The Cost of Regulatory Inaction: Evidence from IFRS Nonadoption

ABSTRACT

Although extensive research examines the costs and benefits of adopting new disclosure regulations, little addresses the consequences of regulatory inaction. We investigate whether firms in nonadopting countries incur additional information losses, beyond the forgone benefits, when their foreign peers adopt International Financial Reporting Standards (IFRS). Nonadopters bear an absolute liquidity cost as foreign peers adopt IFRS, consistent with negative externalities from IFRS and accompanying reforms. Exploiting heterogeneity across nonadopting countries, we observe more pronounced liquidity declines among firms with greater institutional ownership overlap with IFRS peers. This effect appears more pronounced when IFRS peers are domiciled in countries with concurrent enforcement reforms or greater comparability improvements. Further evidence shows shared intermediaries—investors and analysts—reduce information production for nonadopters as other firms in their portfolios adopt IFRS. Overall, regulatory inaction degrades information environments: resources shift to the new regime, worsening liquidity for firms in the old regime.

Data Availability: Data used in this study are available from commercial sources cited in the text.

JEL Classifications: G1; K22; M41; M48.