Office hours tomorrow (4pm ET April 7), University of Chicago Prof. Christian Leuz will be leading a discussion on international convergence.  Christian is in an excellent position to do this:  as I mentioned in this posting on research by Ramanna and Sletten, Christian is one of the authors of a literature review on international convergence–the ‘comprehensive and conclusive’ type that Katherine Schipper has argued is essential for assisting standard setters (see this post for more).  This should be a great session–please join us!  Details on getting to office hours can be found here.

Background reading suggestions after the break.

Start with the comment letter from the FASB.

Next, take a look at the review paper, which was submitted as an attachment to the comment letter:

Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors

Drawing on the academic literature in accounting, finance and economics, we analyze economic and policy factors related to the potential adoption of International Financial Reporting Standards (IFRS) in the U.S. We highlight the unique institutional features of U.S. markets to assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We discuss the compatibility of IFRS with the current U.S. regulatory and legal environment as well as the possible effects of IFRS adoption on the U.S. economy as a whole. We also consider how a switch to IFRS may affect worldwide competition among accounting standards and standard setters, and discuss the political ramifications of such a decision on the standard setting process and on the governance structure of the International Accounting Standards Board. Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit tradeoff between (1) recurring, albeit modest, comparability benefits for investors, (2) recurring future cost savings that will largely accrue to multinational companies, and (3) one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. We conclude by outlining several possible scenarios for the future of U.S. accounting standards, ranging from maintaining U.S. GAAP, letting firms decide whether and when to adopt IFRS, to the creation of a competing U.S. GAAP-based set of global accounting standards that could serve as an alternative to IFRS.

Then, two econometric papers by Christian and various co-authors, one on voluntary adoptions, and one on mandatory adoptions:

Adopting a Label: Heterogeneity in the Economic Consequences of IFRS Adoptions

This paper examines the economic consequences of voluntary IFRS adoptions around the world. In contrast to prior work, we focus on the heterogeneity in the consequences, recognizing that firms have considerable discretion in how they adopt IFRS. Some firms may simply adopt a label, while others view the decision as a serious commitment to transparency. We hypothesize that the economic consequences depend on the extent to which IFRS adoptions represent a serious commitment to transparency. Our results support this prediction. We classify firms into “label” and “serious” adopters and analyze whether capital markets respond to differences in adoption quality, using proxies for market liquidity and the cost of capital. We find that the average effects of voluntary IFRS reporting on these proxies are generally modest, especially when compared to other forms of commitment such as cross-listing in the U.S. However, consistent with our predictions, we find that “serious” adopters experience significantly stronger effects on the cost of capital and market liquidity than label adopters.

Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequence

This paper examines the economic consequences of mandatory IFRS reporting around the world. We analyze the effects on market liquidity, cost of capital and Tobin’s q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms’ cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects occur prior to the official adoption date. Partitioning our sample, we find that the capital-market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms’ reporting incentives and countries’ enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self-selection, the latter result cautions us to attribute the capital-market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries have made concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects.

I will save my opinions for during and after the event.