The Cost of Regulatory Inaction: Evidence from IFRS Non-adoption

Numerous countries adopted IFRS in 2005 for a more detailed and comparable financial reporting regime. But many others did not. We study the consequences of regulatory inaction by non-adopting countries. We first show that IFRS adoption by other countries does not affect the liquidity of S&P 1500 US firms. Using S&P 1500 US firms as the control group, we find that the liquidity of firms in non-US countries that did not adopt IFRS significantly declined after the fourth quarter of 2005, suggesting a deteriorating information environment. To search for the forces behind the liquidity drop, we further show that analysts and institutional investors migrated away from non-adopting countries to adopting countries after 2005. Overall, our findings suggest that regulatory inaction can be costly – valuable information production resources can shift attention away to cover companies in the new regime, resulting in a worse information environment for companies that stay in the old regime