Does the adoption of Ind AS affect the performance of firms in India?

M N, Nikhil and Chakraborty, Suman and B M, Lithin and Lobo, Lumen Shawn (2023): Does the adoption of Ind AS affect the performance of firms in India? Published in: Investment Management and Financial Innovations , Vol. 20, No. 2 (8 May 2023): pp. 171-181.

Abstract

The increasing prevalence of IFRS adoption has resulted in enhanced transparency, accounting quality, and comparability of financial information among firms, especially in emerging markets worldwide, including India. Nonetheless, the question of whether the adoption of IFRS has led to improved firm performance persists. To address this question, this study examines the impact of transitioning from India’s GAAP-based accounting standards to IFRS-converged standards (Ind AS) on non-financial firms’ performance from 2013 to 2022. The empirical findings reveal that the convergence of Indian accounting standards with IFRS significantly improves firm performance, as demonstrated by a positive coefficient of 0.0166 for Ind AS in the fixed-effect model. The study also validates the original empirical findings using the return on equity (ROE) measure of firm performance, which yielded a coefficient of 0.0197, further confirming that the adoption of Ind AS leads to an increase in the performance of Indian firms. These results contribute new insights to the existing IFRS literature and have implications for policymakers and managers.

• Item Type: MPRA Paper
• Language: English
• Keywords: emerging market, firm profitability, fixed effect model, IFRS convergence, Nifty 500, panel data, return on assets
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M48 - Government Policy and Regulation

References

1. Abdullah, H., & Tursoy, T. (2021). Capital structure and firm performance: evidence of Germany under IFRS adoption. Review of Managerial Science, 15(2), 379-398. https://doi.org/10.1007/s11846-019-00344-5

2. Ahmed, A. S., Neel, M., & Wang, D. (2013). Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), 1344-1372. https://doi.org/10.1111/j.1911-3846.2012.01193.x

3. Al-Najjar, B., & Hussainey, K. (2011). Revisiting the capital-structure puzzle: UK evidence. Journal of Risk Finance, 12(4), 329-338. https://doi.org/10.1108/15265941111158505

4. Amare, A. (2021). Capital structure and profitability: Panel data evidence of private banks in Ethiopia. Cogent Economics and Finance, 9(1). https://doi.org/10.1080/23322039.2021.1953736

5. Asimakopoulos, I., Samitas, A., & Papadogonas, T. (2009). Firm-specific and economy wide determinants of firm profitability: Greek evidence using panel data. Managerial Finance, 35(11), 930-939. https://doi.org/10.1108/03074350910993818

6. Attia, E. F., Eldeen, H. hany E., & Daher, S. said. (2023). Size-Threshold Effect in the Capital Structure–Firm Performance Nexus in the MENA Region: A Dynamic Panel Threshold Regression Model. Risks, 11(2), 23. https://doi.org/10.3390/risks11020023

7. Baig, M., & Khan, S. A. (2016). Impact of IFRS on Earnings Management: Comparison of Pre-Post IFRS Era in Pakistan. Procedia – Social and Behavioral Sciences, 230, 343-350. https://doi.org/10.1016/j.sbspro.2016.09.043

8. Bansal, M. (2022). Economic consequences of IFRS convergence: evidence from phased manner implementation in India. Journal of Asia Business Studies. https://doi.org/10.1108/JABS-10-2021-0414

9. Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of Accounting Research, 46(3), 467-498. https://doi.org/10.1111/j.1475-679X.2008.00287.x

10. Bassemir, M., & Novotny-Farkas, Z. (2018). IFRS adoption, reporting incentives and financial reporting quality in private firms. Journal of Business Finance and Accounting, 45(7-8), 759-796. https://doi.org/10.1111/jbfa.12315

11. Chen, H., Tang, Q., Jiang, Y., & Lin, Z. (2010). The role of international financial reporting standards in accounting quality: Evidence from the European Union. Journal of International Financial Management and Accounting, 21(3), 220-278. https://doi.org/10.1111/j.1467-646X.2010.01041.x

12. Cheong, C., & Hoang, H. V. (2021). Macroeconomic factors or firm-specific factors? An examination of the impact on corporate profitability before, during and after the global financial crisis. Cogent Economics and Finance, 9(1). https://doi.org/10.1080/23322039.2021.1959703

13. Daske, H., Hail, L., Leuz, C., & Verdi, R. (2008). Mandatory IFRS reporting around the world: Early evidence on the economic consequences. Journal of Accounting Research, 46(5), 1085-1142. https://doi.org/10.1111/j.1475-679X.2008.00306.x

14. Daske, H., Hail, L., Leuz, C., & Verdi, R. (2013). Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions. Journal of Accounting Research, 51(3), 495-547. https://doi.org/10.1111/1475-679X.12005

15. Egbunike, C. F., & Okerekeoti, C. U. (2018). Macroeconomic factors, firm characteristics and financial performance: A study of selected quoted manufacturing firms in Nigeria. Asian Journal of Accounting Research, 3(2), 142-168. https://doi.org/10.1108/AJAR-09-2018-0029

16. Evans, D. S., & Schmalensee, R. (2005). The Industrial Organization of Markets with Two-Sided Platforms (Working paper 11603).

