Abstract
We examine the market reaction to events related to the standard-setting process of International Financial Reporting Standard (IFRS) 9 for over 3,000 European firms that have adopted IFRS. We find that the market reaction to IFRS 9 is largely affected by firm-specific factors associated with information quality and information asymmetry. In particular, lower information asymmetry and higher information quality have a positive effect on market-adjusted returns. This is in conflict with the common view that IFRS 9 will improve accounting quality for those firms that need it most (namely, small firms with low liquidity and concentrated ownership structure).
1. Introduction
On July 24, 2014, the International Accounting Standards Board (IASB) released International Financial Reporting Standard (IFRS) 9 – Financial Instruments, to replace International Accounting Standard (IAS) 39. The introduction of IFRS 9 was solicited during the recent financial crisis by various international organizations, with the aim of improving accounting for financial instruments (Bischof and Daske, 2016).
Because of the potential impact of IFRS 9 on accounting quality, it is an empirical question whether firm-specific factors affect the investors’ perceptions about the ability of IFRS 9 to increase shareholder value.
5. Conclusions
We have investigated the investors’ reaction to the standard-setting process of IFRS 9 for over 3,000 European listed firms.
Our study offers novel and robust evidence that higher pre-adoption information quality and lower pre-adoption information asymmetry have a positive impact on the MAR. Thus, there is empirical evidence in favor of hypothesis H1, according to which the investors’ reaction to IFRS 9 is affected by firm-specific factors. In particular, the MAR is positively related with size, a dispersed ownership structure, market liquidity for the firm’s stock, and having a Big 4 auditor. We also provide evidence that financial firms react relatively worse than non-financial firms to the IFRS 9 adoption events.
