Effect of Mandatory IFRS Adoption on Accounting-Based Prediction Models for CDS Spreads

Pepa Kraft, Wayne R. Landsman and Zilu Shan

European Accounting Review, 2021, vol. 30, issue 2, 223-250

Abstract: In this study, we examine the effects of mandatory IFRS adoption on accounting-based prediction models of CDS spreads for a sample of 292 firms in 16 countries. In our examination, we estimate the models for both financial and nonfinancial firms before and after mandatory IFRS adoption. We find that mean and median absolute percentage prediction errors are larger for both financial and non-financial firms after mandatory IFRS adoption. We also estimate accounting-based prediction models of CDS spreads separately for financial and non-financial US firms as a benchmark. Although US firms also show an increase in the mean and median absolute percentages of prediction errors over the same period, our findings from regressions that use a difference-in-difference design indicate that the increase is significantly greater for firms in countries that adopted IFRS mandatorily. We also find that in the post-adoption period, prediction errors are larger for firms in countries with weaker institutions such as low levels of property rights and more restrictive access to credit.

Date: 2021
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DOI: 10.1080/09638180.2020.1760116

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