Professional Documents
Culture Documents
October 2011
Abstract
We examine how the adoption of International Financial Reporting Standards (IFRS) across 32 countries
affects stock price informativeness. Overall, we document a decline in stock price informativeness over
time. However, we find that voluntary adopters, arguably the more serious and committed adopters,
experience a less severe decline in stock price informativeness following IFRS adoption. These results
suggest that the benefits associated with IFRS adoption may accrue more to voluntary adopters. In
addition, we find that enforcement plays a critical role on the impact of IFRS adoption. Firms in
countries with better enforcement have higher firm-specific return variation, and experience a less severe
decline in stock price informativeness relative to those firms in countries with weaker enforcement. Our
results are robust to alternate measures of stock price informativeness and enforcement.
1
Assistant Professor of Finance, University of Minho School of Economics and Management, 4710-057 Braga,
Portugal, Email: gilberto@eeg.uminho.pt (Loureiro), and Assistant Professor, Department of Finance, College of
Business Administration, University of Tennessee, 434 Stokely Management Center, Knoxville, TN 37996, Email:
ataboada@utk.edu , Phone: (865) 974-1704 (Taboada).
1. Introduction
More efficient capital markets incorporate information into stock prices quickly and accurately.
Given that stock variation occurs because of informed investors trading on private information, firm-
specific return can be a measure of the rate at which markets incorporate private information into prices
(Grossman and Stiglitz 1980; French and Roll 1986; Roll 1988). A growing literature has provided
evidence on the link between firm-specific return variation and stock price informativeness. High levels
of firm-specific return variation have been associated with more efficient capital allocation (Wurgler
2000; Durnev et al. 2004; Chen et al. 2007) and stock prices that are more informative about future
earnings (Durnev et al. 2003). In addition, evidence points to higher firm-specific return variation (more
stock price informativeness) in more developed countries, with stronger protection rights and more
transparency (Morck et al. 2000; Jin and Myers 2006). Finally, another strand of literature studies how
the changes in firms’ information environment can affect stock price informativeness (Fernandes and
Ferreira 2008; Haggard et al. 2008). Our study contributes to the latter by examining how the adoption of
The adoption of IFRS provides a natural experiment to examine the impact of changes in the
information environment on stock price informativeness. We compare and contrast the impact of
mandatory and voluntary IFRS adoption on stock price informativeness by including firms from countries
that have adopted IFRS (e.g. Australia, countries in the European Union) and those from countries that
plan to adopt IFRS, but already allow firms to use IFRS (e.g. Brazil; Jordan). If the adoption of IFRS
leads to a reduction in the cost of obtaining information and increases transparency, we should observe
significant improvement in stock price informativeness. On the other hand, IFRS adoption may not
achieve its objectives because of inconsistent implementation and enforcement across firms and across
2
Ball (2006) provides a good discussion of the pros and cons of IFRS adoption.
1
In this paper we test whether stock price informativeness increases after a firm adopts IFRS. More
importantly, we compare and contrast the effect of IFRS adoption on voluntary (arguably, the more
serious adopters) and mandatory adopters.3 Since the level of firm commitment to IFRS may vary across
firms, we hypothesize that voluntary IFRS adopters are more likely to observe an improvement in their
information environment than mandatory adopters. Similarly, we also conjecture that firms from
countries with better public enforcement should observe a higher impact on stock price informativeness as
a result of IFRS adoption. We examine our hypotheses using a sample of firms from 32 countries from
1999 through 2009.4 The main measure of stock price informativeness is the firm-specific return
variation, computed as in Morck et al. (2000). We find a declining trend in stock price informativeness
over time. In line with our hypothesis, however, we document that voluntary IFRS adopters experience a
less severe decline in stock price informativeness following IFRS adoption. In addition, we document
the importance of enforcement on the outcomes of IFRS adoption. Firms in countries with better
enforcement have higher stock price informativeness and experience a less severe decline in stock price
informativeness following IFRS adoption. The results still hold after a variety of robustness tests,
including alternative proxies for stock price informativeness and IFRS adoption, and corrections for
International Financial Reporting Standards were designed primarily to provide more accurate,
comprehensive, and timely financial statement information, and to reduce international differences in
accounting standards by standardizing reporting formats. Existing literature documents that IFRS require
greater disclosure and are more comprehensive than local accounting standards (Ashbaugh and Pincus
2001; Ding et al. 2007) and improve the comparability of firms across markets, which improves capital
allocation efficiency (Covrig et al. 2007; Armstrong et al. 2010). Improved disclosure should reduce
information asymmetry, enhance liquidity and reduce the cost of capital (Diamond and Verrecchia 1991;
3
Our focus differs and our results complement the findings of other papers that examine the impact of IFRS
adoption on stock price informativeness on mandatory (Beuselinck et al. 2010) and voluntary adopters (Kim and Shi
2010).
4
The 32 countries include 18 countries from the European Union and Australia, which adopted IFRS as of 2005. It
also includes countries that have yet to adopt IFRS, but allow firms to use IFRS.
2
Easley and O'Hara 2004). Consistent with this view, several studies document reductions in cost of
capital associated with both mandatory and voluntary IFRS adoption (Leuz and Verrecchia 2000; Daske
et al. 2008; Daske et al. 2009; Li 2010). These studies emphasize the importance of both enforcement
While the plausible benefits from IFRS are obvious, there are concerns as to whether these benefits
will be achieved. As explained by Ball (2006), there are many factors that will affect the outcome of
IFRS adoption. Because IFRS provides firms with substantial discretion in the implementation of the
standards, implementation of IFRS is likely to be inconsistent across firms, and even more so across
nations. Local political and economic forces will certainly influence actual reporting practice even after
IFRS adoption. The resulting financial reporting quality will thus depend largely on both firms’ reporting
incentives and the quality of countries’ enforcement regimes. In line with this view, some evidence
points to a limited role of accounting standards in determining reporting quality (Leuz 2003; Ball and
Shivakumar 2005; Burghstahler et al. 2006). Holthausen (2009) also emphasizes the importance of
enforcement in explaining the financial reporting outcomes of IFRS adoption, and further advocates the
use of better measures of enforcement that include both private and public measures of enforcement, as
If the benefits of IFRS adoption are achieved, investors will face lower costs of obtaining
information. The resulting increased comparability of financial statements may reduce the need for
adjustments to financial statements prepared using different standards. This will decrease costs and
increase the speed at which information can be processed. This potential decrease in the cost of private
information should reduce comovement and increase stock price informativeness, consistent with the
predictions of Grossman and Stiglitz (1980) and Veldkamp (2006). In addition, if IFRS adoption indeed
improves the transparency of financial statements, this should also increase firm-specific return variation
by reducing capture by insiders, consistent with the predictions of Jin and Myers (2006). The potential
benefits from IFRS adoption will be achieved only if they affect the resulting financial reporting quality;
3
this will largely depend on firms’ reporting incentives and the quality of private and public enforcement
(Ball 2006; Holthausen 2009). We control for differential impact of IFRS adoption based on several
measures of private and public enforcement and control for differing firms’ incentives by exploring
differences between voluntary (those adopting IFRS prior to the year of mandatory adoption) and
mandatory adopters.
Our study contributes to the literature in several ways. We add to the literature on the impact of IFRS
adoption by examining how IFRS adoption affects stock price informativeness.5 In addition, we also
contribute to the debate as to whether benefits of IFRS adoption accrue more to voluntary or mandatory
adopters. We also contribute to the literature on stock price informativeness (Morck et al. 2000; Jin and
Myers 2006; Fernandes and Ferreira 2008). We add to this growing literature by providing further
evidence of the extent to which improved disclosure and transparency affects stock price informativeness.
A closely related study by Haggard, Martin, and Pereira (2008) examines the effects of increased
voluntary disclosure on stock price informativeness. Unlike our study, which uses mandatory and
voluntary IFRS adoption as a natural experiment, they examine changes in individual firms’ disclosure
quality using analyst evaluation of firm disclosure policy for US firms. In addition, two other studies
examine the impact of IFRS adoption on stock price informativeness. Beuselinck et al. (2010) examine
the impact of mandatory IFRS adoption on stock price informativeness across EU countries, while Kim
and Shi (2010) examine the consequences of voluntary IFRS adoption for firms in 34 countries. We
expand on these studies by exploring the differential impact of IFRS adoption on stock price
informativeness of voluntary and mandatory adopters across a wide range of countries with differing
levels of economic development and enforcement.6 Examining differences between voluntary and
mandatory adopters allows us to differentiate (albeit not perfectly) between the level of firms’
5
Most studies in the IFRS literature focus on the impact of IFRS on the cost of equity capital, market liquidity, and
Tobin’s q (Leuz and Verrecchia 2000; Daske et al. 2008; Daske et al. 2009; Li 2010).
6
In contrast, Beuselinck et al. (2010) examine the impact of mandatory IFRS adoption on stock price
informativeness in the European Union, while Kim and Shi (2010) examine the impact of voluntary IFRS adoption
for firms in countries that do not mandate IFRS.
4
commitment to improvements in transparency and disclosure that could certainly affect the outcome of
IFRS adoption- arguably, voluntary adoption of IFRS may be driven by a firm’s commitment to increase
The rest of the paper is organized as follows. In section 2 we review the related literature on stock
price informativeness and on the impact of IFRS adoption; in section 3 we describe our data and the
methodology used in our analyses; in section 4 we present our main findings on the impact of IFRS
adoption on stock price informativeness; in section 5 we discuss several robustness tests, and we conclude
in section 6.
