Academic journal article IUP Journal of Applied Finance

The Impact of IFRS Adoption on Stock Market Volatility

Academic journal article IUP Journal of Applied Finance

The Impact of IFRS Adoption on Stock Market Volatility

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

The aim of International Financial Reporting Standards (IFRS) is to provide a general direction for the preparation of financial statements and not to set the rules for industry-specific reporting. IFRS adoption increases the process of harmonization of accounting standards worldwide. Substantial works have been done not only by the European Union (EU) but also by the International Accounting Standards Board (IASB) since the 1970s to harmonize accounting rules in different countries. The purpose was only to improve the usefulness of financial information in the international context. According to the American Institute of Certified Public Accountant (AICPA), a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier by adopting IFRS. Besides, companies with subsidiaries in countries that require or permit IFRS may be able to prepare accounts by one method. A subsidiary of a foreign company may also need to convert its accounts by IFRS or if they have a foreign investor that must use IFRS. Companies may also benefit by using IFRS if they wish to raise capital abroad. Hail et al. (2009) described that one of the benefits of moving to IFRS is that it can enhance the liquidity of capital markets and reduce companies' costs of capital by providing investors with better information on corporate performance. The benefit to investors could also lead to more-informed valuation of equity markets, reducing the risk of adverse selection for the less-informed investors.

Alternatively, there is a big disadvantage about companies in Europe adopting IFRS, like the current and future accountants had to relearn how to do their jobs. Though it does not seem to be a problem, it is something to be considered because the accountants are still learning how to prepare financial statements under IFRS. One more fact is that IFRS necessitates application of fair value principles in certain situations. This would result in significant differences from financial information that are currently presented, especially relating to financial instruments and business combinations. This could have resulted in significant volatility in reported earnings and key performance measures like EPS and P/E ratios. This instability in reported earnings can lead to volatility in the returns of a stock market of a country. On the other side, all the benefits rely on the presumption that mandatory IFRS adoption provides superior information to market participants compared to previous accounting regimes, and this can affect the stock market positively.

This paper aims at examining the impact of IFRS adoption on the stock market volatility of 10 European markets by fitting Autoregressive Conditional FFeteroskedasticity (ARCH) and Generalized Autoregressive Conditional FFeteroskedasticity (GARCH) models introduced by Engle (1982), Bollerslev (1986) and Nelson (1991). As volatility is one of the most important concepts in finance, it refers to the degree of fluctuations or the variability of a variable around its mean, where mean may be constant or varying with time or other variables. Standard deviation or variance of series is used to measure the volatility and is often used as a crude measure of the total risk of financial assets.

Literature Review

The objective of IFRS is to provide a global framework so that public companies can prepare and disclose their financial statements. Beuselinck et al. (2009) reported that the main objective of IFRS adoption is to clarify the core principles, ensure the consistency of accounting principles and make the accounting standards easier to understand and apply. There should be uniformity and a common set of standards which will lead to transparency in financial data disclosure. Spauwen (2009) found that the implementation of IFRS is not only about different accounting standards and policies, but also leads to performance measurement and communication with the markets. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.