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Market Reaction to the Adoption of IFRS in Europe
Chris Armstrong, Stanford University
Mary Barth, Stanford University
Alan Jagolinzer, Stanford University
Edward Riedl, Harvard Business School
ABSTRACT. This paper examines the European stock market reaction to sixteen key events associated with the adoption of International Financial Reporting Standards (IFRS) in Europe. We find significant positive (negative) market reactions to events that increase (decrease) the likelihood of IFRS adoption, which indicates that European equity investors perceive net benefits to adoption of IFRS. We then group firms by the quality of their pre-adoption information environments, finding a significant positive reaction to IFRS adoption for firms with higher quality pre-adoption information environments. Because the informational benefits to IFRS adoption should be minimal for these firms, we interpret this result as net benefits associated with convergence. We also find a significantly more positive market reaction to IFRS adoption for firms with lower quality pre-adoption information environments. We interpret this result as net benefits associated with improved information quality under IFRS.
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