2. Literature Review
Early work by Grossman and Stiglitz (1980) suggests that because information is costly, stock prices
reflect only a subset of all relevant information. As the cost of private information declines, informed
trading increases, which leads to more informative pricing. More trading by informed investors results in
increased stock return variation; as Roll (1988) documents, it follows that firm-specific return variation
could be associated with trading based on private information. Following these studies, a growing body
of literature documents a link between firm-specific return variation and stock price informativeness
More recent theoretical work on stock price informativeness seeks to explain the extent of
comovement in asset prices. Jin and Myers (2006) develop a model that predicts that R2s should be
higher in countries with more opaque (less transparent) firms, and that crashes should be more common in
more opaque countries. They argue that opaqueness affects the division of risk between insiders
(managers) and outsiders (investors). In more opaque firms, manager insiders capture more cash flows.
Insiders’ capture is higher (lower) when cash flows are higher (lower) than investors think. With
increased capture, outsiders absorb less firm-specific risk. Thus, increased opaqueness and capture by
5
insiders lead to lower firm-specific risk and higher R2s. In addition, because insiders are willing to absorb
bad news up to a limit, a succession of bad firm-specific news make insiders give up and reveal all bad
news at once, leading to a higher frequency of crashes. Extending the work of Grossman and Stiglitz
(1980), Veldkamp (2006) develops a model that predicts that stock price comovement can be driven by
information markets. Because firm-specific information is too costly for most investors, they tend to
purchase information that provides signals about the value of many assets. Reliance on such high demand
information thus leads to increased stock price comovement. These models thus predict more stock price
informativeness in countries where firms are more transparent and where the cost of private information
is lower.
In contrast to the predictions of the models by Jin and Myers (2006) and Veldkamp (2006), Dasgupta,
Gan, and Gao (2010) develop a model that predicts that increased transparency leads to higher stock price
synchronicity (R2) in the future. They argue that transparency improves the informativeness of stock
prices about future events. This reduces the surprises associated with future events. Given that stock
prices already incorporate information about the futures events, when the events happen, there will be less
information impounded into the stock price, which leads to more synchronicity.
Empirical evidence on stock price informativeness is consistent with the view that more transparent
environments, with better investor protection and lower cost of private information have more informative
stock prices. Morck, Yeung, and Yu (2000) show that stock prices move together more in less developed
countries than in developed markets. They find that this is due primarily to differences in property rights.
They further document that in developed countries, higher firm-specific variation is associated with
stronger property rights. Jin and Myers (2006) test the implications of their model using a sample of
firms from 40 countries from 1990-2001. They document that various measures of opaqueness help
explain both R2 and the frequency of crashes. They find that opaqueness increases R2 and that more
6
Stock price informativeness affects investment behavior, the allocation of capital, and corporate
governance. Durnev, Morck, and Yeung (2004) add support to the view that firm-specific return variation
gauges the extent to which information is quickly and accurately incorporated into stock prices. They
document that the efficiency of corporate investment is positively correlated with the magnitude of firm-
specific return variation. Thus, higher stock price informativeness facilitates more efficient corporate
investment. Chen, Goldstein, and Jiang (2007) study the relation between stock price informativeness
and the sensitivity of investment to stock price. They find strong positive correlation between measures
of stock price informativeness and sensitivity of investment to stock prices. Wurgler (2000) documents
that capital allocation is more efficient in countries with more firm-specific information in stock returns.
Finally, Ferreira, Ferreira, and Raposo (2011) show that stock price informativeness affects board
structure. They find a negative relation between board independence and stock price informativeness,
which suggests that price informativeness and board structure are substitutes.
Another more closely related strand of literature examines how changes in the information
environment affect stock price informativeness. Most of these studies focus on changes in the
information environment associated with cross-listing in US markets. Fernandes and Ferreira (2008) find
that cross-listing has an asymmetric impact on stocks price informativeness around the world. They
document improvements in stock price informativeness following cross-listings for firms from developed
countries, but a decrease in stock price informativeness for firms from emerging markets. The latter
result is explained by the increase in analyst coverage associated with cross-listing which fosters
production of market wide, not firm-specific information. In a related study, Foucault and Gehrig (2008)
show that cross-listing, by increasing stock price informativeness, enables firms to obtain more precise
information about the value of growth opportunities. Their results suggest that the sensitivity of
investment to stock prices is larger for cross-listed firms. Fernandes and Ferreira (2009) study the impact
of enforcement on stock price informativeness. They document that enforcement of trading laws
improves stock price informativeness, but only in developed markets. Enforcement does turn some
7
private information into public information in emerging markets, improving the cost of equity. Finally,
Haggard, Martin, and Pereira (2008) examine whether voluntary disclosure increases stock price
informativeness. They find evidence in support of their hypothesis by using analyst evaluation of firm
disclosure policy. Using a sample of 2,084 firm-year observations from 1982 through 1995, they find
evidence consistent with increased disclosure reducing the cost of gathering firm-specific information,
Our study contributes to this strand of literature on stock price informativeness by taking advantage of
a natural experiment, IFRS adoption, which represents a shock to firms’ information environment.
A growing body of literature, primarily in accounting, examines the consequences of IFRS adoption.
Supporters of IFRS adoption emphasize the potential benefits associated with accounting standards that
provide more accurate, comprehensive, and timely financial statement information, and reduce
international differences in accounting standards by standardizing reporting formats. This optimistic view
is backed by evidence documenting that IFRS require greater disclosure than local accounting standards
and are associated with higher accounting quality (Ashbaugh and Pincus 2001; Ding et al. 2007; Barth et
al. 2008). Skeptics, on the other hand, point to the many obstacles that will mitigate the impact of IFRS
adoption on reporting quality (Ball 2006). Skeptics’ views are supported by evidence documenting the
limited role of accounting standards in determining reporting quality (Ball and Shivakumar 2005;
Burghstahler et al. 2006). Enforcement will thus play a critical role in the implementation and likely
Empirical evidence points to positive consequences associated with the mandatory adoption of IFRS.
Armstrong et al. (2010) document incrementally positive reactions associated with events related to IFRS
adoption for firms with lower pre-adoption information quality and higher information asymmetry, which
suggests that investors perceive that IFRS will lead to improvements in information quality. They also
8
document positive reaction for firms with high quality pre-adoption information, suggesting potential
convergence benefits. Finally, they show negative stock market reaction for firms in civil law countries,
suggesting that the benefits from IFRS will be lower in countries with poor enforcement. Li (2010)
examines the impact of mandatory IFRS adoption in the European Union in 2005 on the cost of equity
capital. She finds a significant reduction in cost of equity for mandatory adopters in countries with strong
legal enforcement. She tests her hypothesis using a sample of 1,084 firms in 18 European Union
countries from 1995-2006. Mandatory adopters experience a 47 basis points reduction in the cost of
equity after adopting IFRS. No significant decrease in cost of equity for voluntary adopters. Daske, Hail,
Leuz, and Verdi (2008) examine the effects of mandatory IFRS adoption on market liquidity, cost of
capital, and Tobin’s q. Using a sample of over 3,100 firms in 26 countries, they document an increase in
market liquidity, a decrease in cost of capital, and an increase in equity valuation for firms in countries
with strong legal enforcement in which firms have strong incentives to be transparent. The positive
capital market effects associated with IFRS adoption are more pronounced for firms that voluntarily adopt
IFRS. Their results hold only if they account for the possibility that the effects can occur prior to the
There is a large body of work documenting the impact of voluntary IFRS adoption. Daske et al.
(2009) examine cost of capital market effects of voluntary IFRS adoption. They argue that some firms
may only adopt the IFRS label, while others adopt IFRS as part of a commitment to increased
transparency and disclosure. Consistent with this idea, they find that on average, voluntary IFRS
adoption does not have significant capital market effects. In addition, after separating label adopters from
serious adopters, they document a significant increase in market liquidity and a decrease in cost of capital
for serious adopters. The authors conclude that improvements in market liquidity and cost of capital
cannot be attributed to IFRS adoption per se, but rather, to changes in firms’ reporting incentives, which
likely make them serious IFRS adopters. Leuz and Verrecchia (2000), and Barth et al. (2008) also
provide evidence of a reduction in cost of equity capital for voluntary adopters. These results are in line
9
with the information asymmetry literature documenting that increased disclosure reduces the cost of
equity capital by mitigating adverse selection problems and enhancing liquidity (Diamond and Verrecchia
Two closely related papers examine the impact of IFRS adoption on stock price informativeness.
