Informativeness vs. Opportunism: Evidence from the Choice of GAAP for Parent Company Accounts of IFRS Adopters in the United Kingdom

Synopsis The research problem This paper investigates the choice between International Financial Reporting Standards (IFRS) and UK Generally Accepted Accounting Principles (UK GAAP) in parent company financial statements of U.K. firms in the mandatory IFRS adoption era. Motivation or theoretical reasoning The study is motivated by the European Union’s (EU) decision to allow member states the option to adopt IFRS for parent company accounts, leading to a mix of full IFRS adopters (using IFRS in both parent-level and consolidated reports) and partial adopters (using UK GAAP for parent-level reports while using IFRS for consolidated reports) within the United Kingdom. The underlying theory explores whether this choice is driven by managerial opportunism or by the desire to meet investors’ information needs. The test hypotheses The paper hypothesizes that partial adoption of IFRS is not primarily motivated by opportunism but is instead aimed at satisfying investors’ information demands, thus suggesting that full IFRS adoption may not be appropriate for all firms. Target population The study is relevant to researchers, regulators, and practitioners evaluating the appropriateness of allowing the choice among multiple sets of reporting standards for listed firms. Particularly, it addresses those concerned with how IFRS adoption variations impact U.K. firms’ information environment. Adopted methodology Utilizing a Machine Learning (ML) approach, specifically LASSO regressions, the study identifies predictors of reporting choices from more than 40 proxies related to financial reporting incentives. A difference-in-differences framework enriches the analysis to assess changes in U.K. firms’ information environment. Analyses The study first identifies characteristics differentiating partial adopters from full adopters using LASSO regression. It then examines the informativeness of financial statements through metrics like price synchronicity, bid-ask spreads, the frequency of zero-return trading days, and earnings announcement trading volumes before and after the mandatory IFRS adoption. Findings The findings reveal that partial adopters differ from full adopters mainly in aspects such as report length, multinationalism, industry, and audit features rather than financial or governance characteristics, suggesting that the choice of reporting standard is not driven by opportunism. The informativeness analysis indicates improvements in information quality for all firms, with partial and full adopters experiencing comparable changes, supporting the notion that firms tailor their level of IFRS commitment to meet investors’ information needs rather than to engage in managerial opportunism. This research contributes to understanding how regulatory choices impact financial reporting quality and offers insights into the motivations behind firms’ reporting standards choices in a regulated environment.