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

 
4.2 Main Results 
4.2.1 Test of H1 
Table C5 presents the multivariate results based on equation (4) of the effect on 
over-investment after 
IFRS
mandatory adoption for my total sample of 321 EU firms 
(2,568 firm-years) that predominantly used historical cost accounting with strict 
impairment rules following 
IFRS
adoption. If over-investment in 
PPE
is lower in the 
post-
IFRS
period relative to the pre-
IFRS
period due to the strict impairment rules under 
IFRS
, I expect a significantly negative 
β
3
coefficient on the interaction between 
IFRS
and 
OVER_INV
. Consistent with this prediction, the estimated 
β
3
coefficient is significantly 
negative (-0.3870; p < 0.01). The magnitude of 
β
3
coefficient suggests that when the 

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likelihood of over-investment is high, EU firms, on average, exhibit a reduction of 
approximately 11.5% in 
CAPEX
(capital expenditures) following 
IFRS
adoption.
34
The above finding provides support for my first hypothesis (H1). Following 
IFRS
adoption, over-investment in 
PPE
is lower among EU firms that used historical cost 
accounting with strict impairment rules under 
IFRS
. Regarding control variables, the 
results are generally consistent with prior literature (e.g., Biddle and Hilary 2006). Firms 
that are larger, more profitable, and have more tangible fixed assets, higher 
MTB
ratio, 
and lower bankruptcy risk, tend to have higher investment in 
PPE
(capital expenditures).