Beuselinck et al (2010) examine the impact of mandatory IFRS adoption on stock price informativeness
across EU countries, while Kim and Shi (2010) examine the consequences of voluntary IFRS adoption for
firms in 34 countries. Beuselinck et al. (2010) document a decrease in stock price synchronicity around
IFRS adoption, and a subsequent increase in stock price synchronicity post IFRS adoption; they interpret
their results as consistent with IFRS disclosures revealing new firm-specific information in the adoption
period, but subsequently lowering the surprise of future disclosures. Kim and Shi (2010) find that stock
price synchronicity decreases following voluntary IFRS adoption. We expand on these studies by
examining the differential impact of IFRS adoption across voluntary and mandatory adopters. Examining
differences between voluntary and mandatory adopters allows us to differentiate (albeit not perfectly)
between the level of firms’ commitment to improvements in transparency and disclosure that could
certainly affect the outcome of IFRS adoption. We thus fill a gap in this literature by comparing and
contrasting the benefits of IFRS adoption between mandatory and voluntary adopters. In doing so, we
contribute to the debate as to the benefits of IFRS adoption for voluntary and mandatory adopters. In
addition, we examine the long-run impact of IFRS adoption on stock price informativeness. This is
important because the benefits of IFRS adoption on stock price informativeness may not be achieved in
the short-term. The adjustment to different rules and standards associated with IFRS adoption may in fact
have an adverse effect on disclosure, transparency, and comparability of financial statements across
countries in the short-term; thus, the benefits may take some time to be realized. Finally, we also shed
some light on how public enforcement of financial regulation affects the outcome of IFRS adoption.
10
3. Data and Methodology
We examine the impact of IFRS adoption on stock price informativeness using a sample of firms
from 32 countries from 1999-2010. We include countries that have adopted IFRS and those committed to
adopt IFRS that allow firms to use IFRS. We obtain dates of actual and planned IFRS adoption for each
country from Deloitte’s IAS Plus.7 Our initial sample consists of all stocks listed in each country’s major
stock exchange that are covered in Thomson Financial’s DataStream database. We begin with the list of
stocks in Datastream country lists (including dead stocks), and apply various filters recommended in prior
studies to ensure that our final sample contains only common stocks (Ince and Porter 2006; Griffin et al.
2010). As in Fernandes and Ferreira (2008), we only consider stocks with available weekly return data
for every week of the year. We obtain all stock price data from Datastream and financial data from
WorldScope. In some robustness tests, we use accounting data from Compustat Global. We proceed
with our data screening by eliminating financial and utilities firms and those firms with missing leverage
and ROE. Moreover, to make firms more comparable across countries, we further eliminate those with
negative sales or total assets lower than $10 million. This screening process leads to a final sample of
18,762 firms from 32 countries and an unbalanced panel of 61,493 firm-year observations.
Our primary measure of stock price informativeness is firm-specific return variation for each stock,
following Morck et al. (2000). We estimate firm-specific return variation from the following two-factor
(1)
where rit represents stock i’s return in week t in excess of the risk-free rate; rmt is the value-weighted
excess local market return, and rust is the value weighted excess US market return. Stock price returns and
market index returns are obtained from Datastream using the total return index, while the risk-free rate
7
http://www.iasplus.com/country/useias.htm. We also cross-check dates from other sources including the European
Corporate Governance Institute.
11
Following prior literature (Morck et al. 2000; Jin and Myers 2006; Fernandes and Ferreira 2008),
our primary measure of firm-specific return variation, i, is a logistic transformation of the ratio of
idiosyncratic volatility-to-total volatility (1-R2) that measures firm-specific return variation relative to
(2)
To mitigate the impact of extreme outliers, we winsorize observations in the top and bottom 1%
of the distribution of individual firm-specific return variation across the full sample period.
The main hypotheses tested in this paper predict a different impact of IFRS adoption on stock
price informativeness for voluntary versus mandatory adopters. To identify firms in each country that
voluntarily adopted IFRS prior to the mandatory adoption year, we use the “Accounting Standards
Followed” variable (WorldScope item WC07536). Thus, we classify a firm as a voluntary adopter if the
firm reports financial statements according to IFRS (or similar) prior to the mandatory adoption year in
the country (e.g. 2005 for European Union members). Throughout the paper we use the broader
definition of IFRS adopters proposed by Daske et al. (2009) in which firms following international
standards, or local standards with EU and IASC guidelines are also quoted as IFRS followers.8 Later we
test the robustness of our results against two alternative classifications of IFRS adopters: (1) a stricter
classification that considers only firms for which the reported WorldScope accounting standards equal
“IFRS”, and (2) a classification based on the accounting standards variable from Compustat Global, also
used by Li (2010).9
Table 1 shows the mean firm-specific stock return variation (by country pre- and post-IFRS
adoption for mandatory and voluntary adopters. There is a considerable dispersion in terms of the
8
The precise classifications are described in Table A1 of Daske et al. (2009) and replicated in Appendix B.
9
Li (2010) classifies a firm as IFRS adopter if the firm’s accounting standards (variable ASTD) =”DI”. In our case,
we complement this approach with the one proposed by Daske et al. (2009) and consider not only “DI”, but also
“DA”, or “DT” prior to 2005 to classify a firm as a voluntary IFRS adopter.
12
number of firms per country (Nfirms). U.K. firms represent about 19% of the sample, followed by
Australia (14%), France (10%) and Germany (8%). Not surprisingly, the smallest country in the sample
(Luxembourg) also has the smallest number of firms in the sample, 23 (representing about 0.1%). Our
sample is also fairly geographically diverse, with several countries from Asia, North and South America,
and Africa. In terms of the firm-specific stock return variation, there is also considerable variation across
countries pre- and post-IFRS adoption for either voluntary or mandatory adopters. According to our
hypotheses, we would expect that after the adoption of IFRS, (would increase reflecting more
firm-specific information incorporated in the stock prices, in particular for voluntary adopters. However,
taking the entire sample, the overall mean (is larger pre-IFRS (0.814) than post-IFRS (0.736). The
same happens for the subsamples of voluntary and mandatory IFRS adopters, although the magnitude of
the difference is larger for mandatory (6.2 percentage points) than voluntary adopters (4.6 percentage
points). The decline in stock price informativeness post-IFRS is primarily a result of a downward trend in
stock price informativeness since 1999, as shown by the graph in Figure 1. Given the large heterogeneity
of the firms in the sample, we cannot draw any conclusions from this analysis since we are not controlling
for any type of firm or country characteristics. However, the results do show that voluntary IFRS
adopters face a smaller decrease in stock price informativeness than mandatory adopters.
Table 2 shows the descriptive statistics of the main variables used in this study for the subsamples of
voluntary and mandatory IFRS adopters. 10 The main proxies for stock price informativeness – and
- show higher means and medians for the group of mandatory relative to voluntary adopters. The mean
and median of the illiquidity ratio of Amihud (2002) – an alternative proxy for stock price
informativeness based on the ratio of a stock’s absolute return to its dollar volume – shows a similar
pattern: higher for mandatory IFRS adopters (mean =21.8 and median = 0.93) than voluntary adopters
(5.8 and 0.25, respectively). The bid-ask spreads show similar pattern as well; mandatory adopters have
10
Appendix A explains in detail all the variable definitions.
13
Table 2 also shows the summary statistics for a set of firm-specific and country-specific control
variables. For instance, firm size, measured by the firm’s total assets, shows considerable dispersion in
both groups of voluntary and mandatory IFRs adopters, with a median of $410.9 million and $133.2
million, respectively. We also use other standard firm-specific controls frequently used in the literature
such as leverage (long-term debt to total assets), ROE, and market-to-book – these variables have
Additionally, we include other firm-level controls motivated by the prior literature on stock price
informativeness. For instance, we control for the potential effects of analyst activity on the information
flow incorporated into stock prices using the total number of analysts (collected from I/B/E/S) that follow
a firm in each year. On average, over the entire sample period, voluntary IFRS adopters are followed by
19 analysts and mandatory adopters are followed by 13. To control for the effect of ownership
concentration, we use the fraction of closely held shares to the total shares outstanding obtained from
WorldScope. 11 On average, there is a small difference between mandatory and voluntary IFRS adopters
in terms of the fraction of equity closely held: 46.4% and 47.3%, respectively. Turnover is the ratio of
stocks traded to the total shares outstanding and it is used to account for the impact of changes in the
trading environment on stock price informativeness. As in previous studies (Lang et al. 2003; Leuz et al.
2003; Fernandes and Ferreira 2008) we use earnings management, based on total accruals, as a measure
of the quality of the firms’ accounting. We follow Fernandes and Ferreira (2008) and define earnings
management as the absolute value of firms’ accruals divided by the absolute value of cash flow from
operations. This ratio is assumed to be positively related with earnings management activities
implemented by firm managers. In our sample the mean values of earnings management are fairly close
for voluntary and mandatory IFRS adopters: 1.96 and 1.78, respectively. The firm Herfindahl index
measures the market share concentration (based on individual annual sales) for each firm in each country
11
This variable includes shares held by insiders (senior corporate officers and directors and their immediate
families), shares held in trusts or by another corporation, excluding nominees, shares held by pension/benefit plans,
and shares held by individuals who hold more than 5% of the total shares outstanding. Whenever a firm has more
than one class of shares, “closely held shares” are based on the total number of shares.
14
per year. Additionally, as suggested by Fernandes and Ferreira (2008), we also control for industry
concentration using the industry Herfindahl index, computed from the total annual sales per industry (2-
digit SIC codes) for each country-year. Finally, we include in our multivariate analysis two more firm-
specific variables to account for aspects that can be seen as substitutes for IFRS adoption, namely cross-
listing in a U.S. stock exchange and reporting financial statements in compliance with U.S. GAAP. We
identify every year firms that are cross-listed in a U.S. stock exchange using the comprehensive Citibank
ADRs database and cross-check that data with direct information from the stock exchanges. As for
compliance with U.S. GAAP, we use the WorldScope variable “Accounting Standards Followed” and
At the country-level, we use the following controls: stock market capitalization – a proxy for the size
of the stock market scaled by the GDP from Beck et al. (2010); GDP per capita from World Bank World
Development Indicators database to proxy for economic development; and the past three-year variance of
the GDP per capita growth rate to proxy for variations in the economic growth.
