The Influence of Voluntary International Financial Reporting Standards on Information Asymmetry in the Stock Market: Case of Japan

The International Financial Reporting Standards (IFRS) exert a considerable influence on investor decision-making by providing valuable information. Nonetheless, the adoption of IFRS, whether mandatory or voluntary, can have significant implications. The impact of voluntary IFRS adoption on information asymmetry in stock markets has not been thoroughly examined, especially in recent years, despite the fact that several countries permit or prohibit voluntary adoption.

Previous research on voluntary IFRS adoption has produced mixed results. Initial studies in Germany, where local accounting standards diverge significantly from IFRS, suggest that voluntary adopters exhibit lower levels of information asymmetry in the stock market compared to non-adopters. However, international comparisons yield inconsistent results. Therefore, it is imperative to comprehend how voluntary IFRS adoption affects information asymmetry, especially in countries where local accounting standards are relatively similar to IFRS.

This study focuses on Japan, a country where local accounting standards have substantially converged with IFRS. However, Japan employs a rules-based approach in the implementation process, which differs from IFRS’s principles-based approach. This variance may have implications for the stock market, and understanding these implications is the primary objective of our research.

The research findings reveal that voluntary IFRS adoption, particularly among small- and medium-sized firms in Japan, leads to increased information asymmetry in the stock market. This increase is driven by the decreased earnings quality of firms after IFRS adoption, indicating that the transition from a rules-based to principles-based approach influences information asymmetry in the stock market.

This study makes valuable contributions to existing literature by expanding the understanding of the effects of IFRS adoption, particularly in the context of voluntary adoption. The findings also shed light on the consequences of IFRS adoption on earnings quality, specifically emphasizing the impact on small- and medium-sized firms.

In conclusion, the results of this study have implications for policymakers and investors, especially in countries where local accounting standards have converged with IFRS but have a more rules-based approach. Understanding the effects of voluntary IFRS adoption is essential for decision-making and regulatory considerations.

This study offers a significant contribution to the understanding of the impact of voluntary IFRS adoption on information asymmetry in the stock market, with a specific focus on Japan. The findings provide valuable insights for investors and policymakers, offering a better understanding of the implications of voluntary IFRS adoption.