j . The
similarity of local GAAP to IFRS (SIM j ) was positively associated with non-adoption, but only
in 2005 and in the overall period. Possibly, firms were more confident in continuing to follow
local reporting standards if the standards were similar to IFRS.
Table 5 panel B presents the marginal effects of the coefficients from the panel A
regression. The marginal effects suggest that although the patterns of significance are quite
similar, the marginal effect of being specifically required to use IFRS is larger in the overall
period than the marginal effects for all but three other firm characteristics (being from a country
that prohibits some firms from using IFRS subsequent to 2005, US cross-listing, and analyst
following).
Our primary analysis includes an indicator variable for firms specifically required by EU-
wide and country-specific implementation rules to adopt IFRS in each year. To assess whether
this proxy controls for sanctioned non-adoption, we replicated our analysis separately on a
sample of firms specifically required to adopt IFRS by their country’s implementation of the
regulation (24,361 firm-years) and a sample of firms that were not explicitly required to adopt
IFRS (13,491 firm-years). 22 This analysis highlights the role of enforcement and reporting
incentives among firms subject to mandatory IFRS adoption.
The results of this diagnostic regression (reported in table 6) support essentially the same
inferences as the primary analysis in table 5. In contrast to the table 5 results, in table 6 we show
22
We created the sample by limiting the mandatory adopters to firms preparing consolidated financial statements and listed on
EU regulated exchanges, identical to our procedure for specifying the Mandatory variable used in our table 5 regressions. We
included firms from countries which required IFRS from specific industries (based on SIC codes) and from parent-only financial
statements. We excluded firms from 2005 and 2007 samples if they were listed in countries which allowed IFRS adoption
deferrals and the firms were eligible for those deferrals (US GAAP users and firms trading only debt securities). We excluded
firms from certain industries exempt from IFRS in a given jurisdiction. All these sample selection procedures are based on a
recent EC report on IFRS implementation options (COM 2013).
21

that the coefficients on RegQ, capturing overall enforcement/regulatory quality, and IFRS_enf,
representing improvements in enforcement, are negative and significant in more samples (and
more significant) among firms not specifically required to adopt IFRS, while for mandatory
adopters none of the enforcement variables are significantly related to non-adoption in the full
sample. Consistent with the evidence in Christensen et al. (2013, 2016), it seems that firms not
required to adopt IFRS are more likely to adopt it in countries with better enforcement and/or in
countries with concurrent enforcement improvements, where benefits from IFRS adoption are
higher. In addition, firm size is significantly negatively related to non-adoption for non-
mandatory adopters, but only in 2005 for mandatory adopters. This result suggests that for firms
not specifically required to adopt IFRS the choice of reporting standards is related to firms’
reporting incentives and expected IFRS adoption benefits, as discussed in section 2.
For the firms required to adopt IFRS, similarity to domestic GAAP is significantly
positively associated with non-adoption, as if firms are less likely to follow the rules and switch
to IFRS when domestic GAAP is a close substitute. For the non-mandatory adopters, the
coefficient on SIM is mostly insignificant, and when it is significant it is positive in 2005 and
negative in 2012. Finally, the explanatory power of the models is slightly higher for the
mandatory adopters than for the voluntary adopters. 23 We conclude from this sensitivity analysis
that although some firms avoided adopting IFRS due to loopholes in the regulation, other firms
continued to use non-IFRS standards in spite of the country-specific requirement to adopt IFRS,
after consideration of the costs and benefits.
To examine the extent to which implementation, enforcement, and reporting incentives
explain non-adoption, we re-estimated the logistic regression on table 5 using the overall sample
23
To shed more light on the differences between the two types of IFRS adopters we provide more discussion and we conduct
additional analyses on samples of non-adopters, mandatory 2005 adopters, and voluntary 2005 adopters in appendix B.
22

period, but including and excluding the three sets of proxies to determine which contribute the
most to explaining the IFRS adoption choice. The results of those regressions are in table 7.
The first column in table 7 presents results from a logistic regression that contains only
the implementation variables. The coefficient estimates are similar to those in table 5, with the
exception of Permit_Pre j and Not_allow j , which are not significant when the implementation
proxies are included on their own. The pseudo R2 is 0.16 and the area under the receiver
operating curve (AUROC) is 0.77. The second column contains regression results with only the
enforcement proxies. Three of the four proxies are significant and the coefficients on IFRS_enf j
and SS_feasible j support the same inferences as those in table 5, but the pseudo R2 is only 0.02
and AUROC is 0.59. AUROC of 0.59 indicates that the enforcement regression coefficients are
no better at predicting non-adoption of IFRS than a random model. The third column reports the
regression results including only the incentive proxies. All of the incentive proxies except
number of stock exchange listings have significant coefficients, the pseudo R2 is 0.24, and
AUROC is 0.83. These results, together with those in Liao et al. (2012), indicate that firms’
reporting incentives shape accounting choices not only at the individual standard level but also in
firms’ choice of reporting standards to follow. These results also suggest that incentives explain
more of the variation in IFRS non-adoption than do the implementation proxies, but enforcement
has low explanatory power on its own (when estimated on a sample of firms not specifically
required to adopt IFRS the R2 increases to 0.08 and AUROC is 0.70). While enforcement
strength plays a significant role in the quality of IFRS adoption, it has little power in determining
whether a firm decides to adopt IFRS or to follow other reporting standards.
23

The fourth column reports results of the regression including the implementation and
enforcement proxies but not the incentive proxies. The pseudo R2 is 0.17 and AUROC is 0.78,
both only .01 larger than for the implementation proxies on their own. The fifth column reports
results of the regression including the enforcement and incentive proxies without the
implementation proxies, for which the pseudo R2 is 0.27 and AUROC is 0.85, only trivially
larger than for the incentive proxies on their own. Finally, the sixth column reports results of the
regression containing the implementation and incentive proxies. The pseudo R2 is 0.32 and
AUROC is 0.87, larger than any other combination of proxies, with AUROC and R2 almost
identical to those of the full model. We conclude from table 7 that both features of the
implementation structure of the EU adoption of IFRS and firms’ individual reporting incentives
are strongly associated with the incidence of IFRS adoption, but enforcement has only a small
role to play.
5. Supplemental Analyses
5.1. Sample Selection Diagnostics.
The UK firms. UK firms make up one-third of our sample. To assess the sensitivity of
our results to their numerical dominance, we exclude British firms from the regressions. In spite
of a few changes in coefficients, the inferences without the UK firms are generally consistent
with our main conclusions. Additionally, the coefficients on Mandatory it and RegQ jt are all
negative and significant. We also analyze the UK firms separately (excluding country-level
variables) and we find only small differences from table 5 results, scattered across annual
subsamples. An interesting difference is that Mandatory it is positively related to non-adoption in
2007, 2009, and 2012 samples. This result is consistent with a large number of UK firms listed
24

on non-regulated markets adopting IFRS in 2007 (specifically, AIM listed firms). 24 Overall,
reporting incentives and implementation options continue to drive the choice of reporting
standards.
Excluding Pre-2005 IFRS adopters. Almost 15% of the IFRS users in the 2005 sample
are firms that adopted IFRS voluntarily prior to 2005. To assess the sensitivity of our results to
pre-2005 voluntary IFRS adoption, we repeated the analysis excluding these firms and found
results similar to our table 5 results. Our overall conclusions do not change.
Constant Sample. Each annual sample includes some firms that are new issuers and some
that delisted before the next sample year. As a sensitivity test, we re-estimated the main analysis
on a constant sample including only firms with all necessary data in all four sample years,
leaving 3,406 firms in each annual sample. Although the sample size is much smaller and some
coefficient estimates differ from the main analysis, our general inferences remain the same.
5.2. Data Quality Verification
Daske et al. (2013), appendix A, reports error rates in WS designations of IAS and IFRS
voluntary adoptions between 1990 and 2005 of 25% of all IFRS voluntary adopters. To assess
the effects on our data of errors in designation of consolidation status and accounting principle
choice, we verified the WS data for a random 10% of firms from each country for fiscal year end
2009 against each firm’s 2009 annual report from ThomsonOne Company Filings or from the
firm’s website. We checked English and foreign language versions of annual reports. In less than
1% of the 681 observations we verified, WS listed the firms as not using IFRS, but the firms’
annual reports showed that they did. In more than 2% of the verified observations, WS listed the
24
As explained in footnote 18, including a separate indicator variable for the AIM firms generates a significantly
positive coefficient in 2005, before the AIM firms were required by the LSE to adopt IFRS, and significantly
negative coefficients for the sample of all years 2005-2012 and in the annual samples for 2007, 2009, and 2012
when AIM firms were required by the LSE to adopt IFRS.
25

firm as using IFRS but the firm’s annual report showed that it was actually using other reporting
standards. 25 With respect to the IFRS use in consolidated reports, we found 4% fewer companies
using non-IFRS standards in consolidated financial statements. We recoded the data to correct
these errors, and generated identical inferences with the corrected data as those in table 5. In
contrast to the substantial error rates reported by Daske et al. (2013) between 1990 and 2005, our
data verification suggests that WS has substantially increased its accuracy as the number of firms
using IFRS skyrocketed in 2005 and as of 2009 the data is quite accurate and appropriate for use
in research addressing questions based on accounting standard choice.
5.3. Alternative Explanatory Variables.
In our main model examining the choice of accounting principles we do not use
accounting variables since such variables may be affected by differences in measurement under
different reporting standards. Instead, we follow prior research (Ashbaugh 2001) in using a
market-based measure of company size and we exclude from the analysis variables affected by
differences in measurement among various reporting standards. 26 In order to examine if our
takeaways are affected by the use of accounting data in the model, we replicated the regression
analyses including the accounting-based measures related to IFRS adoption likelihood in
voluntary adoption period (return on assets, leverage, sales growth), and substituting total assets
for market value as our size proxy. Size (natural log of total assets) is negatively related to non-
adoption in all samples. The inferences supported by the other variables were not affected by this
change.
25
Most of the errors in reporting standards appeared in French (7), Danish (5), Polish (4), German (4), and British (3) reports (out
of 28 errors we have found).
26
Our sample firms are traded on stock exchanges all over Europe and beyond, and the market pricing mechanism and market
efficiency in Italy, for instance, may be different that those in Britain. However, accounting standards used in individual EU
countries and IFRS have many differences in the measurement of key financial items (Bae et al. 2008) and these differences are
likely to affect the quality of inference based on accounting variables produced under different reporting standards. Because of
the diversity in the properties of capital market pricing mechanisms, it is unclear whether market variables or accounting data are
the less noisy proxies for firm size and growth prospects.
26