Finally, to test the hypothesis that improvements in stock price informativeness after IFRs adoption
are more pronounced in countries with better law enforcement, we use several proxies to measure the
degree of public enforcement at the country level. For instance, our public enforcement index is from
Djankov et al. (2008). We also use two resource-based measures of enforcement from Jackson and Roe
(2009); budget is defined as the 2005 securities' regulators' budget divided by the country's GDP, and
staff is defined as the 2005 size of the securities' regulators' staff, divided by the country's population.
4. Results
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A firm is considered to report financial statements according to U.S. GAAP in a given year if the WorldScope
variable, WC07536, states “US standards (GAAP)”, “US standards – inconsistency problems”, or “US GAAP
reclassification from local standards”.
15
We begin our analysis by examining the impact of IFRS adoption on stock price informativeness of
voluntary and mandatory adopters. To this end we estimate the following regression equation:
(3)
where it is firm i’s relative firm-specific return variation in year t; IFRS is an indicator variable equal to
one starting on the year in which the firm adopts IFRS, and 0 otherwise; VOL is an indicator variable
equal to one if the firm adopts IFRS prior to the mandatory adoption date in its country, and 0 otherwise.
Φit is a vector of firm-level controls that includes: the log of total assets; leverage (long-term debt-to-total
assets); return on equity (ROE); market-to-book value; analyst coverage - total number of analysts
covering the firm each year; the percentage of closely-held shares; turnover; a measure of earnings
management - the absolute value of accruals-to-cash flow from operations; a firm Herfindahl index; an
indicator variable equal to one if the firm follows US GAAP, and an indicator variable that equals one if
the firm has shares cross-listed in the US market in a given year. Xct is a vector of country level controls
that includes the log of GDP per capita; stock market capitalization to GDP; an industry level Herfindahl
index, and the variance of GDP per capita using a three-year rolling window. Industry fixed effects are
included in all regressions. In addition, we include a time trend variable, t, which is equal to the value of
year t less 1990, to control for the declining time trend in .13
We include the interaction term IFRSVOL to account for a differential impact from IFRS adoption
for voluntary and mandatory adopters. If a firm voluntarily adopts IFRS as part of a commitment to
increased transparency and disclosure, the impact of such adoption on stock price informativeness could
be more pronounced than for firms who are forced to adopt it, and may only adopt the IFRS label (Daske
et al. 2009). We thus would expect the interaction term to be positive and significant if this is the case.
Table 4 shows results from the above regressions using various specifications. Column 1 shows
results from the basic specification using industry and country fixed effects. Surprisingly, the results
13
Landsman et al. (2011) use a similar approach to allow for time trends in the dependent variable.
16
show that the adoption of IFRS has a negative impact on stock price informativeness for mandatory
adopters. The IFRS coefficient in model 1 is -0.471, and is significant at the 1% level. Thus, for
mandatory adopters, firm-specific return variation actually declines following the adoption of IFRS,
consistent with the downward trend in stock price informativeness over the period. This result is both
statistically and economically significant. The adoption of IFRS decreases firm-specific return variation
by 47.1 basis points, representing a 29% decrease in the average firm-specific return variation.14 The
adoption of IFRS has a less adverse impact on firm-specific return variation for mandatory adopters. The
differential impact for voluntary adopters is 0.216 (column 2). Thus, the adoption of IFRS reduces of
voluntary adopters by 29 basis points, or 18% of the average . These results are consistent with the
view that voluntary adopters are more serious adopters of IFRS, committed to more disclosure.
Consistent with prior studies, the results also show that firm-specific return variation is negatively
associated with firm size, profitability, analyst coverage, and turnover, and positively correlated with the
percentage of closely held shares. For our sample of firms, however, is positively correlated with
leverage, and negatively correlated with the market-to-book ratio. These differences may be explained by
our different sample of countries and by our longer sample period, which covers more post-IFRS adoption
years than other related studies. In addition, the results in Table 4 show that firms in countries with more
volatile economic conditions (measured by the variance in GDP per capita) have lower s. Cross-listed
firms and firms using US GAAP have significantly lower firm-specific return variation. Increased analyst
In columns 3 through 5 of Table 4, we run various specifications of the basic regression model in
equation 3. In column 3 we incorporate other firm and country-level variables that have been shown to
affect stock price informativeness; in column 4 we use country random effects; in column 5 we control
14
The average is 1.59.
15
Fernandes and Ferreira (2008) document a decrease in stock price informativeness associated with cross-listings
for firms in emerging markets. They attribute this to increased analyst coverage.
17
for potential one-period serial correlation; in column 6 we add an indicator variable, financial crisis, to
examine differences in stock price informativeness in years of crisis and find that stock price
excluding firms that are cross-listed in the US. The impact of IFRS on stock price informativeness is
robust to the various specifications in Table 4. Overall, results show that there is a significant decline in
for mandatory IFRS adopters following IFRS adoption, and a less pronounced decline for voluntary
adopters.
The results thus far point to a decline in stock price informativeness following IFRS adoption, which
reflects in part the downward trend in stock price informativeness over our sample period. More
importantly, the impact of IFRS adoption on stock price informativeness is significantly different for
voluntary adopters. For IFRS adoption to have an impact on stock price informativeness, the
transparency and accounting quality of the adopters should improve. Our findings support the view that
the potential benefits from IFRS adoption (increased disclosure, transparency, and comparability of
financial statements) may accrue primarily to voluntary (more serious) adopters. As an alternate way to
account for the downward trend in stock price informativeness, in unreported results we demean by the
country mean each year, and by the full sample mean each year and rerun the regressions. Our results
show an overall decline in stock price informativeness post-IFRS, and an improvement for voluntary
IFRS adopters. In the next section, we explore the role of enforcement on the impact of IFRS.
As Ball (2006) points out, the impact of IFRS adoption on financial reporting quality will depend
largely on firms’ reporting incentives and on the quality of countries’ enforcement regimes. In the
between voluntary and mandatory adopters. In this section, we will explore how enforcement can
18
influence the impact of IFRS adoption on stock price informativeness. We test this using the following
regression framework:
(4)
where it is firm i’s relative firm-specific return variation in year t; IFRS is an indicator variable equal to
one starting in the year in which a country mandates IFRS adoption, or in the first year a firm adopts
IFRS, and 0 otherwise; ENFc refers to the various measures of public enforcement: the public
enforcement from Djankov et al. (2008), and two resource-based measures of enforcement from Jackson
and Roe (2009): the regulatory budget per billion US $ of GDP, and the size of the securities regulator’s
staff as a proportion of the population. Φit and Xict refer to the firm and country-level controls defined
previously. We include industry and country fixed effects in all regressions. In addition, we include a
time trend variable, t, which equals the value of year t less 1990, to control for the declining time trend in
.
The results are shown in Table 5. In column 1, we show results using Djankov et al.’s (2008)
measure of public enforcement; columns 2 and 3 report results using the staff and budget measures of
enforcement, respectively. Confirming our prior findings, the results in Table 5 show a decline in stock
price informativeness following IFRS adoption, even after controlling for the level of enforcement.
Consistent with our hypothesis and the predictions from Ball (2006) and Holthausen (2009), enforcement
appears to be an important determinant of stock price informativeness. The results in Panel A show that
firms in countries with better enforcement have higher firm-specific return variation. These results are
both statistically and economically significant. For example, the results in column 3 show that a one
standard deviation increase in the regulatory budget (32.4) is associated with a 16.2 percentage point
increase in , which constitutes about 15% of its standard deviation of .16 In addition, the decline in
stock price informativeness associated with the adoption of IFRS in less severe for firms in countries with
16
The standard deviation of budget () is 32.4 (1.28). The coefficient of budget is 0.005 (column 3 – Panel A).
Thus a one standard deviation increase in budget is associated with (0.005*32.4)=0.162 increase in .
19
better enforcement (the interaction term IFRSEnforcement is positive and significant). These results are
statistically and economically significant as well. Using the coefficients in column 1, for the average
firm, firm-specific return variation,, decreases by 22.8 basis points following IFRS, which represents a
16.4% decrease in the average (1.39). For firms in countries with better enforcement, the decline in
pos-IFRS is less severe (12.3%).17 These results are robust to the use of various measures of
enforcement.
The results in Table 5 corroborate our prior findings with respect to the relationship between firm-
specific return variation and other firm-level and country level controls. is positively correlated with
leverage and with the percentage of closely-held shares, while larger, more profitable (higher ROE) firms
with more analyst coverage and higher turnover have lower . In addition, is lower for firms from
Overall, our results suggest that even after controlling for the level and quality of enforcement, IFRS
continues to have an adverse impact on stock price informativeness, which reflects the downward trend in
stock price informativeness. However, we document that enforcement does play a key role. As expected,
firms in countries with better enforcement have higher firm-specific return variation; in addition, the
adverse impact of IFRS adoption on stock price informativeness is lessened for firms in countries with
better enforcement.
