Content area
Full text
ABSTRACT
This paper examines a comprehensive set of environmental characteristics based on Choi and Meek's (2008, CM) framework to explain international accounting system development, which we proxy by IFRS adoption. The main finding indicates that CM's framework is fairly descriptive. Factors relating to political and economic ties, reliance on foreign-sourced debt and common law legal systems create contracting incentives for adoption. Similarly, the need for capital investment evidenced by greater economic growth and capital formation, and higher literacy rates creates signaling incentives for adoption. However, other factors relating to size of capital markets, taxation, and inflation produce disincentives for adoption, which point to internal political and practical costs of converting current accounting systems to IFRS.
JEL Classifications: M40, M41, M48
Keywords: logistic regression; accounting system development; international financial reporting
I. INTRODUCTION
Based on a broad compilation of prior theoretical reasoning and empirical research, Choi and Meek (2008, CM) developed a model of accounting system development to explain observed differences in financial reporting worldwide. In CM's framework, eight factors in a country's environment are believed to have a significant influence on the differences found in accounting systems: major source of finance; legal systems; taxation; political and economic ties; inflation; economic development; education; and culture. International Financial Reporting Standards (IFRS) have been touted as high quality accounting standards that will enhance the value of accounting information across international borders. Over 100 countries now require or allow IFRS for domestic reporting1. In light of the increasing popularity of IFRS, we attempt to identify how the set of factors in CM's comprehensive framework plays into the decision.
Our sample consists of 73 countries based on survey of listing requirements from the period 2000 to 2007, supplemented and cross-checked with data from IASB and the World Bank Report on Country Observations of Standards and Codes (ROSC). Variables are constructed using data collected from the World Bank and other publicly available sources. These variables are then empirically tested in a general adoption model using random-effects logit regressions. Alternative specifications, including the addition of EU countries, and other analysis are discussed in robust section.
Section II provides a background of IFRS and accounting system development literature. Section III develops hypotheses and Section IV details the methodology and variable constructs. Section...