Auditors may act as accounting rule enforcers in countries with poor IFRS enforcement
(DeAngelo 1981). As a diagnostic, we control for auditor type in our logistic regressions. Our
general inferences do not change when we include an indicator variable for the Big Four or
global six (Wieczynska 2016) audit firms. The coefficient associated with Big Four is significant
only in the sample of all years, while global six is significant in 2007 and 2009 as well. Thus,
having a global six auditor seems to be at least marginally related to the choice of financial
reporting standards. However, we cannot claim the direction of causality here, since as shown by
Wieczynska (2016), firms are more likely to switch to global six auditors in the year they are
adopting IFRS and not before they switch reporting standards.
5.4. Non-compliance in specific subsamples.
Non-compliance among newly listed firms. We expect that newly listed firms are more
likely to accept the status quo and use IFRS, and that they are likely to face more stringent
oversight. We use Bureau van Dijk’s Orbis database to collect IPO dates for our sample firms. In
the 2005 sample (with non-missing key variables), we find 435 IPOs: 204 using IFRS, 257 using
local GAAP (235 in consolidated annual reports), and four using US GAAP. In the 2012 sample,
84 (15) IPOs used IFRS (local GAAP) and six used US GAAP. The percentage of IPOs in the
initial sample with consolidated financial statements using local GAAP in each of the sample
years is 55% (2005), 30% (2007), 38% (2009), and 14% (2012). As a benchmark, the
percentages of the firms presenting consolidated financial statements and using local GAAP
from table 2, panel C are 32% (2005), 18% (2007), 17% (2009), and 16% (2012). We conclude
that IPO firms are no more likely than seasoned firms to use IFRS. Moreover, IPOs seem more
likely to use local GAAP, suggesting that more IPOs take place on market segments not
27

regulated by the EU to avoid IFRS adoption. This result is consistent with evidence presented by
Vulcheva (2012) and Hitz and Muller-Bloch (2016) showing that IFRS adoption is costly enough
to affect firms’ exchange listing decisions.
Non-compliance among the British firms. To make our results more salient to US standard-
setters, we examine more closely the British subsample, since the UK is arguably the most
similar EU jurisdiction to the US with respect to its capital markets. We compare characteristics
of the British firms that have not adopted IFRS to the British IFRS adopters and find that the
non-adopters are smaller, less diverse, with lower foreign sales, less likely to be followed by
analysts than adopters, and in post-2007 samples they are mostly financial firms. Also, consistent
with our conclusion that the firms in need of external funding are more likely to use IFRS we
find that the British IFRS adopters are significantly more likely to issue debt or equity than non-
adopters. 27
6. Conclusions and Discussion
In this paper, we evaluated the common assertion that EU firms adopted IFRS in 2005
when the EU formally adopted IFRS for firms traded in EU regulated capital markets. We found
that although the incidence of firms using local (or some other) GAAP declined between 2005
and 2012, it is still nontrivial. Specifically, in 2005 about 35% of all EU firms were still using
local GAAP, and by 2012 the incidence of non-IFRS use was still 17%. In both cases, the
majority of non-adopters presented consolidated financial statements and were traded on EU-
regulated markets. We estimated a model of the non-adoption of IFRS as a function of proxies
for the EU-wide and country-specific implementation of the IFRS regulation, country-specific
27
For an in-depth analysis of adopters and non-adopters in the full sample, see appendix B.
28

enforcement mechanisms, and firm-specific reporting incentives. We estimated the model for the
full sample, and separately for 2005 (when the IFRS regulation went into force), 2007 (when
most exemptions and deferrals expired), 2009 (during the financial crisis), and 2012. We found
significant coefficients of the predicted sign for a variable indicating whether a sample firm was
specifically required by EU-wide and country-specific implementation rules to adopt IFRS, and
for other proxies for features of the regulation’s implementation.
In both our full sample and the subsample of firms that were specifically required to
adopt IFRS by EU-wide and their jurisdictions’ implementation of the regulation, we find limited
evidence that country-specific enforcement conditions or mechanisms were associated with IFRS
adoption during our time period. The marginal effects of the enforcement proxies are weak. This
may be because countries that have traditionally been strong enforcers of securities regulation
were both more likely to adopt specific IFRS enforcement mechanisms, and expected to be
stronger enforcers of rigorous application of IFRS, creating both greater likelihood of
enforcement and higher costs associated with adoption (see Christensen et al. 2016). Firms in
these environments may have adopted strategies to avoid adopting IFRS other than disregard for
the new regulation, such as delisting from EU-regulated markets, avoiding consolidation, or
moving to a domicile outside the EU (see Vulcheva 2012, Brüggemann et al. 2013, Hitz and
Muller-Bloch 2016, and Gutierrez et al. 2016). Alternatively, they may have simply failed to
comply with mandatory IFRS adoption because they assessed the benefits of IFRS adoption net
of the product of the likelihood and costs of enforcement to be insufficient to merit the costs of
adoption.
Finally, in both the full sample and the subsample specifically required to adopt IFRS, we
find that larger firms, firms with more foreign operations and more analyst following, and firms
29

that issue new debt and equity were more likely to adopt IFRS, both when the regulation was
initially imposed and in subsequent years. Several other incentives proxies were also significant
overall and in some years in both the full sample and the restricted subsamples.
We conclude that many EU firms do not use IFRS; that some non-adopting firms
exploited available definitions, exemptions, and deferrals while others simply failed to comply
with the jurisdiction-specific regulation; and that firms responded to their reporting incentives in
making the decision to adopt IFRS. We believe our results are important for investors and
researchers making assumptions about European firms’ choice of GAAP, to EU regulators in
evaluating the efficacy of the mandatory imposition of IFRS, and to the US standard-setting
community as it considers whether and how to adopt IFRS in the US.
Our results suggest that the samples used in research on mandatory IFRS adoption
frequently are not representative of the populations from which they are drawn, because the
underlying populations include many non-adopters. Such non-representative samples cannot
support unconditional inferences about the reporting behavior of EU firms in general. Some
examples are the research papers that define all EU countries or all EU-listed firms as mandatory
IFRS adopters. As we have shown here, IFRS adoption is mandatory only for specific groups of
firms and these groups are not the same across countries. Even when IFRS adoption is
“mandatory”, EU firms do not comply with the rule in a nontrivial percentage of cases.
As a solution, we suggest that researchers take account of the details of regulations
mandating IFRS across jurisdictions around the world, and condition their inferences accordingly
(COM 2013, 2012, 2008A, 2008B, 2008C, 2007). We provide further discussion of sample
selection issues in appendix B.
30

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34

Figure 1: Timeline of Major Events Related to the EU Adoption of IFRS
New EU members:
Cyprus, Czech Republic,
Estonia, Hungary, Latvia, New EU members:
Lithuania, Malta, Poland, Bulgaria and
Slovakia, and Slovenia Romania
2002 2003 2004 2005 2006 2007 2008
19 July 2002 1 January 2005 1 January 2007

European Parliament European firms trading Firms trading debt securities on
passes Regulation securities on regulated the EU markets, firms previously
(EC) No 1606/2002; markets have to prepare reporting in US GAAP, and
“The IAS consolidated annual LSE’s AIM listed firms have to
Regulation” financial reports in IFRS for start reporting in IFRS
fiscal years beginning on or
after this date
Source: COM (2008A, 2008B)
35

Table 1: Country Options for the Implementation of IFRS starting in 2005.
Panel A: IFRS Adoption Options
#
Firms traded on EU-regulated exchanges Firms traded on non-EU-regulated exchanges
Country
Consolidated Single entity Consolidated Single entity
Austria R N P N
Belgium R N R for credit institutions, P for others N
R (EU member
Bulgaria R P for SME’s, R for others P for SME’s, R for others
since 2007)
Cyprus R R R R
Czech Republic R R P N
Germany R N P N
Pre 2009: P for all. Post 2009: P for
Denmark R P P
financial companies, R for others
Spain R N P N
R for financial and insurance companies, P R for financial and insurance companies,
Estonia R R
for others P for others
Finland R N for insurance, P for others P N for insurance, P for others
France R N P N
United Kingdom R P P P
Greece R R P P
Hungary R N P N
Ireland R P P P
R for financial and insurance companies, P R for financial companies, N for
Italy R N for insurance companies, R for others
for others insurance, and P for others
R for banks and financial, N for insurance R for banks and financial, N for insurance
Lithuania R R
and P for others and P for others
Luxembourg R P P P
R for banks, insurance, and financial, P R for banks, insurance, and financial, P for R for banks, insurance, and financial, N
Latvia R
for others others for others
Malta R R R R
Netherlands R P P P
R for banks, P for companies applying for P for companies applying for regulated
Poland R N for banks, P for others regulated listing and IFRS firm’s listing and IFRS firm’s subsidiaries, N for
subsidiaries, N for others others
P for IFRS firm’s subsidiaries, N for
Portugal R N for banks, P for others P
others
R (EU member
Romania N R for credit institutions, P for others N
since 2007)
Slovakia R N R N
R for banks and insurance companies, P R for banks and insurance companies, P for R for banks and insurance companies, P
Slovenia R
for others others for others
Sweden R N P N
36