5. Robustness Tests
There are several possible alternatives to code voluntary IFRS adopters. The main results of this
paper are obtained using a broad classification following Daske et al. (2009) (indicated as “base-case” in
17
The standard deviation of public enforcement is 0.39. Taking the coefficient of the interaction of
IFRS*Enforcement (0.145), a one standard deviation increase in public enforcement is associated with a 0.057
increase in post-IFRS. The overall decline in post-IFRS in a country with better enforcement is thus (-
0.316+0.057)=-0.17, or 12.3% of the average (1.39).
20
Appendix B). This classification includes not only firms that prepare their financial statements in
compliance with IFRS, but also those that, in addition to using local accounting standards, follow
international rules, such as EU, IASC, or OECD guidelines, which are similar to IFRS in many aspects.
In this section, we test the robustness of our main results using two alternative coding procedures to
identify IFRS voluntary adopters. First, we use a stricter classification based, as before, on the
WorldScope variable “Accounting Standards Followed.” In this case, we classify a firm as a voluntary
adopter only if the aforementioned variable equals “IFRS” prior to the year in which its country mandates
the use of IFRS. Under this approach, all firms that prepare their financial statements using local
accounting standards are not classified as voluntary adopters, even if they follow international guidelines.
Second, because of potential misclassifications associated with the WorldScope variable, we also classify
voluntary IFRS adopters using the accounting standards variable (ASTD) from Compustat Global, also
used by Li (2010) and Daske et al. (2009). We classify a firm as a voluntary IFRS adopter whenever this
variable equals “DA”, “DI”, or “DT” (meaning that the firm’s financial statements are in accordance with
IASC and/ or OECD guidelines) prior to the year of mandatory IFRS adoption.
Table 6 shows the estimation results of the two main regression equations from table 4 using the
alternative definitions of voluntary IFRS adopters. The conclusions do not change when voluntary
adopters are classified using different methodologies. The coefficient of the interaction term IFRS
Voluntary is positive and statistically significant suggesting that the adoption of IFRS (which is
associated with a reduction in ) has a less adverse impact on firm-specific return variation for voluntary
adopters. The magnitude of the coefficients are also comparable to what we find using the base-case
IFRS classification. Moreover, the results are virtually the same for any alternative specification of the
Overall, our main results are robust to the use of alternative methods of classifying voluntary IFRS
adopters. Our evidence still supports the view that the adverse impact of-IFRS adoption on stock price
21
informativeness is less severe for voluntary adopters. Similarly, although not tabulated, we find that the
alternative proxies for IFRS voluntary adopters do not change the conclusions that the post-IFRS impact
on stock price informativeness tends to be more effective in firms from countries with stronger public
enforcement.
In the previous sections we use a proxy for stock price informativeness that is widely used in the
literature, based on the firm-specific stock return variation. However, other alternative measures have
been proposed. For instance, as in Ferreira et al. (2011), we use the illiquidity ratio suggested by Amihud
(2002) that reflects the annual average of the daily ratio of a stock's absolute return to its dollar volume.
(3)
where ILLIQiy is the illiquidity ratio of stock i in year y; Diy is the number of days with data available for
stock i in year y; riyt is the return of stock i on day t of year y; and VOLDiyt is the dollar daily trading
volume of stock i on day t of year y. This ratio is a proxy for the stock price impact of order flow; in
other words, it represents the absolute relative stock price change per dollar of daily trading volume. This
ratio is positively related, and therefore a valid alternative, to other measures of illiquidity that use intra-
day transactions, such as the one suggested by Kyle (1985). Given that microstructure data is not
available for our sample, we rely on this argument and consider the illiquidity ratio of Amihud (2002) to
be a valid alternative measure for stock price informativeness, given that the magnitude of the price
change should be positively correlated with the amount of informed trading on a stock.
Panel A of Table 7 shows the estimation results of our main regression equations using the illiquidity
ratio (winsorized at the 1% and 99% levels) as the dependent variable. IFRS and voluntary adopters
follow our base-case classification. The remaining variables are defined as before. The results clearly
22
show that voluntary IFRS adopters benefit from an improvement in their illiquidity ratios post IFRS
adoption. The results in table 7 show that using the illiquidity measure, there is a decline in stock price
informativeness for mandatory adopters (IFRS indicator variable is negative and significant at the 1%
level); however, there is a positive and significant change for voluntary adopters. From column 1 of
Table 7, the results show that the adoption of IFRS increases ILLIQ of voluntary adopters by 17.1 basis
points, or 3% of the average ILLIQ.18 The results (not tabulated) are identical when we use variations of
fixed-effects, random-effects, and standard deviations adjusted for one-period serial correlation (similar to
In Panel B of Table 7, we use the bid-ask spread as an additional measure of stock price
informativeness. We compute the bid-ask spread as the yearly median of the daily quoted bid-ask spread
(difference between the bid and ask prices divided the midpoint). A larger bid-ask spread could signal
more information asymmetry. The adoption of IFRS could lead to improvements in the information
environment that can lead to reductions in information asymmetry and thus lower bid-ask spreads.
Consistent with this view, the results in Panel B of Table 7 show a reduction in bid-ask spreads post-
IFRS, and a more significant decline in bid-ask spreads for voluntary adopters, which corroborate our
earlier findings. IFRS adoption seems to be more beneficial for the more serious adopters.
From this evidence we conclude that alternative measures of stock price informativeness should lead
to the same results and corroborate the idea that potential improvements in the quality of financial
information incorporated in stock prices due to the adoption of IFRS accrue primarily to voluntary (i.e.
committed) adopters.
18
For mandatory adopters, IFRS adoption is associated with a -2.152 decline in ILLIQ (column 1). ILLIQ is 0.485
higher for voluntary adopters. In addition, there is a differential impact post-IFRS on voluntary adopters (1.838).
Thus, the adoption of IFRS is associated with a 0.171 higher ILLIQ for voluntary adopters.
23
Endogeneity problems are a concern in this study, in particular due to potential sample selection
issues affecting firms that voluntarily adopt IFRS prior to the mandatory adoption year. The evidence
discussed in the previous sections that stock price informativeness of voluntary IFRS adopters are less
adversely affected (or benefit more) by the adoption of IFRS, may be misleading if voluntary adopters are
self-selected. In other words, the possibility that firms with higher levels of firm-specific information
incorporated into their stock prices are precisely those that step up and become voluntary IFRS adopters
We use two standard methodologies to account for this problem: the Heckman’s (1979) approach and
the two-stage least squares (2SLS) estimation.19 The Heckman approach is a two-step estimation
procedure, where in the first step (selection equation) we estimate the probability of a firm being a
voluntary IFRS adopter. Then we compute the inverse Mill’s ratio, , from the probit regression
estimation, and use it as an additional control variable in the second-stage regressions of price
informativeness. Table 8 shows the results. The selection equation is a probit model where the
dependent variable is 1 if the firm adopted IFRS prior to the year of mandatory adoption and zero
otherwise. The right-hand side variables include all the controls used in the second-stage regressions plus
two additional instrumental variables: “corruption index,” from Transparency International, and the
revised anti-director rights index from La Porta et al. (1998). The results from the probit regressions
show that firms from countries with better investor protection and less corruption are less likely to
voluntarily adopt IFRS. This is consistent with the argument that firms in better countries stand to gain
less from the adoption of IFRS. In the second-stage regressions the coefficient of the inverse Mill’s ratio,
, corrects for sample selection of voluntary IFRS adopters, thus it is expected to extract part of the
explanatory power of the dummy variable that identifies voluntary adopters. Consistently, the coefficient
of is positive and statistically significant. Our main variable of interest – the interaction term IFRS
19
These robustness tests are common in other studies where the same type of self-selection issues is a major
concern. For instance, in the context of cross-listings Doidge, Karolyi, and Stulz (2004) provide a detailed
explanation of Heckman’s (1979) approach. Similar procedures are also used by Fernandes and Ferreira (2008) to
explain the link between cross-listings and stock price informativeness.
24
Voluntary – has, as before, a positive and statistically significant coefficient of similar magnitude,
suggesting that our results are robust after accounting for sample-selection issues.
The last two regression models in Table 8 show the estimation of the second-stage equations using
the 2SLS approach. The first-stage regression is the same probit model from which we generate the fitted
values that are used in the second stage. Again the results show a positive (albeit of smaller magnitude)
and statistically significant coefficient of the interaction term. Overall, both methodologies yield results
consistent with the main evidence discussed throughout the paper that on average any positive impact on
stock price informativeness due to the adoption of IFRS, should be attributed primarily to voluntary rather
6. Conclusion
In this paper, we examine how the adoption of International Financial Reporting Standards across 32
countries affects stock price informativeness. The potential benefits from IFRS adoption (e.g. increased
transparency and comparability of financial statement information across countries) would suggest that
the adoption of IFRS could lead to an improvement in the information environment that would have a
positive impact on stock price informativeness. On the other hand, the implementation of IFRS is likely
to be inconsistent across firms, and even more so across nations, which may lead to a reduction in the
comparability of the resulting financial statement information. As such, IFRS may not have any impact,
We find that the adoption of IFRS is associated with a significant reduction in stock price
informativeness. This result reflects, in part, the downward trend in stock price informativeness since
1999 that is independent of the adoption of IFRS; however, there is a decline in stock price
informativeness post-IFRS even after accounting for the time trend in stock price informativeness.
