American Accounting Association DOI: 10.2308 / accr.2010.85.1.31
Market Reaction to the Adoption of IFRS in Europe
Christopher S. Armstrong University of Pennsylvania Mary E. Barth Alan D. Jagolinzer Stanford University Edward J. Riedl Harvard University ABSTRACT: This study examines European stock market reactions to 16 events associated with the adoption of International Financial Reporting Standards (IFRS) in Europe. European IFRS adoption represented a major milestone toward ﬁnancial reporting convergence yet spurred controversy reaching the highest levels of government. We ﬁnd an incrementally positive reaction for ﬁrms with lower quality pre-adoption information, which is more pronounced for banks, and with higher pre-adoption information asymmetry, consistent with investors expecting net information quality beneﬁts from IFRS adoption. We ﬁnd an incrementally negative reaction for ﬁrms domiciled in code law countries, consistent with investors’ concerns over enforcement of IFRS in those countries. Finally, we ﬁnd a positive reaction to IFRS adoption events for ﬁrms with high-quality pre-adoption information, consistent with investors expecting net convergence beneﬁts from IFRS adoption. Keywords: IFRS; IAS 39; convergence; Europe. Data Availability: All data are publicly available from sources indicated in the text. JEL Classiﬁcations: M41, G15, G38. We thank Robert Bushman, Craig Chapman, Tony Cope, Gilbert Gelard, Ian Gow, Bob Holthausen, Ole-Kristian ´ Hope, Dave Larcker, Jim Leisenring, Dave Maber, Greg Miller, Karl Muller, Joe Piotroski, Thorsten Sellhorn, Dan Taylor, and two anonymous referees for helpful comments and discussions. We also thank seminar participants at the American Accounting Association Annual Meeting, especially Luzi Hail, discussant, European Accounting Association Annual Congress, Harvard Business School Accounting Seminar Series, Harvard Business School International Seminar Series, The Ohio State University, Southern Methodist University, Stanford Graduate School of Business Accounting Summer Camp, The University of Chicago, The University of Iowa, University of North Carolina Global Issues in Accounting Conference, and University of Toronto. We thank Sarah Eriksen and James Zeitler for data assistance, and Susanna Kim for research assistance. Editor’s note: Accepted by Steven Kachelmeier, with thanks to Dan Dhaliwal for serving as editor on previous versions.
Submitted: August 2007 Accepted: April 2009 Published Online: January 2010
Armstrong, Barth, Jagolinzer, and Riedl
I. INTRODUCTION his study examines European stock market reactions to events associated with the 2005 adoption of International Financial Reporting Standards (IFRS) in Europe.1 Prior to 2005, most European ﬁrms applied domestic accounting standards. Thus, the adoption of IFRS in Europe represented one of the largest ﬁnancial reporting changes in recent years and was controversial, generating debate that reached the highest levels of government. The adoption of IFRS as issued by the International Accounting Standards Board (IASB) would result in the application of a common set of ﬁnancial reporting standards within Europe, and between Europe and the many other countries that require or permit application of IFRS. Thus, the debate was about not only the beneﬁts and costs of IFRS adoption itself, but also the global ﬁnancial reporting convergence implications if IFRS were modiﬁed as a result of the adoption process.2 Modifying IFRS would result in European standards differing from those used in other countries, thereby eliminating some potential convergence beneﬁts.3 We refer to the adoption of IFRS as issued by the IASB as the adoption of IFRS—adoption of modiﬁed standards is not adoption of IFRS. It is unclear how investors in European ﬁrms would react to this anticipated change in ﬁnancial reporting. This study examines these reactions. It is...