Andrew Hof

Date of Award

Spring 2019

Degree Name

Bachelor of Science (BS)

Advisor(s)

John Shon

Abstract

The purpose of this study is to determine whether a country’s adoption of International Financial Reporting Standards (IFRS) impacts the level of firm innovation for domestically filing public companies. Because IFRS allows firms to capitalize portions of development costs that are economically viable, firms from countries which previously required all research and development (R&D) costs to be expensed will be incentivized to increase their R&D expenditures after IFRS adoption. Essentially, accounting standards may be playing a role in a firm’s tendency to innovate. Defining innovation through a quantitative metric known as research quotient (RQ), a multivariate regression with the incorporation of an IFRS Adoption and Lagged R&D expense interaction term was used to determine if there is a statistically significant change in firm innovation post-IFRS adoption. RQ incorporates R&D expenditures into a firm’s production function to determine the output elasticity of R&D, creating a straightforward link between a firm’s R&D expenditures and the firm’s output, profits, and market value. This study examines countries that required IFRS accounting standards for domestically filing public companies prior to 2016. Countries are evaluated on an individual basis to determine if there is a statistically significant change after the adoption of IFRS, and these results are further aggregated by the legal system of countries to determine the role that code law and common law play in a firm’s tendency to innovate. Additional analysis is conducted based on the year of IFRS adoption. The results support the hypothesis that adoption of IFRS is associated with an increase of firm innovation for common law countries. Ultimately, this study seeks to demonstrate how accounting standards impact firm decision making in order to develop a deeper understanding of whether IFRS adoption stifles or encourages innovation.

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