Table 1 (continued)
Panel B: IFRS Adoption Deferral and Early Adoption Options
Adoption deferral##
Country Early adoption
Debt Intern
Austria Y Y Y, consolidated reports since 1998
Belgium Y Y Y, consolidated
Y, mandatory for listed# companies, banks,
Bulgaria No No insurance, and investment firms since 2003,
voluntary for others since 2003
Cyprus No No Required for all companies since 1981
Czech Republic No No Yes, for all companies
Yes, for consolidated reports: listed firms since
Germany Y Y
1998 and unlisted since 2003
No for financial, Y for No for financial companies, Yes for others
Denmark No
others starting in 2004
No for banking
Spain No No
companies, Y for others
Estonia No No Y, since 2003
No for insurance. Others: Y, since 2003 for listed
Finland Y No
cons, since 2004 for others
France Y - No
United Kingdom No No No
Yes, since 2004 and only for companies audited
Greece No No
by certified auditors
Hungary Y No No
Ireland Y No No
Italy No No No
Lithuania No No Y for banks and financial institutions since 1997
Luxembourg Y Y Individual basis
Y, R for banks, insurance and other financial and
Latvia No No
P for others before 2005
Malta No No Yes, for all companies
Netherlands No No No
Poland Y No No
Portugal No No Individual basis
Romania Y (until 2009) Y (until 2009) Y, since 2001 (informational purposes only)
Slovakia No No No
Slovenia Y No No
Sweden Y No No
Sources: COM 2013; 2012; 2008 A; 2008 B; 2007; Abbreviations: R-required, P-permitted, Y- option used or
option allowed, N- not allowed, No- option not used.
#
OJ 2002 mandates IFRS only for a subset of firms listed on exchange segments that are regulated by the EU. The
EU frequently uses the terms “listed” to describe these firms. However, firms that are traded on other stock
exchange segments are also listed firms. Therefore, in our analyses we refer to the firms listed on EU-regulated
segments as EU-regulated firms.
##
Debt refers to deferral for companies trading only debt securities in the EU regulated markets. Intern refers to the
deferral available to firms trading in international securities markets and using international accepted accounting
standards. Both deferral options expire in 2007.
37

Table 2: Initial Sample of Publicly Traded EU Firms
Panel A. Country Composition of the Initial Sample
EU firms
Country Data 2001- 2005- 2005-
Country with 2005 2012
Symbol sample** 2012*** 2012*** 2012 %
SEDOL*
Austria AUT 172 134 117 99 1.22 91 84
Belgium BEL 273 192 178 163 2.01 145 131
Bulgaria BGR 282 280 266 266 3.28 220 234
Cyprus CYP 145 141 130 130 1.6 115 104
Czech Republic CZE 69 46 43 25 0.31 24 15
Germany DEU 1,394 1,170 1,097 966 11.92 838 738
Denmark DNK 499 253 246 225 2.78 191 182
Spain ESP 310 227 210 188 2.32 157 157
Estonia EST 21 21 17 17 0.21 13 15
Finland FIN 212 166 158 144 1.78 128 128
France FRA 1,463 1,030 975 879 10.84 728 727
Great Britain GBR 4,709 3,290 3,029 2,655 32.75 2,006 1,837
Greece GRC 428 388 374 335 4.13 305 252
Hungary HUN 81 65 59 50 0.62 35 42
Ireland IRL 161 121 101 92 1.13 77 62
Italy ITA 497 377 359 331 4.08 280 279
Lithuania LTU 43 42 35 35 0.43 22 34
Luxembourg LUX 96 78 67 64 0.79 47 50
Latvia LVA 29 29 29 29 0.36 27 27
Malta MLT 21 21 21 21 0.26 17 21
Netherlands NLD 362 244 216 186 2.29 155 147
Poland POL 560 547 524 515 6.35 319 478
Portugal PRT 126 78 70 61 0.75 54 52
Slovakia SVK 39 34 32 27 0.33 13 19
Slovenia SVN 61 61 60 60 0.74 30 50
Sweden SWE 736 604 583 544 6.71 401 441
Total: 12,789 9,639 8,996 8,107 100 6,438 6,306
38

Table 2 (continued)
Panel B: Frequency of Accounting Standards’ Choice by Consolidation Status
Fiscal year or \Standards IFRS Local US GAAP Other Total

sample Consolidation
Consolidated 313 3,877 173 4 4,367

2001 Single-entity 4 588 1 0 593
Total 317 4,465 174 4 4,960
Consolidated 503 3,952 163 5 4,623

2003 Single-entity 15 656 1 1 673
Total 518 4,608 164 6 5,296
Consolidated 4,116 1,801 65 4 5,986

2005 Single-entity 212 238 1 1 452
Total 4,328 2,039 66 5 6,438
Consolidated 5,194 1,031 71 5 6,301

2007 Single-entity 254 207 0 1 462
Total 5,448 1,238 71 6 6,763
Consolidated 5,112 954 70 3 6,139

2009 Single-entity 249 185 0 2 436
Total 5,361 1,139 70 5 6,575
Consolidated 5,031 853 78 3 5,965

2012 Single-entity 207 133 0 1 341
Total 5,238 986 78 4 6,306
Consolidated 39,452 9,077 574 29 49,132

All firms 2005-2012 Single-entity 1,891 1,501 1 11 3,404
Total 41,343 10,578 575 40 52,536
Consolidated 26,499 2,813 91 11 29,414

Mandatory sample
Single-entity 126 112 0 0 238
2005-2012
Total 26,625 2,925 91 11 29,652
39

Table 2 (continued)
Panel C: Frequency of Accounting Standards’ Choice by IFRS-Regulation Applicability
Fiscal year or \Standards IFRS Local US GAAP Other Total

sample EU firm sample
Mandatory 2,942 440 10 1 3,393

2005 Non-mandatory 1,386 1,599 56 4 3,045
Total 4,328 2,039 66 5 6,438
Mandatory 3,318 391 13 2 3,724

2007 Non-mandatory 2,130 847 58 4 3,039
Total 5,448 1,238 71 6 6,763
Mandatory 3,440 355 11 1 3,807

2009 Non-mandatory 1,921 784 59 4 2,768
Total 5,361 1,139 70 5 6,575
Mandatory 3,497 300 13 1 3,811

2012 Non-mandatory 1,741 686 65 3 2,495
Total 5,238 986 78 4 6,306
Mandatory 26,625 2,925 91 11 29,652

All firms 2005-2012 Non-mandatory 14,718 7,653 484 29 22,884
Total 41,343 10,578 575 40 52,536
40

Table 2 (continued)
Panel D: Frequency of Accounting Standard Choice by Consolidation and Country-Year
Firm-year observations Consolidated firm-years Mandatory IFRS

# 2005 2012 2005 2012 2005-2012
Country of firms IFRS NoIFRS IFRS NoIFRS IFRS NoIFRS IFRS NoIFRS IFRS NoIFRS
AUT 99 75 16 77 7 75 6 77 6 542 45
BEL 163 117 28 117 14 117 28 117 14 781 64
BGR 266 219 1 234 0 77 1 92 0 672 0
CYP 130 115 0 104 0 109 0 98 0 948 0
CZE 25 22 2 15 0 19 1 13 0 136 4
DEU 966 573 265 514 224 571 251 510 212 3,488 382
DNK 225 129 62 149 33 127 47 142 25 999 194
ESP 188 136 21 137 20 136 17 135 17 690 35
EST 17 13 0 15 0 13 0 15 0 103 0
FIN 144 126 2 125 3 125 2 125 3 919 0
FRA 879 494 234 521 206 492 205 520 191 3,537 240
GBR 2,655 880 1,126 1,583 254 878 1,120 1,582 254 4,277 1,699
GRC 335 293 12 236 16 292 12 235 16 1,736 15
HUN 50 29 6 32 10 26 3 31 4 180 9
IRL 92 45 32 56 6 44 30 56 6 163 6
ITA 331 258 22 271 8 257 20 270 6 1,846 19
LTU 35 21 1 34 0 19 1 34 0 183 2
LUX 64 35 12 46 4 35 12 46 4 233 17
LVA 29 9 18 15 12 5 4 11 3 114 110
MLT 21 16 1 21 0 16 1 21 0 142 2
NLD 186 130 25 123 24 130 25 123 24 700 53
POL 515 206 113 372 106 179 23 346 52 1,893 58
PRT 61 47 7 47 5 47 6 46 5 330 20
SVK 27 10 3 10 9 8 2 8 3 67 26
SVN 60 21 9 39 11 19 4 35 1 240 8
SWE 544 309 92 345 96 300 49 343 88 1,706 19
Total: 8,107 4,328 2,110 5,238 1,068 4,116 1,870 5,031 934 26,625 3,027
Panel A: The sample firms have been selected based on advanced search criteria in Thomson Reuters database.
Selection criteria limit the sample to: *non-private and non-ADR firms from the EU countries that have a SEDOL
(we need this identifier to collect the remaining variables); **firms with at least one of the key variables available in
any of the years 2001-2013: fiscal-year end date, consolidation status, financial reporting standards followed, and
total assets data available in any of the years 2001-2013. Next, we define a fiscal year by year when annual fiscal
period begins, such that if a fiscal year end date is between Dec 31, 2005 and Dec 30, 2006, fiscal year begins in
2005 it is included in year 2005. When two fiscal year end dates fall within the same year we retain the latter one.
This choice is caused by the specific phrasing of the regulation mandating IFRS for the EU “for each financial year
starting on or after 1 January 2005” (OJ 2002, Article 4, p.3). Therefore, the last two steps limit the sample to the
following firms: ***firms with all of the key data items available in at least one fiscal year (as defined previously)
between 2001 (or 2005) and 2012; all duplicate firm observations were removed at this step (some firms had more
than one SEDOL representing a single firm). 2005 and 2012 columns report the number of firms with available total
assets and reporting standards data in respective years. The 2005-2012 sample is used as a starting sample in our
main regression analyses where we examine the reasons for non-adoption of IFRS and as a sample for which Panels
B through D present reporting standards followed. In those panels, Mandatory sample includes firm-years that
represent firms which were specifically required to adopt IFRS either by the EU or by their country-specific
implementation choices for IFRS adoption (OJ 2002, see appendix A for a detailed specification of how Mandatory
indicator is quantified). In Panel D, IFRS columns include the number of firms following IFRS, while NoIFRS
columns include the number of firms following local GAAP, US GAAP, or other reporting standards. Frequencies
provided in this table are based on the whole sample, before elimination of firm-years with missing regression data.
41

Table 3: Sample Selection
Number of firms in the initial sample: = 8,107
IFRS period (2005-2012):

