Stock price volatility and informational efficiency following the mandatory adoption of IFRS in Europe

Abstract

The aim of this study is to examine the impact of mandatory International Financial Reporting Standards (IFRS) adoption on the informational efficiency, market stability, and price adjustment of underlying stocks in Europe. This study examines 1,187 stocks from 20 European countries to assess the impact of the mandatory adoption of IFRS on certain aspects of the market quality of the adopting firms. The observed decrease in the first order autocorrelation and the permanent component of the conditional variance indicates that the mandatory IFRS adoption enhances informational efficiency and contributes to the market stability of the underlying stocks. The authors find no evidence that IFRS adoption affects the role old news has in determining the conditional variance of adopting firms. The effects of IFRS adoption on the equity cost of capital are shown to depend on the country-specific characteristics. Specifically, IFRS adoption is more likely to increase (decrease) the betas of stocks that are listed in the common (civil) law countries. Like any empirical event-study, the validity of the results depends on the absence of confounding events. To the best of the authors’ knowledge, this paper is the first to use GARCH type models to empirically examine the effects of mandatory IFRS adoption on the informational efficiency and market stability of adopting firms.