Accounting choices under ifrs and their effect on over-investment in capital expenditures

 
 
38
This result would also mitigate the concern that the reduction in over-investment after 
IFRS
adoption is 
an effect attributed to the economic downturn. 

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37 
CHAPTER VI 
CONCLUSION
In this study, I examine the effect of firms’ accounting choices for 
PPE
on over-
investment after 
IFRS
mandatory adoption in the EU. My results indicate that EU firms 
that used historical cost accounting with impairment testing in the post-
IFRS
period 
exhibit lower over-investment following 
IFRS
adoption, consistent with EU firms having 
more timely loss recognition for 
PPE
under 
IFRS
strict impairment rules. In my analysis 
of UK firms, I argue that the existence of a positive revaluation reserve in the equity of 
firms that used fair-value accounting for 
PPE
creates slack that self-interested managers 
can opportunistically use to offset impairment losses on 
PPE
assets and delay the 
recognition of impairment losses in earnings. Hence, self-interested managers are likely 
to be more disciplined in their investment decisions under historical cost accounting with 
impairment testing than under fair-value accounting. Consistent with this argument, I find 
that UK firms that previously used fair-value accounting under UK GAAP and then 
switched to historical cost accounting with strict impairment rules under 
IFRS
exhibit 
greater reductions in over-investment relative to other EU firms that used historical cost 
accounting with impairment testing prior to 
IFRS
adoption. Furthermore, my results 
suggest that the effect on reducing over-investment after 
IFRS
adoption is more 
pronounced as the severity of agency conflicts increases, consistent with outside 
shareholders demanding timely loss recognition as a means of addressing agency 
conflicts with managers. 
The documented results in this study are subject to two caveats. First, the 
economic downturn in the EU is likely to affect managerial investment behavior and, 
thus, my results cannot be solely attributed to the accounting treatments under 
IFRS
. 
Second, as EU countries revise their institutional mechanisms (e.g., enforcement, 

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38 
auditing, and governance mechanisms) to support the adoption of 
IFRS
, it is likely that 
my results partly reflect the effect of the improvements in those mechanisms. 
With these two caveats in mind, my study demonstrates the importance of 
accounting choices that firms can make under 
IFRS
. My findings suggest that firms 
exhibit investment efficiency gains in terms of lower over-investment in 
PPE
after they 
chose historical cost accounting with strict impairment rules under 
IFRS
. Therefore, my 
findings emphasize the importance of retaining conservative accounting policies (i.e., 
more timely loss recognition) for measuring non-financial assets. Finally, accounting 
choices for non-financial assets under 
IFRS
may not only affect firms’ investment 
decisions as my study has shown, but could also affect other important firms’ decisions 
such as financing decisions. I leave that to future research.