Market Reaction to the Adoption of IFRS in Europe

TLDR

European IFRS adoption was a major milestone toward financial reporting convergence but sparked high‑level controversy. The study investigates how European stock markets react to 16 IFRS adoption events. IFRS adoption events produce mixed market reactions: firms with lower pre‑adoption information quality and higher asymmetry, especially banks, see positive returns, firms in code‑law jurisdictions experience negative returns, and firms with high pre‑adoption quality enjoy positive returns.

Abstract

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.