Starting firm-year observations with non-missing key variables 52,536
- missing country-level variables* - 4,259
- missing firm-year regression variables - 5,696
Full logistic regression sample = 42,581
2005 logistic regression sample:

- missing country-level variables* - 457
- missing firm-year regression variables - 1,070
2005 logistic regression sample = 4,911
2007 sample
- missing firm-year regression variables - 650
2009 sample
2012 sample
The sample we begin with includes firms for which we have all of the key variables (consolidation status, fiscal year
end date, financial reporting standards, and total assets) in any of the fiscal years 2005 through 2012 (# of firms).
The firm-year observations include only the observations for which we have all of the key variables in that year.
Each year contains all firm-year observations for which fiscal period starts within that year. For example, year 2005
contains all firms-year observations with fiscal year ends between 12/31/2005 and 12/30/2006. *Country-level
variables include JR_enf, SIM, and SS_feasible, and at least one of these variables is missing for the following
countries: Bulgaria, Cyprus, Estonia, Lithuania, Latvia, Malta, Slovakia, and Slovenia. Continuous firm-level
variables were truncated at one and 99 percent and the effect of the truncation procedure is included with the
missing firm-year regression variables.
42

Table 4: Data Description
Panel A: Sample Characteristics
2005-2012 2005 2007 2009 2012

Variable μ med σ μ med σ μ med σ μ med σ μ med σ
NoIFRS 0.21 0.00 0.41 0.32 0.00 0.47 0.19 0.00 0.39 0.18 0.00 0.38 0.17 0.00 0.38
Mandatory 0.61 1.00 0.49 0.59 1.00 0.49 0.58 1.00 0.49 0.61 1.00 0.49 0.64 1.00 0.48
Diverse 3.34 3.00 2.13 3.34 3.00 2.15 3.27 3.00 2.12 3.36 3.00 2.13 3.38 3.00 2.13
Not_allow 0.38 0.00 0.48 0.36 0.00 0.48 0.38 0.00 0.48 0.38 0.00 0.49 0.38 0.00 0.48
Permit_Pre 0.30 0.00 0.46 0.31 0.00 0.46 0.31 0.00 0.46 0.31 0.00 0.46 0.29 0.00 0.45
RegQ 1.46 1.58 0.35 1.48 1.51 0.31 1.52 1.62 0.34 1.45 1.58 0.31 1.42 1.53 0.40
JR_enf 10.63 10.74 0.72 10.68 11.00 0.72 10.64 10.74 0.72 10.61 10.45 0.72 10.61 10.45 0.72
IFRS_enf 0.61 1.00 0.49 0.62 1.00 0.48 0.62 1.00 0.49 0.60 1.00 0.49 0.59 1.00 0.49
SS_feasible 0.83 1.00 0.38 0.85 1.00 0.36 0.84 1.00 0.36 0.83 1.00 0.38 0.81 1.00 0.39
Ln_size 11.48 11.27 2.26 11.65 11.44 2.19 11.70 11.53 2.20 11.37 11.16 2.26 11.46 11.25 2.35
Stock_iss 0.33 0.00 0.47 0.39 0.00 0.49 0.38 0.00 0.49 0.29 0.00 0.45 0.28 0.00 0.45
Debt_iss 0.39 0.00 0.49 0.35 0.00 0.48 0.39 0.00 0.49 0.39 0.00 0.49 0.42 0.00 0.49
Num_cross 0.10 0.00 0.40 0.09 0.00 0.40 0.09 0.00 0.37 0.10 0.00 0.40 0.11 0.00 0.41
US_list 0.01 0.00 0.09 0.01 0.00 0.09 0.01 0.00 0.09 0.01 0.00 0.09 0.01 0.00 0.11
Foreign_ops 0.57 1.00 0.50 0.55 1.00 0.50 0.52 1.00 0.50 0.57 1.00 0.49 0.61 1.00 0.49
Analyst 0.57 1.00 0.49 0.52 1.00 0.50 0.54 1.00 0.50 0.59 1.00 0.49 0.63 1.00 0.48
SIM -1.63 -2.40 1.18 -1.55 -2.40 1.21 -1.60 -2.40 1.19 -1.66 -2.40 1.17 -1.68 -2.40 1.16
Tax 0.54 1.00 0.50 0.53 1.00 0.50 0.54 1.00 0.50 0.55 1.00 0.50 0.54 1.00 0.50
Observations 42,581 4,911 5,571 5,392 5,192
43

Table 4 (continued)
Panel B: Correlation Table
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
1.NoIFRS 1 -0.32 -0.29 0.05 -0.05 0.11 0.00 0.08 0.11 -0.30 -0.05 -0.18 -0.04 0.11 -0.32 -0.37 0.13 -0.08
2.Mandatory -0.32 1 0.20 0.06 0.18 -0.21 -0.16 -0.24 -0.13 0.41 -0.12 0.13 -0.02 -0.08 0.13 0.15 -0.29 0.21
3.Diverse -0.27 0.21 1 0.04 0.09 -0.23 -0.15 -0.23 -0.22 0.25 -0.04 0.18 0.05 0.00 0.20 0.23 -0.29 0.16
4.Not_allow 0.05 0.06 0.02 1 0.17 -0.23 -0.70 -0.06 0.17 0.02 -0.12 0.04 -0.04 -0.04 -0.04 0.02 -0.31 0.72
5.Permit_Pre -0.05 0.18 0.07 0.17 1 -0.13 -0.49 -0.08 -0.13 0.03 -0.18 0.04 0.00 0.01 -0.05 -0.01 -0.44 0.46
6.RegQ 0.12 -0.21 -0.23 -0.06 -0.06 1 0.39 0.70 0.48 -0.03 0.18 -0.17 0.03 0.00 0.07 0.04 0.76 -0.53
7.JR_enf -0.03 -0.13 -0.11 -0.73 -0.43 0.21 1 0.26 0.14 0.04 0.19 -0.09 0.09 0.05 0.15 0.05 0.49 -0.63
8.IFRS_enf 0.08 -0.24 -0.23 -0.06 -0.08 0.76 0.22 1 0.40 -0.07 0.16 -0.16 0.01 0.01 0.04 0.05 0.75 -0.34
9.SS_feasible 0.11 -0.13 -0.22 0.17 -0.13 0.58 0.08 0.40 1 0.03 0.08 -0.21 0.04 -0.02 0.10 0.09 0.58 -0.07
10.Ln_size -0.30 0.39 0.29 0.02 0.03 -0.02 0.03 -0.07 0.03 1 0.09 0.17 0.16 0.09 0.38 0.47 -0.09 0.09
11.Stock_iss -0.05 -0.12 -0.04 -0.12 -0.18 0.16 0.16 0.16 0.08 0.09 1 0.04 0.03 0.04 0.09 0.12 0.24 -0.22
12.Debt_iss -0.18 0.13 0.17 0.04 0.04 -0.18 -0.07 -0.16 -0.21 0.18 0.04 1 0.05 0.05 0.11 0.14 -0.21 0.09
13.Num_cross -0.03 0.00 0.07 -0.02 0.00 0.02 0.10 0.01 0.04 0.20 0.03 0.05 1 0.33 0.09 0.10 -0.03 0.01
14.US_list 0.11 -0.08 0.00 -0.04 0.01 -0.01 0.06 0.01 -0.02 0.10 0.04 0.05 0.31 1 0.04 0.05 -0.01 0.00
15.Foreign_ops -0.32 0.13 0.19 -0.04 -0.05 0.07 0.13 0.04 0.10 0.37 0.09 0.11 0.09 0.04 1 0.41 0.06 -0.03
16.Analyst -0.37 0.15 0.22 0.02 -0.01 0.06 0.04 0.05 0.09 0.46 0.12 0.14 0.10 0.05 0.41 1 0.02 0.05
17.SIM 0.10 -0.29 -0.27 -0.53 -0.50 0.61 0.65 0.63 0.40 -0.08 0.26 -0.17 -0.03 0.00 0.10 0.03 1 -0.73
18.Tax -0.08 0.21 0.14 0.72 0.46 -0.43 -0.56 -0.34 -0.07 0.09 -0.22 0.09 0.02 0.00 -0.03 0.05 -0.81 1
44

Table 4 (continued)
Panel C: Sample characteristics for IFRS and non-IFRS firm-year observations.
2005 – IFRS 2005 – non IFRS 2012 – IFRS 2012 – non IFRS
Variable μ med σ μ med σ T-test μ med σ μ med σ T-test
Mandatory 0.75 1.00 0.43 0.25 0.00 0.43 *** 0.71 1.00 0.45 0.32 0.00 0.47 ***
Diverse 3.86 3.00 2.19 2.24 2.00 1.58 *** 3.61 3.00 2.15 2.28 2.00 1.61 ***
Not_allow 0.42 0.00 0.49 0.24 0.00 0.43 *** 0.34 0.00 0.48 0.53 1.00 0.50 ***
Permit_Pre 0.38 0.00 0.48 0.16 0.00 0.37 *** 0.29 0.00 0.45 0.28 0.00 0.45 -
RegQ 1.41 1.49 0.31 1.62 1.62 0.26 *** 1.41 1.55 0.41 1.45 1.53 0.35 ***
JR_enf 10.57 10.30 0.71 10.90 11.30 0.68 *** 10.66 10.74 0.71 10.40 10.27 0.72 ***
IFRS_enf 0.54 1.00 0.50 0.80 1.00 0.40 *** 0.58 1.00 0.49 0.60 1.00 0.49 -
SS_feasible 0.79 1.00 0.41 0.95 1.00 0.21 *** 0.80 1.00 0.40 0.85 1.00 0.36 ***
Ln_size 12.27 12.13 2.11 10.34 10.25 1.75 *** 11.73 11.53 2.29 10.14 9.96 2.15 ***
Stock_iss 0.38 0.00 0.49 0.39 0.00 0.49 - 0.30 0.00 0.46 0.22 0.00 0.42 ***
Debt_iss 0.41 0.00 0.49 0.22 0.00 0.41 *** 0.46 0.00 0.50 0.26 0.00 0.44 ***
Num_cross 0.10 0.00 0.43 0.06 0.00 0.32 *** 0.11 0.00 0.42 0.09 0.00 0.36 *
US_list 0.00 0.00 0.06 0.01 0.00 0.12 *** 0.00 0.00 0.06 0.04 0.00 0.21 ***
Foreign_ops 0.62 1.00 0.49 0.40 0.00 0.49 *** 0.67 1.00 0.47 0.28 0.00 0.45 ***
Analyst 0.63 1.00 0.48 0.27 0.00 0.44 *** 0.71 1.00 0.45 0.22 0.00 0.42 ***
SIM -1.90 -2.40 1.07 -0.83 0.00 1.16 *** -1.66 -2.40 1.18 -1.77 -2.40 1.09 ***
Tax 0.65 1.00 0.48 0.28 0.00 0.45 *** 0.53 1.00 0.50 0.57 1.00 0.50 *
Observations 3320 1591 4299 893
45