17. Feldstein, M. (1997). The Costs and Benefits of Going from Low Inflation to Price Stability. Retrieved from http://www.nber.org/chapters/c8883

18. Gajevszky, A. (2015). Assessing Financial Reporting Quality: Evidence from Romania. Audit Financiar, 13(121).

19. Gu, J. (2021). Voluntary IFRS adoption and accounting quality: Evidence from Japan. Economic Research-Ekonomska Istrazivanja, 34(1), 1985-2012. https://doi.org/10.1080/1331677X.2020.1860793

20. Hasan, T., Karim, W., & Quayes, S. (2008). Regulatory change and the quality of compliance to mandatory disclosure requirements: Evidence from Bangladesh. Research in Accounting Regulation, 20(C), 193-203). https://doi.org/10.1016/S1052-0457(07)00211-1

21. Hawawini, G., Subhramanian, V., & Verdin, P. (2003). The relative importance of country, industry and firm effects on firm performance. Retrieved from https://www.researchgate.net/publication/241763521

22. Hope, O.-K., Jin, J., Kang, T., Hope, O.-K., & Jin, J. (2006). Empirical evidence on jurisdictions that adopt IFRS. Journal of International Accounting Research, 5(2). Retrieved from https://ink.library.smu.edu.sg/soa_research_smu

23. Houqe, M. N., Monem, R. M., & Zijl, T. van. (2016). The economic consequences of IFRS adoption: Evidence from New Zealand. Journal of International Accounting, Auditing and Taxation, 27, 40-48. https://doi.org/10.1016/j.intaccaudtax.2016.10.001

24. Iatridis, G. (2008). Accounting disclosure and firms’ financial attributes: Evidence from the UK stock market. International Review of Financial Analysis, 17(2), 219-241. https://doi.org/10.1016/j.irfa.2006.05.003

25. Iatridis, G., & Dalla, K. (2011). The impact of IFRS implementation on Greek listed companies: An industrial sector and stock market index analysis. International Journal of Managerial Finance, 7(3), 284-303. https://doi.org/10.1108/17439131111144478

26. Ismail, W. A. W., Kamarudin, K. A., Van Zijl, T., & Dunstan, K. (2013). Earnings quality and the adoption of IFRS-based accounting standards: Evidence from an emerging market. Asian Review of Accounting, 21(1), 53-73. https://doi.org/10.1108/13217341311316940

27. Issah, M., & Antwi, S. (2017). Role of macroeconomic variables on firms’ performance: Evidence from the UK. Cogent Economics and Finance, 5(1). https://doi.org/10.1080/23322039.2017.1405581

28. Key, K. G., & Kim, J. Y. (2020). IFRS and accounting quality: Additional evidence from Korea. Journal of International Accounting, Auditing and Taxation, 39. https://doi.org/10.1016/j.intaccaudtax.2020.100306

29. Killins, R. N. (2020). Firm-specific, industry-specific and macroeconomic factors of life insurers’ profitability: Evidence from Canada. North American Journal of Economics and Finance, 51. https://doi.org/10.1016/j.najef.2019.101068

30. Le, T. P. V., & Phan, T. B. N. (2017). Capital structure and firm performance: Empirical evidence from a small transition country. Research in International Business and Finance, 42(June), 710-726. https://doi.org/10.1016/j.ribaf.2017.07.012

31. Le Thi Kim, N., Duvernay, D., & Le Thanh, H. (2021). Determinants of financial performance of listed firms manufacturing food products in Vietnam: regression analysis and Blinder–Oaxaca decomposition analysis. Journal of Economics and Development, 23(3), 267-283. https://doi.org/10.1108/jed-09-2020-0130

32. Majumdar, S. K. (1997). The Impact of Size and Age on Firm-Level Performance: Some Evidence from India. Review of Industrial Organization, 231-241. https://doi.org/10.1023/A:1007766324749 33. Marra, A., Mazzola, P., & Prencipe, A. (2011). Board monitoring and earnings management pre- and post-IFRS. International Journal of Accounting, 46(2), 205-230. https://doi.org/10.1016/j.intacc.2011.04.007

