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Internationa Financial Reporting Standards Implimintaiton in Paki...

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Internationa Financial Reporting Standards Implimintaiton in Pakistan Listed Countries

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Network Effects in Countries’ Adoption of IFRS*

Karthik Ramanna Harvard Business School kramanna@hbs.edu and Ewa Sletten MIT Sloan School of Management esletten@mit.edu

This draft: April 13, 2010 Original Draft: April 6, 2010

Abstract If a country’s accounting standards represent a political-economic equilibrium, why is that equilibrium for some countries shifting over time in favor of IFRS? We develop and test the hypothesis that network effects from the extant worldwide adoption of IFRS explain a country’s shift away from local accounting standards. That is, as more jurisdictions with economic ties to a given country adopt IFRS, perceived benefits from lowering transactions costs to foreign financial-statement users come to outweigh institutional differences (e.g., auditing technology) that make IFRS adoption costly. If true, the implication is that worldwide IFRS adoption is selfperpetuating. We find that perceived network benefits increase the degree of IFRS harmonization, although larger countries and countries less dependent on foreign trade have a differentially lower response to the IFRS network value. Also, benefits expected to accrue due to economic relations with the EU are a significant component of the perceived network value.

This paper is based, in part, on our manuscript, “Why do countries adopt IFRS?” We thank S.P. Kothari, Sugata Roychowdhury, and Thor Sletten for helpful comments on this paper. Financial support was provided by Harvard University and the Massachusetts Institute of Technology. Any errors are our responsibility.

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Network Effects in Countries’ Adoption of IFRS 1. Introduction The International Accounting Standards Board (IASB) was established in 2001 to develop International Financial Reporting Standards (IFRS). In the period from 2003 through 2008, nearly 50 countries (including the EU countries) mandated IFRS for all listed companies in their jurisdictions. Further, in that period, another 15 countries either...

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