Founder ownership and value relevance of IFRS convergence: Role of institutional investors

R. Shruti and M. Thenmozhi

Pacific-Basin Finance Journal, 2023, vol. 79, issue C

Abstract: We examine how founder shareholders switch between alignment and entrenchment and thereby shape the value relevance impact of IFRS convergence. Using a sample of Indian firms adopting the IFRS converged standards in the first phase, we find that founder ownership affects the ability of IFRS to improve value relevance non-monotonically and this effect holds even after addressing the endogeneity concern in founder ownership. However, we find that the non-monotonic effect is limited to domestic owners and not foreign owners. Further analysis shows that the non-monotonic founder effect is present only in large-size firms and high-leverage firms which are experiencing higher equity adjustment post convergence. We also find that active(passive) institutional investors have a positive (negative) effect on the relationship between founder shareholding and IFRS impact suggesting that monitoring incentives rest with active investors and not passive investors. On solving for the turning points, we find that founders facilitate effective IFRS implementation only when they hold enough equity which qualifies as significant influence but not exceeding the super-majority level (around 60%), indicating an alignment effect. However, entrenchment prevails at extreme levels of founder shareholding leading to opportunistic IFRS implementation which deteriorates value relevance. Our results advocate that a minimum public shareholding at around 35% is desirable to promote financial transparency and disclosure.

Keywords: IFRS convergence; Value relevance; Founder shareholding; Institutional shareholding; Emerging markets (search for similar items in EconPapers)
JEL-codes: G14 G32 M41 M42 M48 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x23000550

DOI: 10.1016/j.pacfin.2023.101989

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