Academic journal article Review of Business

Determinants of IFRS Voluntary Adoption in Emerging and Frontier Markets

Academic journal article Review of Business

Determinants of IFRS Voluntary Adoption in Emerging and Frontier Markets

Article excerpt


In this paper, we focus on the determinants of the voluntary International Financial Reporting Standards (IFRS) adoption decision by countries in emerging and frontier markets. Using logistic regression, we find that access to capital market, corporate governance, and strength of investor protection significantly affects emerging and frontier market countries' voluntary adoption of IFRS.

At the same time, economic growth, level of education, regulatory environment, and culture have no significant impact on these countries' decision to adopt the IFRS. We also conclude that adoption of IFRS by emerging and frontier market countries greatly benefits their domestic financial community.


Effective January 1, 2005, the European Parliament requires all companies listed on European Union (EU) countries' organized exchanges to prepare their consolidated financial statements using International Financial Reporting Standards (IFRS). Currently, there are over 150 countries around the world that require the use of IFRS to complete financial statements ( (1).

IFRS advocates assert that IFRS have multiple advantages over local accounting standards. First, IFRS enhance the quality of financial reporting, increase the comparability of financial statements, and hence benefit companies, investors, credit institutions, and auditors (Daske et al., 2008).

Second, according to Hail et al. (2010), adoption of IFRS exhibits positive impact on market efficiency and leads to indirect market benefits compared to the most local GAAP found in emerging and frontier markets and, therefore, is more useful to market participants (e.g., creditors, investors).

Third, use of IFRS reduces the choice of accounting methods and contributes to increasing the quality of accounting information, lessening information asymmetry between shareholders and managers and reducing cost of capital (Tendeloo and Vanstraelen, 2005; latridis, 2010).

Fourth, IFRS recognize a firm's underlying economic position; therefore, providing more relevant information for investment decisions (Barth et al., 2008).

Lastly, supporters of IFRS claim that harmonization of accounting standards through the universal adoption of IFRS increases comparability of firms across markets and countries, hence facilitating cross-border capital investment and integration of capital markets (e.g., Armstrong et al., 2010; DeFond et al., 2011).

In this paper, we focus on the voluntary IFRS adoption decision by countries in emerging and frontier markets as defined by economic development, size and liquidity, and market accessibility criteria as defined in Table 1. The next section reviews prior related empirical findings and elaborates on the motivation of our study. Section three describes research design, data and methodology. We discuss our findings in section four. Finally, section five presents our conclusions.

Theoretical Background and Motivation

The purpose of this study is to identify the major determinants for adopting International Financial Reporting Standards by countries in emerging and frontier markets. Previous empirical studies could be divided into two categories. While the first category of research focuses on the macroeconomic determinants of IFRS adoption, the second investigates the microeconomic determinants of IFRS adoption. Our study extends previous empirical investigations and takes into account macroeconomic, microeconomic, and institutional characteristics of an adopting country.

Most of the previous empirical work examines the accounting choices of developed countries. Leuz and Verrechia (2000) study the accounting choices of publicly traded German companies in late 1990s. Using a logistic regression analysis, the authors show how firm market capitalization, need for capital, and market performance explain the decision of adopting IFRS. …

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