Impact of IFRS adoption on the disclosure of management forecasts by industry concentration

ABSTRACT

We aim to investigate the impact of the adoption of the International Financial Reporting Standards (IFRS) on a firm’s strategic voluntary disclosure decisions under different product market conditions. In the corporate world, firms tactically decide the level of voluntary disclosures considering their benefits, like resolving information asymmetry in the financial market, and costs, like providing proprietary information to their rivals. The adoption of IFRS has affected the demands in the financial market for complementary information, and therefore, it would affect the incentive to withhold corporate information in consideration of proprietary costs in the product market. Using a sample of Korean firms, we find that the likelihood of withholding management forecasts in concentrated industries is weaker in the post-IFRS adoption phase than in the pre-IFRS adoption phase. This is because there are greater demands for corporate disclosures for firms in concentrated industries in the post-IFRS adoption phase than earlier. Moreover, we find that the influence of IFRS on the decision of firms in concentrated industries to disclose management forecasts is significant only for firms with higher market power and higher financial leverage.

KEYWORDS:

• IFRS
• management forecast
• industry concentration
• product market power
• financial leverage

JEL CLASSIFICATION:

• M20
• M41
• D40
• L10

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Referring to Verrecchia (1983), the disclosure-related costs include the costs for preparing and disseminating information and proprietary costs.

² Many related studies set sample periods to include one to five years before and after adopting IFRS (Ahmed, Neel, and Wang 2013; De George, Li, and Shivakumar 2016; Key and Kim 2020; Kwon, Na, and Park 2019; Li and Yang 2016; Rhee, Yoo, and Cha 2016).

³ In our sample, 13% (9% and 3%) firm-years have sales (operating income and net income) forecasts.

4 We estimated the alternative regression model, Equation (2)(2) $FOR{E}_t\left(1\right)={\alpha }_0+{\beta }_{1}INDCO{N}_t+{\beta }_{2}IFR{S}_t+{\beta }_{3}INDCON\ast IFR{S}_t+{\beta }_{4}SIZ{E}_{t-1}+{\beta }_{5}LE{V}_{t-1}+{\beta }_{6}RO{A}_{t-1}+{\beta }_{7}DP{C}_{t-1}+{\beta }_{8}DISSU{E}_t+{\beta }_{9}FOLLO{W}_t+{\beta }_{10}BIG{4}_t+\sum yeardummies$(2) , which only includes the control variables that show the statistically significant association with the likelihood of releasing management forecasts. The test results for H1 to H3 are consistent to the results reported in subsection 4.2. The coefficients on the variable of interest, INDCON*IFRS, are overall larger than those on the main tests, and Max-rescaled R²s are slightly smaller than those of main tests.

(2) $FOR{E}_t\left(1\right)={\alpha }_0+{\beta }_{1}INDCO{N}_t+{\beta }_{2}IFR{S}_t+{\beta }_{3}INDCON\ast IFR{S}_t+{\beta }_{4}SIZ{E}_{t-1}+{\beta }_{5}LE{V}_{t-1}+{\beta }_{6}RO{A}_{t-1}+{\beta }_{7}DP{C}_{t-1}+{\beta }_{8}DISSU{E}_t+{\beta }_{9}FOLLO{W}_t+{\beta }_{10}BIG{4}_t+\sum yeardummies$(2)

⁵ We conduct the same analyses in testing H2 and H3. In testing H2, we find the supporting evidence only when the event years are set to 2011 and 2012. In testing H3, we find the supporting evidence only when the event year is set to 2011. These are untabulated for a simple documentation.

Additional information

Funding

This work was supported by INHA UNIVERSITY Research Grant.