Reaction of Institutional Investors and Insiders Following Adoption of IFRS and Fair Value Measurement: Chilean Evidence

Abstract

Our study investigates whether there is any connection between institutional investors fund flows and IFRS adoption in Chile. Our sample consists for 366 firm years between the years 2007-2012. Our results suggest that, during a period of economic crisis, the local pension funds were prone to “herding” behavior. Our study shows that during an economic crisis local pension funds seem to follow the investment behavior of mutual funds that are able to invest globally. Moreover, the mutual funds reaction is likely to be greater in companies not adopting IAS early; hence, the reaction to fair value measurement in company annual reports is confounded by many economic factors and during an economic crisis, and early adoption is more likely to help than hurt in less developed capital markets. Insiders seem to take advantage of this situation to increase their ownership concentration levels, which is exacerbated in companies that do not have an independent board.