Research Seminars

Accounting Choices under IFRS and their Effect on Over-investment in Capital Expenditures

Speaker: Professor Mohamad MAZBOUDI
American University of Beirut

23 November 2012 - Room T004 - From 2.00 pm to 4.00 pm

IFRS allows firms to choose between fair-value accounting and historical cost accounting with impairment testing for property, plant and equipment (PPE). This study examines the effect of firms’ accounting choices for this group of non-financial assets on over-investment after IFRS mandatory adoption in the European Union (EU). My results indicate that over-investment in PPE (or capital expenditures) is lower following IFRS adoption among EU firms that used historical cost accounting with impairment testing in the post-IFRS period, consistent with EU firms having more timely loss recognition for PPE under IFRS strict impairment rules. In my analysis of United Kingdom (UK) firms, I find that most UK firms elected to use historical cost accounting with impairment testing for PPE after IFRS mandatory adoption. I also find that UK firms that previously used fair-value accounting under UK GAAP and then switched to historical cost accounting with impairment testing under IFRS exhibit greater reductions in over-investment relative to other EU firms that used historical cost accounting with impairment testing prior to IFRS adoption. Additional analysis suggests that the reductions in over-investment after IFRS mandatory adoption are greater as the severity of agency conflicts increases, consistent with outside shareholders demanding timely loss recognition as a means of addressing agency conflicts with managers.

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