Effect of IFRS. Adoption on Stock Prices of Companies
Financial environment of the recent decades has seen a significantly increased pace of globalization. Therefore, there arose a need for a universal means of communication in the field of financial transactions, a question to which the International Financial Reporting Standard (IFRS) was the answer. Believing that medium is the message, it is also possible to say that clarified and unified way of reporting is what can make the business environment more efficient and reduce transaction costs of acquiring information.Briefly stating the differences between US GAAP and IFRS, it is worth noting that conventionally, IFRS implies classifying income statements by nature or by function (for case of GAAP, it happens only by function).
Also, in contrast to GAAP, it is allowed to re-valuate intangible assets, buildings and land, which is further reported as equity adjustments. Therefore in IFRS there emerge a higher amount of transactions which influence equity, rather than the net income figure. Furthermore, for the purposes of income statements GAAP implies presenting three years of relevant data, while for IFRS only two years are required. Also, in contrast to GAAP, IFRS offers better comparability of financial information disclosed by foreign and local companies, lower costs of acquiring foreign capital as a result of the absent restatements in case of foreign securities issue, and higher corporate efficiency for enterprises operating both domestically and overseas.Concerning the critique of IFRS, it is worth noting that it is not yet adopted in the United States, a country which unquestionably is one of the world’s key financial markets. United States Securities and Exchange Commission has stated such a goal; however, in practice this process has proved to be slow and uncertain. In the case of European Union, it has been the case since 2005 that publicly listed companies adhere to the IFRS standard, following the EU Parliament regulation of 2002 (Jermakowicz & Gornik-Tomaszewski, 2006).
However, practical research still noted heterogeneous quality of resulting accounting processes in different countries, and the effect on the business environment, as financial reporting quality is even more a function of the level of institutional organization of a firm, and political and legal environment of the country to which it belongs, rather than some specific acquired standard (Soderstrom& Sun, 2007).One interesting issue in the field of accounting standards’ effect on the empirical outcomes for companies is the way in which IFRS adoption, voluntary or compulsory, influences stock price movements of the company. Within the scope of this particular paper, it is interesting to explore, which specific elements of adoption process are responsible for the varying outcomes, focusing on the accounting-related side of the issue rather than financial markets mechanics. Such inputs as speed and voluntariness of the IFRS adoption, as well as the reputation of an auditing company can be the issues having a crucial effect on the stock market well-being of companies, and set of the influencing factors is not limited to those.
Acquiring a deeper …