Increase in Leverage Driven by International Financial Reporting Standards Adoption

Abstract

Context: adoption of International Financial Reporting Standards (IFRS) in Brazil has improved corporate governance practices and information available to investors, providing greater transparency. Despite its mandatory effect, companies listed in B3 tiers (Novo Mercado and Level 2) were already accustomed to using it, allowing a comparison with firms affected by the law. Objective: analyze the influence of IFRS adoption on the capital structure of publicly traded Brazilian companies by comparing firms that only began to adhere to it by the new law (Regular and Level 1) with firms that adopted IFRS before it went into effect (Novo Mercado and Level 2). Method: we performed a quasi-experimental design via difference-in-difference (DID) estimator to compare leverage levels of firms segmented in treatment and control groups before and after IFRS. Conclusions: we found that the treatment group companies had higher market leverage after IFRS adoption, influenced by the greater information disclosure and, consequently, reduction of investors’ perception of risk. In addition, the differences between groups in DID analysis were influenced by the greater effect on market leverage for treated companies and on net indebtedness for the control ones. Furthermore, we confirmed the pecking order theory assumptions for most of the covariates.