Accounting disclosures and stock price efficiency: Evidence from mandatory IFRS adoption

Abstract

We investigate whether adopting a uniform set of accounting standards impacts stock price efficiency by introducing a novel empirical test imported from the finance literature. Using mandatory adoption of International Financial Reporting Standards (IFRS) as an exogenous shock to the accounting information disclosure environment and employing a difference-in-difference research design, we find that the extent to which stock prices deviate from their fundamental values decreases significantly following the adoption of IFRS. In cross-sectional tests, we further observe that the impact of IFRS adoption on stock price efficiency is more pronounced in countries with lower accounting quality prior to IFRS adoption and in those with substantial differences between their domestic Generally Accepted Accounting Principles (GAAP) and IFRS. Overall, our study contributes to the literature by empirically examining a fundamental aspect of the IFRS mission statement—whether IFRS adoption enhances financial market efficiency.