Voluntary adopters, arguably the more serious and committed adopters, experience a less severe decline
in stock price informativeness following IFRS adoption. As expected, we find that enforcement plays a
25
critical role on the impact of IFRS adoption. Firms in countries with better enforcement have higher firm-
specific return variation and experience a less severe decline in stock price informativeness relative to
those firms in countries with weaker enforcement. This finding underscores the importance of strong
enforcement for firms that may not necessarily have strong incentives to commit to higher levels of
Our results are robust to various different specifications and controls, and to alternate measures of
stock price informativeness. Given that the introduction of IFRS is relatively recent, we cannot draw any
strong conclusions as far as the long-term impact of IFRS adoption on stock price informativeness. In the
short-term, however, the evidence presented here does point to significant benefits associated with IFRS
26
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29
APPENDIX A
List of variables
Relative firm-specific stock return variation, estimated from a two-factor model using
US$-denominated weekly excess returns (winsorized at the 1% and 99% levels). Source:
Datastream.
: Annual firm-specific return variation measure (log(1-R2/R2)), estimated from a two-factor
model using US$-denominated weekly excess returns (winsorized at the 1% and 99%
levels). Source: Datastream.
Anti-director Index: The revised anti-director’s rights index of La Porta et al. (1998).
Bid-ask spread: Yearly median of the daily quoted bid-ask spread (difference between bid
and ask price divided by the midpoint).
Budget: The 2005 securities' regulators' budget divided by the country's GDP. A resource-
based public enforcement measure from Jackson and Roe (2009) (for scaling purposes this
variable is divided by 1000 in the regressions).
Closely Held: Closely-held shares divided by total shares outstanding; Worldscope item:
WC08021.
Corruption Index: Transparency International Corruption Index (2003-2007).
Cross-list: dummy variable that equals 1 if the firm is cross-listed in year t and zero
otherwise. Sources: Citibank ADRs and data collected from the U.S. stock exchanges.
Earnings Mgmt: Earnings management measure corresponding to the absolute value of
accruals scaled by the absolute value of cash flow from operations, as defined by Fernandes
and Ferreira (2008).
GDP per capita: GDP per capita in US$ reflecting 2000 constant prices. Source: World
Bank WDI Database.
Herfindahl (firm): Herfindahl index measuring the firm concentration at the country level,
per year, based on the annual net sales (WC01001) of each firm. Source: Worldscope.
Herfindahl (industry): Herfindahl index measuring the industrial concentration at the
country level, per year, based on the annual net sales (item WC01001) of each industry (2-
digit SIC codes). Source: Worldscope.
IFRS: Dummy variable that equals 1 if year>=the year of mandatory IFRS adoption in the
country or whenever the firm adopted IFRS rules prior to the year of mandatory adoption,
and zero otherwise. Adopters of IFRS prior to the year of mandatory adoption are identified
as in Daske et al. (2009) using the Worldscope definition of “Accounting Standards
Followed” (WC07536). In some robustness tests we use two alternative classifications: (1) a
stricter classification that considers only firms for which the Worldscope accounting
standards variable states “IFRS”, prior to the year of mandatory adoption in the country; and
(2) a classification based on Compustat Global, where prior adopters of IFRS rules are coded
whenever the variable “ASTD” equals “DA”, “DI”, or “DT”, prior to the mandatory
adoption year.
Illiquidity: Amihud (2002) illiquidity measure – the annual average of the daily ratio of a
stock's absolute return to its dollar volume. Source: Datastream.
Industry: 2-digit SIC code for major segment (Datastream - SIC code 1).
Leverage: Long-term debt in US$ 000 (WC03251) divided by total assets in US$ 000
(WC02999). Source: Worldscope.
30
MTB: Market-to-book (item MTBV). Source: Datastream.
Public Enforcement: Index of public enforcement from Djankov et al. (2008).
ROE: Return on equity (item WC08301). Source: Worldscope.
Staff: The 2005 size of the securities' regulators' staff, divided by the country's population.
A resource-based public enforcement measure from Jackson and Roe (2009).
Stock Mkt Cap: Country-level variable that measures the stock market capitalization to the
GDP. Source: Beck, Demirgüç-Kunt, and Levine (2010).
Time trend: Equals the value year t minus 1990.
Total Analysts: Total number of analysts following a firm by year. Source: I/B/E/S.
Total Assets: Total assets (in US$ 000, reflecting 2010 prices). Worldscope item WC02999.
Turnover: Turnover ratio (%) – stocks traded divided by the number of shares outstanding.
Source: Datastream.
USGAAP: Dummy variable that equals 1 if the firm’s accounting standards follow the U.S.
GAAP in a given year, and zero otherwise (item WC07536). Source: Worldscope.
Var. GDP per capita: Variance of the GDP per capita using a three-year rolling window.
Voluntary: dummy variable that equals 1 if the firm adopted IFRS rules prior to the year of
mandatory adoption in its country, and zero otherwise (the classification of IFRS adopters is
explained above).
31
APPENDIX B
We use the same coding proposed by Daske et al. (2009) based on Worldscope “Accounting
Standards Followed” (WC07536) and Compustat Global “Accounting Standard” (ASTD).
Panels A and B replicate part of Table A1 of Daske et al. (2009) and show how the variable
IFRS was coded for each firm-year observation prior to the mandatory adoption year. The
“base-case” is the classification that we use throughout the paper for most of the analyses and
the “alternative” classifications are used in the section of robustness tests.
WS code WS Description
02 International standards IFRS (base-case)
06 International standards and some EU guidelines IFRS (base-case)
08 Local standards with EU and IASC guidelines IFRS (base-case)
12 International standards - inconsistency problems IFRS (base-case)
16 International standards and some EU guidelines - inconsistency problems IFRS (base-case)
18 Local standards with some IASC guidelines IFRS (base-case)
19 Local standards with OECD and IASC guidelines IFRS (base-case)
IFRS (base-case)/ Alternative
23 IFRS
(stricter) IFRS classification
CG code CG Description
Domestic standards generally in accordance with IASC Alternative IFRS classification based on Compustat
DA
and OECD guidelines Global
Domestic standards generally in accordance with IASC Alternative IFRS classification based on Compustat
DI
guidelines Global
Domestic standards in accordance with principles
DT generally accepted in the U. S. and generally in Alternative IFRS classification based on Compustat
accordance with IASC and OECD guidelines Global
32
Table 1. Mean relative firm-specific stock return variation by country pre- and post-IFRS adoption
The sample is comprised of firms from countries that adopted IFRS, or have committed to adopt IFRS
and allow firms to report financial statements in accordance with IFRS. The sample period ranges from
1999 to 2009. The table reports the mean relative firm-specific stock return variation (by country,
pre- and post-IFRS adoption; is estimated from a two-factor model using US$-denominated
weekly excess returns and then winsorized at the 1% and 99% levels.
33
Table 2. Descriptive statistics
The sample is comprised of firms from countries that adopted IFRS, or have committed to adopt IFRS
and allow firms to report financial statements in accordance with IFRS. The sample period ranges from
1999 to 2009. All variables are defined in Appendix A. Panels A and B show the summary statistics for
voluntary and mandatory IFRS adopters.
34
Table 3. Correlation matrix
The sample is comprised of firms from countries that adopted IFRS, or have committed to adopt IFRS and allow firms to report financial statements in accordance with IFRS.
The sample period ranges from 1999 to 2009. All variables are defined in Appendix A.
Illiquidity Bid-ask spread Total Assets Leverage ROE MTB Total Analysts Closely Held Turnover Earnings Mgmt Herfindahl (firm) Herfindahl (industry) Stock Mkt CapGDP per capitaPublic Enforcement Budget Staff
1
0.919 1
Illiquidity 0.123 0.1494 1
Bid-ask spread 0.3662 0.3897 0.3467 1
Total Assets -0.268 -0.213 -0.036 -0.1406 1
Leverage -0.117 -0.108 -0.014 -0.1092 0.072 1
ROE -0.071 -0.076 -0.066 -0.1085 0.019 -0.005 1
MTB -0.056 -0.058 -0.039 -0.0884 -0.005 0.000 0.056 1
Total Analysts -0.387 -0.336 -0.105 -0.3478 0.514 0.162 0.047 0.097 1
Closely Held 0.055 0.051 0.063 0.0726 -0.106 -0.040 0.007 -0.040 -0.212 1
Turnover -0.063 -0.066 -0.040 0.0358 0.036 -0.009 -0.006 0.021 0.025 -0.123 1
Earnings Mgmt 0.037 0.032 0.024 0.0379 -0.019 -0.009 -0.048 -0.023 -0.045 0.025 0.005 1
Herfindahl (firm) -0.152 -0.136 0.017 -0.1473 -0.028 0.093 0.021 -0.027 0.065 0.142 -0.264 -0.011 1
Herfindahl (industry) -0.020 -0.028 -0.016 -0.0475 -0.006 0.034 0.003 -0.007 -0.012 0.043 -0.163 -0.008 0.185 1
Stock Mkt Cap 0.123 0.111 -0.023 0.1107 -0.034 -0.077 0.033 0.082 -0.065 -0.232 -0.115 -0.032 -0.268 -0.081 1
GDP per capita 0.153 0.129 -0.048 0.1286 0.031 0.055 -0.023 0.053 0.072 -0.277 0.291 -0.018 -0.233 0.030 0.231 1
Public Enforcement -0.045 -0.057 -0.044 -0.1988 0.058 0.064 -0.004 0.010 0.134 0.141 -0.058 -0.002 0.123 0.050 -0.250 0.255 1
Budget 0.022 0.030 0.038 0.1613 -0.056 0.004 0.008 -0.004 -0.118 -0.159 0.038 -0.016 0.032 -0.119 0.205 -0.093 -0.653 1
Staff 0.039 0.037 0.017 0.1904 -0.033 0.063 -0.003 0.020 -0.065 -0.199 0.018 -0.022 0.076 0.025 0.192 0.357 -0.190 0.672 1
35
Table 4. IFRS adoptions and firm-specific stock return variation
The sample is comprised of firms from countries that adopted IFRS, or have committed to adopt IFRS
and allow firms to report financial statements in accordance with IFRS. The sample period ranges from
1999 to 2009. The dependent variable is the proxy for stock price informativeness, . All variables are
defined in Appendix A. To identify IFRS voluntary adopters, we follow Daske at al. (2009). White-
robust t-stats (absolute value) are shown in parentheses. *, **, *** stand for statistical significance at the
10%, 5%, and 1% levels, respectively.