Table 4 (continued)
Panel D: Country-year observations by accounting standards’ type in regression samples.
Firm-year observations Consolidated firm-year observations

2005 2012 2005 2012
Country NoIFRS IFRS NoIFRS IFRS NoIFRS IFRS NoIFRS IFRS
AUT 13 64 6 75 4 64 6 75
BEL 16 98 12 110 16 98 12 110
CZE 2 16 0 13 1 15 0 11
DEU 165 493 185 479 159 493 177 475
DNK 39 117 29 140 34 116 23 133
ESP 16 110 18 126 14 110 15 124
FIN 0 118 0 118 0 117 0 118
FRA 160 435 172 461 144 434 159 461
GBR 1,017 732 232 1,364 1,013 730 232 1,363
GRC 7 278 15 227 7 277 15 226
HUN 3 26 7 31 1 23 3 30
IRL 27 34 6 47 25 33 6 47
ITA 15 207 3 251 14 207 2 250
LUX 10 25 2 42 10 25 2 42
NLD 22 115 24 113 22 115 24 113
POL 46 156 96 350 3 147 47 325
PRT 6 41 4 44 5 41 4 43
SWE 27 255 82 308 12 247 76 306
Total: 1,591 3,320 893 4,299 1,484 3,292 803 4,252
Panel A presents descriptive statistics (mean, median, standard deviation) for firm-years in fiscal years 2005 through
2012 and in individual fiscal years 2005, 2007, 2009, and 2012. Panel B presents Pearson (lower diagonal) and
Spearman (upper diagonal) correlation coefficients for the regression variables in the sample of firm-years from
2005 through 2012. Panel C presents characteristics of the sample firms from 2005 and 2012 subsamples for firms
following IFRS and firms using non-IFRS reporting standards. To calculate sample characteristics we included only
the data used in the main regression model: Pr(NoIFRS) it = α +β 1 Mandatory it +β 2 Diverse it +β 3 Not_allow j
+β 4 Permit_Pre j +χ 1 RegQ jt +χ 2 JR_enf j +χ 3 IFRS_enf j +χ 4 SS_feasible j +δ 1 Ln_size it +δ 2 Stock_iss it +δ 3 Debt_iss it
+δ 4 Num_cross i +δ 5 US_list i +δ 6 Foreign_ops it +δ 7 Analyst it +δ 8 SIM j +δ 9 Tax j +ε it , where i indexes firms, j indexes
countries and t indexes sample years. All variables are defined in appendix A. Bolded values in panel B indicate
significance at 1% level. Significance levels from t-test for differences in sample characteristics between IFRS and
non-IFRS firms are reported in Panel C (T-tests columns) using asterisks as follows: *** p<0.01, ** p<0.05, *
p<0.10.
46

Table 5: Multivariate Results
Panel A: Main Model Coefficients
Expected Sample in Fiscal Year:
VARIABLES Sign 2005-2012 2005 2007 2009 2012
Mandatory - -1.33*** -1.86*** -0.95 -1.05* -1.41**

Diverse - -0.23*** -0.23*** -0.22*** -0.23*** -0.29***
Not_allow + 1.83*** 1.25** 2.74*** 2.48*** 2.27***
Permit_Pre - 0.50*** 0.60*** 1.01*** 0.73*** 0.17
RegQ - 0.13 -0.44 -1.88*** -1.19* -0.98***
JR_enf - -0.19 0.02 0.22 -0.17 -0.36**
IFRS_enf - -1.08*** -1.16*** -0.82*** -0.95*** 0.05
SS_feasible +/- 0.50 1.29*** 1.80*** 1.12* 0.86**
Ln_size - -0.06*** -0.33*** -0.07* -0.06 0.02
Stock_iss - -0.31*** -0.49*** -0.59*** -0.40** -0.25
Debt_iss - -0.49*** -0.29 -0.81*** -0.56*** -0.62***
Num_cross - -0.21 0.17*** -0.17 -0.51** -0.27
US_list + 4.46*** 2.97*** 5.00*** 5.97*** 4.84***
Foreign_ops - -1.17*** -0.64*** -1.66*** -1.74*** -1.05***
Analyst - -1.45*** -1.00*** -1.55*** -1.64*** -2.01***
SIM - 0.52** 0.97*** 0.12 0.52 -0.17
Tax -/+ -1.35*** -1.42** -2.74*** -1.87*** -2.09***
Constant 4.69** 7.00*** 1.59 5.62* 5.59**
Observations 42,581 4,911 5,571 5,392 5,192

Pseudo R2 0.33 0.45 0.36 0.37 0.38
AUROC 0.88 0.91 0.89 0.90 0.90
Panel B: Main Model Marginal Effects

Sample in Fiscal Year:
VARIABLES 2005-2012 2005 2007 2009 2012
Mandatory -0.14*** -0.30*** -0.07* -0.07* -0.10**
Diverse -0.02*** -0.03*** -0.01*** -0.01*** -0.02***
Not_allow 0.20*** 0.20** 0.27*** 0.21*** 0.19***
Permit_Pre 0.05*** 0.09*** 0.08*** 0.05*** 0.01
RegQ 0.01 -0.06 -0.12*** -0.07** -0.06**
JR_enf -0.02 0.00 0.01 -0.01 -0.02*
IFRS_enf -0.11*** -0.19*** -0.06** -0.06*** 0.00
SS_feasible 0.04** 0.14*** 0.08*** 0.05*** 0.04***
Ln_size -0.01** -0.05*** -0.00 -0.00 0.00
Stock_iss -0.03*** -0.07*** -0.04*** -0.02*** -0.01
Debt_iss -0.04*** -0.04 -0.05*** -0.03** -0.04***
Num_cross -0.02 0.03*** -0.01 -0.03*** -0.02
US_list 0.81*** 0.63*** 0.85*** 0.90*** 0.83***
Foreign_ops -0.11*** -0.10*** -0.12*** -0.12*** -0.07***
Analyst -0.15*** -0.15*** -0.11*** -0.12*** -0.16***
SIM 0.05** 0.14*** 0.01 0.03 -0.01
Tax -0.13*** -0.22** -0.23*** -0.13*** -0.15***
47

Table 5 (continued)
The regression coefficients reported in this table are estimated using the following logit equation: Pr(NoIFRS) it = α
+β 1 Mandatory it +β 2 Diverse it +β 3 Not_allow j +β 4 Permit_Pre j +χ 1 RegQ jt +χ 2 JR_enf j
+χ 3 IFRS_enf j +χ 4 SS_feasible j +δ 1 Ln_size it +δ 2 Stock_iss it +δ 3 Debt_iss it +δ 4 Num_cross i +δ 5 US_list i
+δ 6 Foreign_ops it +δ 7 Analyst it +δ 8 SIM j +δ 9 Tax j +ε it , where i indexes firms, j indexes countries and t indexes
sample years. All variables are defined in appendix A. Panel A presents coefficients and panel 2 presents marginal
effects. Standard errors are clustered by industry using 12 Fama-French industry categories. Significance levels are
reported using asterisks as follows: *** p<0.01, ** p<0.05, * p<0.10.
48

Table 6: Mandatory and non-mandatory sample analyses.
Mandatory=1 Mandatory=0
VARIABLES sign 2005-2012 2005 2007 2009 2012 2005-2012 2005 2007 2009 2012
Diverse - -0.27*** -0.32*** -0.31*** -0.23*** -0.27** -0.13*** -0.17*** -0.08* -0.11*** -0.13***
Not_allow + 1.57*** 0.39 2.15*** 1.62*** 2.01*** 2.15*** 2.70*** 3.26*** 3.48*** 2.76***
Permit_Pre - 0.88*** 0.58*** 1.29*** 0.94*** 0.78*** 0.62** 1.00*** 1.14*** 0.95*** 0.28
RegQ - -0.31 -0.30 -0.85 -0.30 -0.22 0.64 -1.28** -2.31*** -2.11*** -1.68*
JR_enf - 0.19 0.29 0.27 0.11 0.03 -0.31 -0.10 0.27 -0.07 -0.30
IFRS_enf - -0.52 -0.62* -0.81* -0.51 -0.05 -1.78*** -1.59*** -1.49*** -1.33*** -0.09
SS_feasible +/- 1.23** 3.25*** 1.12 0.91 0.75 0.57** 0.86*** 2.36*** 1.77** 1.89***
Ln_size - -0.09 -0.18*** -0.11 -0.12 -0.06 -0.17*** -0.47*** -0.25*** -0.21*** -0.22***
Stock_iss - -0.23** -0.59*** -0.53* -0.32** 0.23* -0.15** -0.28* -0.40*** -0.36** -0.37***
Debt_iss - -0.85*** -0.75*** -1.00*** -0.82*** -0.71*** -0.20*** 0.12 -0.60*** -0.35* -0.29**
Num_cross - 0.20 0.54** 0.03 -0.17 0.13 -0.33 -0.06 -0.00 -0.37 -0.20
US_list + 3.00*** 1.66 3.86*** 3.72*** 3.61*** 4.64*** 3.62*** 5.02*** 6.29*** 5.28***
Foreign_ops - -0.92*** -0.73** -1.10*** -0.93*** -0.93*** -0.72*** -0.41*** -1.21*** -1.33*** -0.57***
Analyst - -2.45*** -1.86*** -2.32*** -2.44*** -2.72*** -0.89*** -0.45*** -1.02*** -1.05*** -1.15***
SIM - 0.75** 0.51** 0.74** 0.99** 0.84** 0.19 1.25*** -0.24 -0.11 -1.19***
Tax -/+ -1.40*** -0.90 -2.38*** -1.03 -1.11 -1.83*** -2.61*** -2.89*** -3.09*** -3.44***
Constant -0.17 -1.93 0.63 1.38 0.87 5.59** 11.32** 2.05 5.54* 5.38**
Observations 25,864 2,877 3,258 3,316 3,339 16,717 2,034 2,313 2,076 1,853
Pseudo R-squared 0.44 0.41 0.46 0.44 0.45 0.22 0.32 0.37 0.38 0.42
AUROC 0.92 0.91 0.93 0.92 0.92 0.80 0.85 0.89 0.89 0.90
The regression coefficients reported in this table are estimated using the following logit equation: Pr(NoIFRS) it = α +β 1 Diverse it +β 2 Not_allow j
+β 3 Permit_Pre j +χ 1 RegQ jt +χ 2 JR_enf j +χ 3 IFRS_enf j +χ 4 SS_feasible j +δ 1 Ln_size it +δ 2 Stock_iss it +δ 3 Debt_iss it +δ 4 Num_cross i +δ 5 US_list i
+δ 6 Foreign_ops it +δ 7 Analyst it +δ 8 SIM j +δ 9 Tax j +ε it , where i indexes firms, j indexes countries and t indexes sample years. All variables are defined in
appendix A. Coefficients reported in this table are from estimating the main model separately on a sample of firm-years for which Mandatory it =1 and for which
Mandatory it =0. The former sample allows examining non-adoption among firms that were required by the EU or country-specific IFRS implementation options
to adopt IFRS, while the latter allows testing our predictions among a set of firm-years which were not specifically required to be using IFRS in a given year
(either because there were allowed or required to use non-IFRS reporting standards, or because they could defer IFRS adoption. Significance levels are reported
using asterisks as follows: *** p<0.01, ** p<0.05, * p<0.10.
49

