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Research
May 26, 2017

Effect Of Mandatory IFRS Adoption On Accounting-Based Prediction Models For CDS Spreads

Abstract

This study examines the effects of mandatory IFRS adoption on accounting-based prediction models for CDS spreads for a sample of 357 firms in 16 IFRS-adopting countries. We do this by estimating accounting-based prediction models for CDS spreads separately for financial and non-financial 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 for CDS spreads separately for financial and non-financial US firms before and after mandatory IFRS adoption to obtain prediction errors serve that as a benchmark. Although US firms also exhibit an increase in mean and median absolute percentage prediction errors over the same period, findings from regressions using 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 low levels of and decreases in legal and regulatory quality.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.


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