Mandatory adoption of IFRS and timely loss recognition across Europe: The effect of corporate finance incentives

We examine whether firms have increased their timely loss recognition with the mandatory adoption of International Financial Reporting Standards (IFRS) across Europe since 2005. We estimate firm-specific asymmetric timeliness using the Khan and Watts (2009) C-score, which accounts for size, market-to-book, and leverage. We use firms that voluntarily adopted IFRS before the mandatory adoption date as a control sample to address the effect of unidentified confounding events. We find increased timely loss recognition relative to this control sample only among mandatory IFRS adopters with a higher cost of debt and in countries less dependent on private debt or bank financing. Our results are robust to controls for firm characteristics such as interest coverage, return on assets, earnings volatility, loss, accrual quality, beta, and growth, as well as both industry and country effects. We confirm that corporate finance incentives play a decisive role in determining firms' timeliness of loss recognition after mandatory IFRS adoption.