Table 7: Separate Analyses of Implementation, Enforcement, and Incentives (2005-2012)
VARIABLES IMP ENF INC IMP & ENF INC & ENF IMP & INC ALL
Mandatory -1.477** -1.508** -1.272*** -1.33***

Diverse -0.381*** -0.381*** -0.247*** -0.23***
Not_allow 0.452 -0.0937 1.772*** 1.83***
Permit_Pre 0.00240 -0.300 0.326** 0.50***
RegQ 0.887*** 0.988*** 0.782*** 0.13
JR_enf -0.192** -0.551*** -1.007*** -0.19
IFRS_enf -0.0863 -0.596 -1.161*** -1.08***
SS_feasible 0.494*** 0.162 0.483* 0.50
Ln_size -0.198*** -0.210*** -0.0502** -0.06***
Stock_iss -0.137* -0.141* -0.337*** -0.31***
Debt_iss -0.628*** -0.512*** -0.509*** -0.49***
Num_cross -0.308** -0.222 -0.261 -0.21
US_list 4.504*** 5.252*** 4.231*** 4.46***
Foreign_ops -1.146*** -1.177*** -1.090*** -1.17***
Analyst -1.354*** -1.389*** -1.436*** -1.45***
SIM 0.428*** 1.049*** 0.114 0.52**
Tax 0.387*** 0.536* -1.577*** -1.35***
Constant 0.312 -0.985 2.589*** 5.236*** 13.40*** 2.018*** 4.69**
Observations 42,581 42,581 42,581 42,581 42,581 42,581 42,581

Pseudo R2 0.16 0.02 0.24 0.17 0.27 0.32 0.33
AUROC 0.77 0.59 0.83 0.78 0.85 0.87 0.88
The table presents results of estimating logistic regression with different subsets of explanatory variables.
Pr(NoIFRS) it = α +β 1 Mandatory it +β 2 Diverse it +β 3 Not_allow j +β 4 Permit_Pre j +χ 1 RegQ jt +χ 2 JR_enf j
+χ 3 IFRS_enf j +χ 4 SS_feasible j +δ 1 Ln_size it +δ 2 Stock_iss it +δ 3 Debt_iss it +δ 4 Num_cross i +δ 5 US_list i
+δ 6 Foreign_ops it +δ 7 Analyst it +δ 8 SIM j +δ 9 Tax j +ε it , where i indexes firms, j indexes countries and t indexes
sample years. All variables are defined in appendix A. The column titles: IMP, ENF, and INC represent sets of
variables included in the analysis: implementation, enforcement, and reporting incentives, respectively. Column
ALL includes all three sets of variables (original model reported in Table 6 panel A) for the sample of observations
from years 2005 through 2012. Standard errors are clustered by industry. Significance levels are reported using
asterisks as follows: *** p<0.01, ** p<0.05, * p<0.10.
50

Appendix A: Variable Definitions
Variable
Variable Description Source
Name
NoIFRS it is an indicator variable equal zero if firm i prepares financial statements
in accordance with IFRS and equal one if firm i uses US GAAP, local or other
reporting standards in its’ financial statements for year t. We code reporting
Thomson
standards as IFRS if WS code for Accounting Standards Followed (ASF) (item
Reuters
NoIFRS it #07536) is 2-International Standards, 6-International Standards with some EU
Financials,
guidelines or 23-IFRS. For missing observations we use Reuters Financials’
Worldscope
Reporting Accounting Standards data and we code standards as IFRS when the
value of the data item is IAS. The variable is set to missing if reporting standards’
data are not available.
Mandatory it is an indicator variable equal one if firm i is specifically required by
the EU and/or country-specific IFRS implementation options to use IFRS in year
t’s financial report. In the first step, we code Mandatory it as one for firms that are
listed on stock exchanges regulated by the EU and prepare consolidated financial
statements. These firms are specifically required to adopt IFRS by the EU adoption
mandate (COM 2002). We use a list of companies listed on EU-regulated capital
markets provided by ESMA in Registers Portal and we use consolidation
designation provided by Worldscope. The list is available since June 2007 (our
fiscal year 2006). We match the firm lists for each fiscal year and we match
ESMA’s 2006 list with our sample year 2005 assuming that not many firms
changed their regulated status between these years. We match 4,885 firms (from
our initial sample of 8,107 firms), which we define as regulated in years in which
they were listed in ESMA’s database. Next we include firms from individual
countries, which according to country-specific IFRS implementation options ESMA’s
Mandatory it (published by the EU) were also required to adopt IFRS (for example, all public Registers
companies in Cyprus were required to follow IFRS in all sample years). Country- Portal
specific requirements are frequently limited to individual industries (e.g., insurance
or financial companies), to publicly listed firms, or to all firms preparing
consolidated financial statements. Next, we code Mandatory it as zero for firms not
required to follow IFRS in year t. We replace values of Mandatory it with zero if the
firms are excluded from the mandate at the country level (usually in specific
industries), or if they could apply any of the exemptions or IFRS adoption deferrals
provided by the European Union’s mandate and country-specific implementation
options (e.g., firms trading only debt securities or firms using US GAAP could
defer the adoption until 2007). We designate these options using firm’s primary
SIC codes, prior year’s accounting standards, and presence of equity (as opposed to
only debt financing). We also designate each year t to include firm-years with fiscal
years starting on or after January 1st of year t and before January 1st of year t+1, as
this is the terminology used in the EU’s mandate.
The value of the variable is the number of SIC codes reported for a given firm in
Diverse i SICCode data item in Worldscope (composed of eight data fields from 07021 Worldscope
through 07028).
Country-level indicator variable equal to one if firm i’s country (j) does not allow
Not_allow j COM 2013
the use of IFRS after year 2005 for a subset of country j’s firms.
Country-level indicator variable equal to one if firm i’s country (j) allowed
Permit_Pre j COM 2013
adoption of IFRS prior to 2005.
World Bank:
RegQ jt , regulatory quality variable from Kaufmann et al. (2009), is as “an index
Worldwide
capturing the ability of the government to formulate and implement sound policies
RegQ jt Governance
and regulations” (Christensen et al. 2016). We collect values of RegQ jt from
Indicators
Kaufmann et al. (2009) for each country-year in our sample.
Database
JR_enf j is a proxy for resources invested in enforcement of securities laws in a Jackson and
JR_enf j
given country. We define it as the natural logarithm of the enforcement agency’s Roe, 2009
51

budget per billion of GDP (USD). The variable is based on Jackson and Roe
(2009).
An indicator variable equal to one for countries which implemented enforcement Christensen et
IFRS_enf j
reforms around IFRS adoption (Christensen et al. 2013). al. (2013)
Country-level indicator variable capturing the feasibility of short-selling in firm i’s Charoenrook
SS_feasible j country (j) as reported in Charoenrook and Daouk (2005). The data are based on a and Daouk
survey of 111 capital markets and derivatives exchanges in year 2002. (2005)
Ln_size it is a proxy for firm size. Ln_size it is calculated as the natural logarithm of
Ln_size it market capitalization (USD) for firm i at the end of year t. The variable has been Worldscope
truncated at 1% and 99%.
Indicator variable equal to one if firm i issued stock in year t. The variable is based
Stock_iss it on sale or issuance of common and preferred, sale or issuance of common, and sale Worldscope
or issuance of preferred data items from Worldscope.
Indicator variable equal to one if firm i issued debt in year t. The variable is based
Debt_iss it on total debt issued, long-term debt issued, and short-term debt issued data items Worldscope
from Worldscope.
Num_cross i is the number of countries where firm i is listed (individual exchange
Num_cross i codes used to create this variable are based on the stock exchange(s) listed data Worldscope
from Worldscope).
US_list i is an indicator variable equal one for firms cross-listed on at least one US
US_list i stock exchange. We code firms as cross-listed in the US based on Stock Exchanges Worldscope
Listed data item from Worldscope.
An indicator variable equal to one if a firm was directly involved in foreign
Foreign_
operations, i.e., if a firm reported foreign assets, foreign sales, or foreign income in Worldscope
ops it
year t.
IBES and
Thomson
Analyst it Indicator variable equal to one for firms followed by analysts, zero otherwise.
Reuters
Financials
Country-level proxy for similarity between local reporting standards and IFRS
based on Bae et al. (2008) study. SIM j is equal to the natural logarithm of the sum
Bae et al.,
SIM j of individual differences between specific accounting standards and IFRS
2008
multiplied by -1 (higher values of SIM indicate that local reporting standards are
more similar to IFRS).
Variable equals 1 for countries identified in the GAAP Convergence 2002 (BDO et BDO et al.,
Tax j
al. 2003) report as having tax-driven nature of the National Accounting Regime. 2003
Industry Standard errors in all regression analyses are clustered by industry. Industry
Worldscope
Clustering indicator variables are based on Fama-French twelve industries.
52