36
Excl.
(1) (2) (3) (4) (5) (6)
ADRs (7)
IFRS -0.471*** -0.510*** -0.296*** -0.434*** -0.309*** -0.296*** -0.332***
(45.83) (46.83) (13.42) (21.36) (13.12) (13.22) (14.19)
IFRS * Voluntary 0.216*** 0.198*** 0.295*** 0.198*** 0.198*** 0.211***
(6.30) (4.74) (6.69) (4.12) (4.74) (4.73)
Voluntary 0.020 0.002 -0.222*** -0.006 0.002 0.000
(0.61) (0.05) (5.49) (0.12) (0.05) (0.00)
Log total assets -0.320*** -0.324*** -0.213*** -0.226*** -0.212*** -0.213*** -0.211***
(115.82) (116.49) (37.09) (38.55) (32.34) (37.06) (34.85)
Leverage 0.335*** 0.344*** 0.247*** 0.295*** 0.208*** 0.247*** 0.245***
(9.44) (9.71) (5.08) (5.89) (3.98) (5.08) (4.88)
ROE -0.019** -0.018** -0.050** -0.050** -0.038*** -0.050** -0.048**
(2.22) (2.23) (2.12) (1.99) (6.19) (2.12) (2.13)
MTB -0.005*** -0.005*** -0.020*** -0.024*** -0.017*** -0.020*** -0.019***
(2.69) (2.69) (6.76) (7.34) (10.02) (6.76) (6.33)
Log total analysts -0.138*** -0.123*** -0.133*** -0.138*** -0.140***
(17.03) (14.97) (15.34) (17.00) (16.76)
Closely held 0.384*** 0.209*** 0.349*** 0.384*** 0.390***
(14.12) (7.71) (11.30) (14.11) (13.79)
Turnover -0.001*** 0.000* -0.001*** -0.001*** -0.001***
(7.74) (1.73) (7.29) (7.56) (6.73)
Earnings Mgmt 0.004** 0.003* 0.002* 0.004** 0.004**
(2.49) (1.95) (1.65) (2.49) (2.47)
Herfindahl (firm) -2.485*** -2.169*** -3.152*** -2.484*** -3.015***
(3.77) (8.14) (4.59) (3.77) (4.11)
Herfindahl (industry) -0.000 -0.012*** -0.001 -0.000 0.000
(0.02) (8.33) (0.47) (0.02) (0.05)
Cross-list -0.000 -0.017 -0.016 -0.000 0.000
(0.01) (0.58) (0.44) (0.01) (.)
USGAAP -0.090** -0.226*** -0.124** -0.090** -0.138**
(2.15) (5.58) (2.49) (2.15) (2.54)
Time trend -0.012*** -0.051*** -0.004 0.001 -0.016
(2.60) (16.27) (0.88) (0.04) (0.77)
Log GDP per capita -2.479*** 0.257*** -2.796*** -0.012** -0.006
(14.20) (30.70) (14.83) (2.34) (1.14)
Stock mkt Cap -0.000 0.001*** 0.000* -2.480*** -2.519***
(0.95) (7.21) (1.81) (14.15) (13.99)
Var. GDP per capita -0.012*** -0.007*** -0.011*** -0.000 -0.000
(10.54) (6.77) (10.41) (0.95) (1.22)
Financial Crisis -0.012*** -0.012***
(10.36) (10.00)
Constant 5.521*** 5.591*** 29.477*** 6.367*** 32.946*** 29.482*** 29.800***
(154.13) (154.21) (17.23) (14.59) (16.35) (17.12) (16.85)
37
Table 5. Public enforcement and IFRS adoption
The sample is comprised of firms from countries that adopted IFRS, or have committed to adopt IFRS
and allow firms to report financial statements in accordance with IFRS. The sample period ranges from
1999 to 2009. The dependent variable is the proxy for stock price informativeness, . All variables are
defined in Appendix A. White-robust t-stats (absolute value) are shown in parentheses. *, **, *** stand
for statistical significance at the 10%, 5%, and 1% levels, respectively.
38
(1) (2) (3)
IFRS -0.284*** -0.271*** -0.266***
(11.47) (9.52) (8.17)
Public Enforcement 8.493***
(12.99)
IFRS * Pub. Enforcement 0.145***
(4.10)
Staff 0.005***
(2.84)
IFRS * Staff 0.003**
(2.35)
Budget 0.005***
(5.23)
IFRS * Budget 0.001*
(1.92)
Log total assets -0.210*** -0.211*** -0.209***
(36.62) (36.71) (35.54)
Leverage 0.233*** 0.236*** 0.214***
(4.77) (4.83) (4.27)
ROE -0.051** -0.051** -0.052**
(2.11) (2.11) (2.07)
MTB -0.020*** -0.020*** -0.021***
(6.81) (6.80) (6.67)
Log total analysts -0.139*** -0.137*** -0.142***
(17.02) (16.81) (16.81)
Closely held 0.381*** 0.374*** 0.376***
(14.02) (13.77) (13.63)
Turnover -0.001*** -0.002*** -0.002***
(7.36) (8.62) (9.21)
Earnings Mgmt 0.004** 0.004** 0.005***
(2.50) (2.49) (2.73)
Herfindahl (firm) -2.323*** -2.405*** -2.279***
(3.53) (3.64) (3.35)
Herfindahl (industry) -0.000 -0.000 0.000
(0.07) (0.29) (0.28)
Cross-list 0.002 0.006 0.008
(0.08) (0.21) (0.27)
Log GDP per capita -2.343*** -2.503*** -2.377***
(13.20) (14.34) (10.40)
Stock mkt Cap -0.000* -0.000 -0.001***
(1.88) (1.55) (3.50)
Var. GDP per capita -0.012*** -0.013*** -0.012***
(10.28) (10.82) (9.67)
USGAAP -0.108** -0.163*** -0.161***
(2.55) (3.89) (3.79)
Time trend -0.021*** -0.018*** -0.021***
(4.67) (3.93) (4.36)
Constant 23.937***29.579***28.154***
(15.84) (17.46) (12.74)
Country fixed-effects yes yes yes
Industry fixed-effects yes yes yes
Observations 30426 30420 29519
R-squared 0.37 0.37 0.37
39
Table 6. Alternative measures of voluntary IFRS adopters
The sample is comprised of firms from countries that adopted IFRS, or have committed to adopt IFRS
and allow firms to report financial statements in accordance with IFRS. The sample period ranges from
1999 to 2009. The dependent variable is the proxy for stock price informativeness, . In regressions (1)
and (2) we use a stricter definition of voluntary IFRS adopters that includes only firms reported by
Worldscope (variable WC07536) to follow IFRS standards prior to the year of mandatory adoption in
their country. In regressions (3) and (4) we use another definition of voluntary IFRS adopters based on
the accounting standards information obtained from Compustat Global following the procedure of Daske
et al. (2009). All variables are defined in Appendix A. White-robust t-stats (absolute value) are shown in
parentheses. *, **, *** stand for statistical significance at the 10%, 5%, and 1% levels, respectively.
