The Unintended Consequences of IFRS 9 on CVC Investments: Evidence From China

This study investigates the unintended consequences of the new classification and measurement of equity financial assets following International Financial Reporting Standard 9 (IFRS 9) adoption on corporate venture capital (CVC) investments. Using a sample of Chinese companies, we find that firms substitute available-for-sale (AFS), eliminated under IFRS 9, with CVC, suggesting a shift in firms’ equity investment strategies. We also find that CVCs are positively associated with the “profit or loss due to fair value changes” account balance post-IFRS 9, particularly for firms with strong incentives to manage earnings, indicating that the discretion in fair value measurement of the underlying portfolio firms of CVCs may be used for earnings manipulations. This conclusion is further supported when we find that the relationship disappears when a new delisting regulation weakens firms’ incentives to maintain positive net income. Collectively, our study indicates that IFRS 9 creates unintended consequences on CVC investments.