Appendix B: A Comparison of Mandatory IFRS Adopters, Non-Mandatory IFRS
Adopters, and Non-Adopters: Does Sample Selection Matter?
Many papers do not make a distinction between IFRS and non-IFRS users in the
mandatory-IFRS period, although such a distinction is empirically possible. 28 Instead, some
studies ignore non-adopters. 29 For example, Cascino and Gassen (2010, addressing the
comparability of accounting information) and Landsman et al. (2012, addressing the information
content of earnings announcements) define IFRS adopters as firms domiciled in countries which
mandated IFRS in 2005. Chen et al. (2010, examining accounting quality) and Callao and Jarne
(2010, examining earnings management) do not distinguish between firms using IFRS and local
reporting standards post-2005. These papers split samples into pre-IFRS and IFRS periods based
on the year of the financial report. Papers using this method either do not mention non-adopters
or state that non-adopters could use local reporting standards because they were Small and
Medium Entities (SMEs) (Yu 2010). However, the EU regulation does not exempt SMEs from
adopting IFRS (COM 2002).
Other studies limit the samples of IFRS adopters to firms which were using IFRS in 2005
and non-IFRS reporting standards in 2004 (e.g., DeFond et al. 2011; Lang et al. 2010; Byard et
al. 2011). Although this method limits the sample to IFRS adopters, it may contain voluntary
IFRS adopters, which were not subject to the EU regulation but chose to voluntarily adopt IFRS
in 2005. 30 In the referenced studies, the sample selection criteria assure exclusion of IFRS non-
28
The European Securities and Markets Authority (ESMA) is an EU agency responsible for keeping a list containing
all firms whose shares are admitted to trading in EU-regulated markets. The list, available in ESMA’s Registers
Portal, is available since June 2007 (our fiscal year 2006).
29
In this appendix we focus on adopters vs. non-adopters from countries mandating IFRS. Please see De George et
al. (2016) for an overview of sample selection choices made in prior studies of the effects of IFRS and Hitz et al.
(2015) for WS-specific sample selection issues in difference-in-difference studies of IFRS adoption effects.
30
Voluntary IFRS adopters in these studies include adopters form countries that do not require IFRS and pre-2005
EU adopters. In our study we distinguish between pre-2005 and post-2005 voluntary IFRS adopters.
53

adopters post-2005, but do not address whether the samples are representative of the population
of EU firms or of mandatory 2005 IFRS adopters. 31
Other mandatory IFRS adoption studies exclude firms for which IFRS adoption could be
deferred and firms which were exempt from IFRS reporting. Armstrong et al. (2010, examining
the market reaction to IFRS regulation) list exemptions and deferrals from IFRS reporting in the
EU, such as the deferral for firms trading only debt securities and firms which were already
using internationally accepted accounting standards. However, the authors are silent on the issue
of adoption or non-adoption after 2005 as their study period ended before 2005. Christensen et
al. (2015, addressing accounting quality) and Atwood et al. (2011, addressing the forecasting
ability of financial numbers) exclude from their samples firm-years without consolidated
financial statements, but do not indicate whether there are any non-IFRS and non-US GAAP
users in their mandatory IFRS samples.
Only a few papers mention firms using local reporting standards after 2005 in the EU.
For example, Jeanjean and Stolowy (2008) provide a table with fiscal year ends for first-time
IFRS adopters from France and the UK, and note that IFRS adoption in 2005 “corresponds to the
first application in most of the firms studied” (Jeanjean and Stolowy 2008, p.486). Based on this
study readers can infer that the first-time adoptions of IFRS are dispersed through time. Aharony
et al. (2010) exclude firms with Datastream’s “Domestic Adjusted” reporting standards after
2005 from their sample, but they do not report how many such firms were in the initial sample or
the reasons for non-adoption of IFRS. Li (2010) defines mandatory adopters as firms using non-
IFRS reporting standards prior to 2005 and not exempt from IFRS until 2007, but does not report
31
The Brüggemann et al. (2013) review paper compares sample sizes of a few mandatory IFRS studies using EU data. These
studies include all firms with equity traded in the EU, “required” to prepare their consolidated financial statements using IFRS.
The Committee of European Securities Regulators (2007, CESR) study included more than five thousand firms, but Daske et al.
(2008) use only 2,000 firms, DeFond et al. (2011) use 1,618 firms, Horton et al. (2010) use 1,898 firms, and Landsman et al.
(2012) use 1,465 firms.31These relatively small samples are unlikely to be representative of all EU firms or all EU IFRS adopters.
54

how many firms are excluded due to the non-exemption selection criterion. Table 1A of Daske,
Hail, Leuz, and Verdi (2008) provides a breakdown of their initial sample by country and IFRS
adoption status (early voluntary, late voluntary, or first-time mandatory), but the sum of early,
late, and mandatory adopter firm-years is not the number of unique firms for some of the EU
countries (e.g. France, the UK, Sweden, Spain). Finally, Yu (2010) explains the existence of
non-IFRS users post-2005 with the IFRS exemptions for SMEs and adoption deferrals. Table 1
in Yu (2010) shows that IFRS adoption for the EU countries ranges from 24% (the UK) to 96.9%
(Greece) in 2005. In 2007 the IFRS adoption ranges from 52% (France) to 100% (Finland,
Greece).
Few papers acknowledge that some EU firms avoided adopting IFRS subsequent to the
2005 mandate, but Brüggemann et al. (2013) point out the lack of evidence on strategies firms
used to avoid IFRS reporting. Among the strategies suggested in the paper are: delisting from
EU-regulated markets, preparing unconsolidated financial reports, and moving to a non-EU
country.
Based on the review of prior literature examining consequences of mandatory IFRS
adoption and the results from this study, it is necessary to determine if the lack of detailed
sample specification affects inferences made in IFRS-related studies. We examine this issue by
comparing firm characteristics and simple accounting quality metrics separately for subsamples
of EU firms defined by their IFRS-adoption status. We examine a sample of firms that adopted
IFRS in 2005 and were required to do so by the EU or by country-specific IFRS implementation
rules (Mandatory 2005 Adopters), a sample of firms which adopted IFRS in 2005 but were not
specifically required to do so (Voluntary 2005 Adopters), and a sample of firms which had not
adopted IFRS between fiscal years 2001 and 2008 (IFRS Non-Adopters). We chose 2001 as the
55

beginning year because it is the year since when firms following IFRS had to implement all of
the standards in order to state that they were using IFRS and we chose 2008 as the last year to
avoid the contamination of our results by the crisis period (the economic crisis started affecting
European countries in mid-2009). We exclude firms adopting IFRS in years other than 2005.
Table B1 panel A presents a number of firm characteristics for our three samples.
Specifically, the first (second) row for each variable reports characteristics for the pre-2005
(2005 through 2008) period. All of these reported measures differ significantly between
mandatory 2005 adopters and non-adopters, and six of the ten differ between mandatory 2005
adopters and voluntary 2005 adopters. On average, mandatory 2005 IFRS adopters are more
profitable, with slower sales growth, higher sales, higher total assets, higher leverage, less widely
held equity, etc. Based on this evidence, we conclude that pooling the non-adopters or voluntary
2005 adopters with the 2005 mandatory adopters in samples of all EU firms may introduce noise
in most empirical estimations, although this conclusion should be interpreted with caution
because some of the differences may be driven by systematic differences in the way accounting
variables are measured under IFRS and local GAAP.
[Insert Table B1 About Here]
Panel B compares several common earnings quality measures: correlation between
accruals and operating cash flows, smoothness, nearness to cash, timeliness, conservatism, and
value relevance for the three samples of firms. 32 The results indicate that mandatory 2005
adopters experience improvements in more accounting quality measures than voluntary 2005
adopters or non-adopters. Similarly to the sample characteristics’ comparison in panel A, these
32
To calculate the measures that require lagged values of financial variables in the first IFRS year (2005) we use
lagged values restated to IFRS (based on the Thomson ONE “as restated” data). Significance in Panel B is based on
coefficient significance and for non-coefficient measures on bootstrapped empirical distributions.
56

results suggest that mandatory 2005 IFRS adopters should not be mixed with voluntary 2005
IFRS adopters or non-adopters in analyses of the effects of IFRS adoption on EU firms.
The choice of which firms to include in a sample is important for studies on the effect of
IFRS. Researchers should sample selectively, and the extent of selectivity depends on the
questions addressed. Studies that examine the effect of mandatory IFRS adoption on reported
accounting numbers need to determine if the sample should include all firms adopting IFRS
during the mandatory adoption period or only firms that were de facto mandatory adopters.
Mandatory IFRS adoption affects firms that adopt IFRS mandatorily or voluntarily, as well as
those that do not adopt IFRS, but the effects are likely different for each group of firms. Also,
country-level oversight may be limited to only the mandatory adopters, so the costs of
implementation likely differ for mandatory and voluntary adopters.
Although a more specific sample selection requires the use of ESMA databases and
country-specific IFRS implementation options, it provides opportunities by allowing researchers
to examine the effect of IFRS adoption on different types of firms. 33 Specifically, the EU IFRS
adoption provides in-country control samples of both non-mandatory adopters and non-adopters
that coexist in the same time period, although the differences between mandatory adopters and
control samples of non-mandatory adopters and non-adopters should be interpreted with caution
due to the differences documented in panel A of table B1. Moreover, presence of firms following
different reporting standards allows for examination of externalities from IFRS adoption for non-
adopters within the same countries. Finally, availability of voluntary and mandatory adopters
allows for examination of differences in the quality of IFRS implementation across different
33
WS provides accurate data on reporting standards and consolidation, so in connection with ESMA’s publicly-available data
WS is sufficient for specification of EU mandatory and voluntary IFRS adopters and non-adopters.
57

types of firms in countries with varying levels of enforcement quality. While these tests are
outside of the scope of our study, they provide an interesting avenue for future research. 34
34
A recent review of the literature examining IFRS adoption by De George et al. (2016) provides a useful description of samples
used by various studies and limitations inherent in some sample-selection choices.
58