40
Stricter definition of IFRS definition based on
IFRS based on Compustat Global
(1)Worldscope(2) accounting
(3) standards
(4)
IFRS -0.381*** -0.417*** -0.319*** -0.340***
(16.92) (17.24) (15.17) (15.28)
IFRS * Voluntary 0.230*** 0.229*** 0.278*** 0.291***
(6.03) (5.92) (6.02) (6.31)
Voluntary -0.057 -0.041 -0.085* -0.086*
(1.46) (1.05) (1.89) (1.93)
Log total assets -0.217*** -0.210*** -0.220*** -0.213***
(39.96) (36.82) (40.23) (36.98)
Leverage 0.241*** 0.259*** 0.242*** 0.255***
(5.16) (5.34) (5.17) (5.24)
ROE -0.049** -0.050** -0.050** -0.050**
(2.11) (2.14) (2.10) (2.12)
MTB -0.020*** -0.020*** -0.021*** -0.020***
(7.19) (6.74) (7.28) (6.81)
Log total analysts -0.143*** -0.141*** -0.140*** -0.138***
(18.66) (17.43) (18.17) (17.04)
Closely held 0.383*** 0.378*** 0.391*** 0.386***
(14.80) (13.93) (15.10) (14.21)
Turnover -0.001*** -0.001*** -0.001*** -0.001***
(6.95) (6.46) (7.49) (7.06)
Earnings Mgmt 0.003** 0.003** 0.003** 0.004**
(2.16) (2.43) (2.22) (2.49)
Herfindahl (firm) -1.800*** -2.643*** -1.828*** -2.676***
(2.89) (3.98) (2.95) (4.06)
Herfindahl (industry) -0.000 -0.001 -0.000 -0.000
(0.19) (0.48) (0.03) (0.26)
Cross-list 0.019 0.003 0.016 0.000
(0.70) (0.10) (0.60) (0.01)
USGAAP -0.087** -0.096** -0.081** -0.090**
(2.17) (2.33) (2.01) (2.18)
Time trend -0.044*** 0.010** -0.052*** -0.003
(13.87) (1.98) (18.35) (0.70)
Log GDP per capita -2.820*** -2.704***
(15.94) (15.44)
Stock mkt Cap 0.000 -0.000
(0.83) (0.45)
Var. GDP per capita -0.013*** -0.013***
(11.17) (10.85)
Constant 5.023*** 32.571*** 5.144*** 31.613***
(67.23) (18.85) (70.66) (18.45)
Industry fixed-effects yes yes yes yes
Country fixed-effects yes yes yes yes
Observations 33047 30426 33047 30426
R-squared 0.38 0.37 0.38 0.37
41
Table 7. Alternative measures of stock price informativeness
The sample is comprised of firms from countries that adopted IFRS, or have committed to adopt IFRS
and allow firms to report financial statements in accordance with IFRS. The sample period ranges from
1999 to 2009. In panel A, the dependent variable is the illiquidity measure defined by Amihud (2002). In
panel B the dependent variable is the yearly median of the daily quoted bid-ask spreads. All variables are
defined in Appendix A. White-robust t-stats (absolute value) are shown in parentheses. *, **, *** stand
for statistical significance at the 10%, 5%, and 1% levels, respectively.
(1) (2)
IFRS -2.152*** -2.226***
(4.38) (3.80)
IFRS * Voluntary 1.838** 1.856**
(2.28) (2.22)
Voluntary 0.485 0.636
(0.60) (0.78)
Log total assets -2.143*** -2.046***
(12.44) (11.43)
Leverage 8.386*** 6.977***
(4.02) (3.26)
ROE -1.705* -1.608*
(1.72) (1.70)
MTB -0.251*** -0.187***
(3.44) (2.61)
Log total analysts -2.085*** -2.353***
(8.91) (9.19)
Closely held 4.075*** 3.768***
(4.93) (4.25)
Turnover 0.003 -0.005
(0.88) (1.10)
Earnings Mgmt 0.084* 0.086*
(1.77) (1.76)
Herfindahl (firm) 64.240*** 78.022***
(2.61) (2.85)
Herfindahl (industry) 0.056*** 0.055***
(4.75) (4.24)
Cross-list 3.663*** 3.387***
(7.08) (6.05)
USGAAP 0.352 0.500
(0.52) (0.70)
Log GDP per capita 1.075
(0.27)
Stock mkt Cap -0.046***
(7.37)
Var. GDP per capita 0.052
(1.24)
Constant 35.439*** 30.092
(13.20) (0.75)
Industry fixed-effects yes yes
Country fixed-effects yes yes
Observations 30544 28125
R-squared 0.07 0.07
42
Panel B: Dependent variable – “Bid-ask spread”
(1) (2)
IFRS -0.001* -0.002***
(1.95) (3.20)
IFRS * Voluntary -0.002*** -0.001*
(2.90) (1.81)
Voluntary 0.005*** 0.005***
(7.40) (7.59)
Log total assets -0.006*** -0.006***
(33.06) (31.43)
Leverage 0.011*** 0.010***
(6.62) (5.68)
ROE -0.002 -0.002
(1.46) (1.44)
MTB -0.001*** -0.001***
(7.25) (6.80)
Log total analysts -0.005*** -0.005***
(23.04) (22.67)
Closely held 0.017*** 0.017***
(21.10) (19.61)
Turnover -0.000*** -0.000***
(7.30) (9.74)
Earnings Mgmt 0.000** 0.000**
(2.47) (2.04)
Herfindahl (firm) 0.063** 0.037
(2.04) (1.17)
Herfindahl (industry) 0.000*** 0.000***
(7.79) (6.34)
Cross-list 0.008*** 0.007***
(13.55) (12.04)
USGAAP 0.001 0.002**
(1.60) (2.19)
Log GDP per capita 0.006
(1.01)
Stock mkt Cap -0.000***
(8.05)
Var. GDP per capita 0.000***
(9.38)
Constant 0.097*** 0.045
(43.84) (0.78)
43
Table 8. Heckman’s (1979) procedure and 2SLS to correct for endogeneity issues
The sample is comprised of firms from countries that adopted IFRS, or have committed to adopt IFRS
and allow firms to report financial statements in accordance with IFRS. The sample period ranges from
1999 to 2009. To account for possible endogeneity and sample selection of voluntary IFRS adopters, we
use the Heckman’s (1979) procedure and the 2SLS. The first-stage regression is a probit model that
estimates the likelihood of a firm being a voluntary IFRS adopter. The dependent variable is 1 if prior to
2005 the firm adopted IFRS (following the definition of Daske et al. 2009), and zero otherwise.
Specifications (2) and (3) show the estimates of the Heckman’s (1979) procedure and specifications ((4)
and (5) show the 2SLS estimates. The dependent variable in the second-stage regressions is the proxy for
stock price informativeness, . is the inverse Mills ratio that corrects for sample selection bias. All
variables are defined in Appendix A. The table reports marginal effects for the probit regression. White-
robust t-stats (absolute value) are shown in parentheses. *, **, *** stand for statistical significance at the
10%, 5%, and 1% levels, respectively.
44
Probit Heckman 2SLS
(1) (2) (3) (4) (5)
Log total assets 0.012*** -0.172*** -0.172*** -0.207*** -0.234***
(12.14) (22.30) (22.25) (32.14) (34.21)
Leverage -0.041*** 0.149*** 0.149*** 0.249*** 0.339***
(4.30) (2.72) (2.71) (4.66) (6.24)
ROE -0.010*** -0.204*** -0.205*** -0.182*** -0.161***
(3.25) (3.44) (3.45) (3.07) (2.70)
MTB -0.001* -0.025*** -0.025*** -0.023*** -0.022***
(1.71) (10.66) (10.67) (9.86) (9.22)
Log total analysts 0.006*** -0.117*** -0.117*** -0.131*** -0.145***
(4.40) (13.67) (13.64) (15.62) (16.84)
Closely held -0.009 0.381*** 0.380*** 0.408*** 0.426***
(1.62) (13.33) (13.30) (14.25) (14.96)
Turnover -0.000*** -0.002*** -0.002*** -0.001*** -0.001***
(3.37) (8.00) (8.04) (6.23) (4.61)
Earnings Mgmt -0.000 0.003* 0.003* 0.003** 0.003**
(0.44) (1.77) (1.76) (2.09) (2.26)
Herfindahl (firm) -0.317*** -1.694** -1.689** -1.253 -0.562
(2.95) (2.16) (2.15) (1.61) (0.73)
Herfindahl (industry) -0.000** -0.000 -0.000 0.001 0.002
(2.35) (0.23) (0.21) (0.62) (1.28)
Cross-list -0.007 -0.037 -0.037 -0.015 0.002
(1.42) (1.27) (1.26) (0.52) (0.05)
Time trend -0.019*** -0.076*** -0.077*** -0.039*** 0.003
(25.42) (11.97) (11.98) (8.57) (0.43)
Log GDP per capita 0.005 -1.550*** -1.558*** -1.422*** -1.432***
(0.12) (9.07) (9.10) (8.45) (8.47)
Stock mkt Cap -0.000*** -0.001** -0.001** -0.000 0.001***
(6.91) (2.42) (2.45) (0.03) (3.04)
USGAAP -0.030*** -0.210*** -0.212*** -0.122*** -0.014
(7.08) (4.71) (4.75) (2.77) (0.32)
Anti-director Index -0.104***
(4.85)
Corruption Index -0.042*
(1.87)
IFRS 0.204*** 0.124** 0.133** -0.189*** -0.554***
(38.30) (2.22) (2.33) (8.66) (12.68)
IFRS * Voluntary 0.119*** 0.089** 0.032*** 0.032***
(4.78) (2.02) (3.28) (3.28)
Voluntary 0.272*** 0.277***
(7.84) (7.85)
0.033 0.178***
(0.81) (9.69)
Constant 19.539*** 19.608*** 19.042*** 19.402***
(11.71) (11.73) (11.50) (11.53)
Industry fixed-effects
Country fixed-effects
Observations 27891 27891 27891 27891 27891
Pseudo R-squared 0.62
Actual Prob. 0.18
R-squared 0.38 0.38 0.38 0.38
45
Figure 1 – The graph shows the trend in the measure of stock price informativeness, , defined as log[(1-R2)/R2]
from the following model of weekly excess returns: .
1.5
0.5
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
46