Abstract

K－IFRS allows firms to choose between fair－value accounting and historical cost accountingwith impairment testing for property, plant and equipment(PPE). This study examines the effect offirms’accounting choices for this group of non－financial assets on over－investment after IFRSmandatory adoption in the Korea. My results indicate that over－investment in PPE (or capital expenditures) is lower following K－IFRS adoption in the post－IFRS period, It is consistent with firms having more timely lossrecognition for PPE under K－IFRS strict impairment rules. I also find that firms that used fairvalueaccounting under K－GAAP or K－IFRS exhibit lower reductions in over－investmentrelative to firms that used historical cost accounting with impairment testing. This analysis suggests that the reductions in over－investment after K－IFRS mandatory adoptionare greater as the severity of agency conflicts increases, consistent with outside shareholdersdemanding timely loss recognition as a means of addressing agency conflicts with managers.

Keywords

• K－IFRS
• Over－investment
• Conservatism

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