Table B1: Comparison of non-IFRS users, 2005 mandatory IFRS adopters, and 2005 voluntary IFRS adopters.
Panel A: Comparison of firm characteristics.
Voluntary 2005 Adopters IFRS Non-Adopters Mandatory 2005 Adopters

Characteristic N μ σ Sig. N μ σ Sig. N μ σ Sig.
pre 2556 0.25 0.80 2481 0.28 1.04 8029 0.23 0.65
Sales_Growth it N [***] *** [***] ***
post 2575 0.22 0.89 3648 0.38 1.30 8279 0.15 0.60
pre 2652 -0.03 0.20 2656 -0.04 0.22 8189 0.01 0.13
ROA it *** [***] N [***] ***
post 2698 -0.01 0.18 4107 -0.04 0.23 8360 0.03 0.11
pre 2322 0.19 0.23 2220 0.11 0.19 7611 0.22 0.23
Lev it N [***] *** [***] N
post 2450 0.20 0.23 3553 0.09 0.17 8054 0.22 0.23
pre 2730 0.22 0.30 3023 0.05 0.19 8306 0.23 0.31
Int_sales it *** [N] *** [***] ***
post 2725 0.24 0.32 4625 0.04 0.16 8384 0.25 0.31
pre 2696 30.23 29.84 2874 23.64 30.57 8225 33.82 31.61
Close it ***[***] *** [***] N
post 2688 27.79 28.52 4298 15.15 26.80 8380 34.38 31.18
pre 2752 1.27 0.69 3052 1.10 0.44 8341 1.22 0.69
Num_Exch i N [***] *** [***] N
post 2744 1.26 0.69 4658 1.07 0.36 8410 1.21 0.69
pre 2707 1132.38 2975.83 3009 133.19 802.09 8206 1385.08 4114.04
Sales it *** [N] N [***] ***
post 2701 1523.64 3877.28 4493 157.06 1025.14 8195 1621.73 4310.89
pre 2717 2986.83 10900.00 2955 505.58 3813.65 8192 3019.51 10700.00
Total_Assets it * [*] N [***] ***
post 2698 3513.08 11800.00 4480 471.87 3787.37 8233 3982.49 12400.00
pre 2320 1157.95 3322.39 2209 260.87 1276.69 7595 1122.79 3529.67
Market_Cap it ***[N] N [***] ***
post 2456 1554.43 3805.69 3536 246.43 1172.64 7982 1524.14 4088.15
pre 2675 52.15 179.73 3019 9.41 79.10 8157 60.08 211.78
Net_Income it *** [N] N [***] ***
post 2656 93.76 267.88 4598 11.73 95.87 8075 92.76 256.12
59

Table B1 (continued)
Panel B: Comparison of Accounting Quality Proxies
Sample Voluntary Mandatory

IFRS Non-
2005 Sig. Sig. 2005 Sig.
Characteristic Adopters
Adopters Adopters
Corr (Accruals, CFO) N 1,494 1,433 5,955
Pre-2005 -0.15*** 0.07** *** -0.44***
N [***] N
N 2,112 1,929 [***] 7,270
Post-2005 -0.17*** -0.12*** -0.45***
Pre-2005 2,752 3,052 8,341
N
Var(NI) Post-2005 2,744 4,658 8,410
& Pre-2005 0.13 0.29 0.04
Var(NI) N [*] N [N] ***
Var(NI)/ Post-2005 0.29 0.35 0.02
/Var(CF) Var Pre-2005 0.23 0.22 0.50
N [***] N [*] N
(NI/CF) Post-2005 0.07 0.12 0.68
N 3,841 3,627 13,616
Near_Cash *** [**] N[***] ***
NI*Post 0.70 0.03 0.11
N 3,606 3,362 13,225
Timeliness & SPOS -0.03 N [N] -0.07 ** [N] -0.05 ***
Conservatism
LNEG -0.04 N [***] 0.02 N [***] -0.10 ***
N 1,308 1,199 4,584
Good Pre-2005 0.0024 0.0012 0.0012
N [N] N [N] N
news N 1,084 1,302 3,759
Post-2005 0.0066 0.0024 0.0004
Ni/P reg R2
N 838 743 2,659
Pre-2005 0.0315 0.0013 0.0084
Bad news N [N] N [N] N
N 1,176 1643 3,846
Post-2005 0.0162 0.0013 0.0045
N 2,168 2045 7,388
Pre-2005 0.3975 0.4622 0.3551
P reg R2 N [N] N [N] **
N 2,317 3297 7,633
Post-2005 0.4081 0.3880 0.4349
***, **, and * indicate statistical significance at 0.01, 0.05, and 0.10 levels; N indicates lack of statistical significance. The first
significance levels reported in the Sig. columns are from testing for a difference in the measure within a given sample between
2001-2004 and 2005-2008 periods. In square brackets we include significance levels from tests of differences between a given
sample (Voluntary 2005 Adopters or IFRS Non-adopters) and mandatory IFRS adopters in the 2005-2008 sample (i.e., IFRS
period). In Panel A, significance levels are estimated using t-tests. In Panel B: in the case of regression variables, the significance
levels are associated with the relevant coefficients (Timeliness, Conservatism, Near_Cash), and in the case of other variables,
they are estimated using bootstrap tests performed with 1000 repetitions. We evaluated firm characteristics and accounting
quality changes and differences for the following samples: Mandatory 2005 Adopters (mandatory adopters that adopted IFRS in
2005), IFRS Non-Adopters (firms that used non-IFRS reporting standards in fiscal years 2001-2008), and Voluntary 2005
Adopters (a set of firms which adopted IFRS in 2005 but were not specifically required to adopt IFRS). Variables from Panel A
include: Growth it , ROA it, Lev it, (defined in appendix A), Int_sales it (foreign sales), Close (percentage of closely held-shares),
Num_Exch (number of stock exchanges firm i is listed on), and Sales, Total_Assets, Market_Cap, and Net_Income represent
respective reported accounts (in millions USD). Our measures of accounting quality are based on Lang et al. (2003), Burgstahler
et al. (2006), Barth et al. (2008), Barton et al. (2010), and Pownall et al. (2014). These measures include: Corr (Accruals, CFO),
a correlation of accruals with cash flows (estimated following Barth et al. 2008); Var(NI) and Var(NI)/ /Var(CF), variances of
net income, and a ratio of variance of changes in net income to variance of changes in operating cash flows (calculated as in
Barth et al. 2008); Near_Cash, a proxy for nearness to cash based on Pownall et al. (2014). Timeliness and Conservatism proxies
are based on Barth et al. (2008) and Burgstahler et al. (2006). Ni/P reg R2 and P reg R2 are adjusted R2 from value relevance
regressions based on Barth et al. (2008).
60

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Deviations from the Mandatory Adoption of IFRS in the European Union:

Implementation, Enforcement, Incentives, and Compliance

*Corresponding author, Professor of Accounting, Goizueta Business School, Emory University,

Electronic copy available at: https://ssrn.com/abstract=1919805

Key Words: EU, IFRS, enforcement, reporting incentives.

JEL Classification: financial; empirical/archival

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specific IFRS adoption options.

In this paper, we document the incidence of non-adoption of IFRS in the EU in 2005

Electronic copy available at: https://ssrn.com/abstract=1919805

fallen since the EU’s mandatory adoption of IFRS, it is still nontrivial.

Next, we test whether common proxies for EU-wide and country-specific

implementation features, country-specific enforcement, and firm-specific reporting incentives

To focus on the incremental effects of enforcement and reporting incentives on adoption

Electronic copy available at: https://ssrn.com/abstract=1919805

for which adoption of IFRS was specifically required.

expected to be stronger enforcers of rigorous application of IFRS, creating both greater

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separating 2005 mandatory adopters from 2005 voluntary adopters.

investors and researchers making assumptions about EU firms’ choice of GAAP, to EU

considering whether and how to adopt IFRS.

2. The EU Adoption of IFRS and Hypothesis Development

2.1. Mandatory IFRS Regulation in the EU

Regulation No. 1606/2002, Article 4, requires that consolidated financial statements of

specifically requires consolidated financial statements to be prepared using IFRS, exempting

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listed on such markets.5

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[Insert Table 1 and Figure 1 About Here]

2.2. EU Enforcement Mechanisms

necessarily ESMA’s concern. 6

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country-level enforcement quality, and country-specific IFRS implementation options on the

choice of reporting standards in the mandatory IFRS adoption period.

2.3. Research Questions

Our empirical design seeks to address the following research questions:

by the IASB or IFRS as adopted by the EU?

specific weak enforcement; and/or (c) firm-specific reporting incentives?

specific non-adoption of IFRS as a function of implementation, enforcement, and incentive

specific IFRS implementation rules.

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requirement to adopt IFRS should be perfectly negatively correlated with non-adoption.

differences in accounting regulation outcomes associated with country-specific enforcement. For

implemented in EU countries with stronger enforcement (Christensen et al. 2016).

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enforcement countries may or may not be more likely to adopt IFRS.

have little impact on the choice of whether to adopt IFRS.

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(see De George et al. 2016 for a survey of IFRS literature).

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3. Initial Sample of Publicly Traded EU Firms and IFRS Adoption Status

Malta, Portugal, Slovakia, and Slovenia.

[Insert Table 2 About Here]

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954 (853) with consolidated financial statements.

deferrals as well as country-specific implementation that required single entity financial

comparisons in panel B to these exemptions, deferrals, and country-specific requirements, panel

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noncompliance declined from 2005 through 2012, it is still nontrivial.

4. Data, Empirical Design, and Multivariate Analysis

4.1 Sample Selection and Data

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