34. McDonald, J. T. (1999). The determinants of firm profitability in Australian manufacturing. Economic Record, 75(2), 115-126. https://doi.org/10.1111/j.1475-4932.1999.tb02440.x

35. Mensah, E. (2021). The effect of IFRS adoption on financial reporting quality: evidence from listed manufacturing firms in Ghana. Economic Research-Ekonomska Istrazivanja, 34(1), 2890-2905. https://doi.org/10.1080/1331677X.2020.1860109

36. Meshram, V. V., & Arora, J. (2021). Accounting constructs and economic consequences of IFRS adoption in India. Journal of International Accounting, Auditing and Taxation, 45. https://doi.org/10.1016/j.intaccaudtax.2021.100427

37. Miah, M. S. (2021). Does IFRS convergence bring improvement in firm performance? An empirical analysis. Journal of Chinese Economic and Business Studies, 19(1), 95-107. https://doi.org/10.1080/14765284.2020.1846010

38. Nanda, S., & Panda, A. K. (2018). The determinants of corporate profitability: an investigation of Indian manufacturing firms. International Journal of Emerging Markets, 13(1), 66-86. https://doi.org/10.1108/IJoEM-01-2017-0013

39. Niresh, J. A., & Velnampy, T. (2014). Firm Size and Profitability: A Study of Listed Manufacturing Firms ed Manufacturing Firms in Sri Lanka. International Journal of Business and Management, 9(4). https://doi.org/10.5539/ijbm.v9n4p57

40. Pandey, I. M. M. (2001). Capital Structure and the Firm Characterstics: Evidence from an Emerging Market. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.300221

41. Pattitoni, P., Petracci, B., & Spisni, M. (2014). Determinants of profitability in the EU-15 area. Applied Financial Economics, 24(11), 763-775. https://doi.org/10.1080/09603107.2014.904488

42. Pervan, M., Pervan, I., & Ćurak, M. (2019). Determinants of firm profitability in the Croatian manufacturing industry: evidence from dynamic panel analysis. Economic Research-Ekonomska Istrazivanja, 32(1), 968-981. https://doi.org/10.1080/1331677X.2019.1583587

43. Phan, D., Joshi, M., & Mascitelli, B. (2018). What influences the willingness of Vietnamese accountants to adopt International Financial Reporting Standards (IFRS) by 2025? Asian Review of Accounting, 26(2), 225-247. https://doi.org/10.1108/ARA-03-2017-0052

44. Rumelt, R. P. (1991). How much does industry matter? Strategic Management Journal, 12(3), 167-185. https://doi.org/10.1002/smj.4250120302

45. Saif-Alyousfi, A. Y. H., Md-Rus, R., Taufil-Mohd, K. N., Mohd Taib, H., & Shahar, H. K. (2020). Determinants of capital structure: evidence from Malaysian firms. Asia-Pacific Journal of Business Administration, 12(3-4), 283-326. https://doi.org/10.1108/APJBA-09-2019-0202

46. Saji, T. G. (2022). Asymmetric financial reporting quality and firm size: conditional evidence from an emerging market. Journal of Applied Accounting Research, 23(5), 977-1004. https://doi.org/10.1108/JAAR-10-2021-0264

47. Saravanan, R., & Firoz, M. (2022). The impact of IFRS convergence on market liquidity: evidence from India. Journal of Financial Reporting and Accounting. https://doi.org/10.1108/JFRA-02-2022-0055

48. Spanos, Y. E., Zaralis, G., & Lioukas, S. (2004). Strategy and industry effects on profitability: Evidence from Greece. Strategic Management Journal, 25(2), 139-165. https://doi.org/10.1002/smj.369

49. Taouab, O., & Issor, Z. (2019). Firm Performance: Definition and Measurement Models. European Scientific Journal ESJ, 15(1). https://doi.org/10.19044/esj.2019.v15n1p93

50. Tsiapa, M. (2021). Performance of large firms in Greece during the unstable period of 2011–2016: lessons from the weak parts of Europe. European Journal of Management and Business Economics. https://doi.org/10.1108/EJMBE-06-2019-0109

51. Tsiapa, M. (2022). Performance of large firms in Greece during the unstable period of 2011–2016: lessons from the weak parts of Europe. European Journal of Management and Business Economics, 31(1), 94-114. https://doi.org/10.1108/EJMBE-06-2019-0109

52. van Tendeloo, B., & Vanstraelen, A. (2008). Earnings management and audit quality in Europe: Evidence from the private client segment market. European Accounting Review, 17(3), 447-469. https://doi.org/10.1080/09638180802016684

53. Yazdanfar, D. (2013). Profitability determinants among micro firms: Evidence from Swedish data. International Journal of Managerial Finance, 9(2), 151-160. https://doi.org/10.1108/17439131311307565