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Financial reporting is an essential resource of confirmed information about the firm’s performance that helps investors and other stakeholders make financial decisions (Habib et al., 2019; IASB, 2108). As a result, disclosure quality is a fundamental contributor to stock market performance. The disclosure quality depends on the value relevance of information that meets stakeholders’ needs. In this context, accounting standards are the major factor that improves the quality of reporting. The International Accounting Standards Board (IASB) aims to achieve global convergence of accounting standards, through issuing and implementing international accounting standards that improve disclosure quality. Therefore, one of the central goals of adopting IFRS is to increase the quality of financial statements (Callao et al., 2007).
The expectation is that adopting IFRS provides higher quality accounting information by employing more accepted accounting and market-oriented principles (Tristão & Sonza, 2020). The IFRS builds on principles-based approach. Therefore, adopting IFRS allows the firm’s management to benefit from greater flexibility in financial reporting and improve disclosure quality. This flexibility has led to the extension of accounting information disclosed in financial reports, which increases market liquidity by decreasing information asymmetry among stakeholders. Conversely, IFRS’s flexibility may increase the uncertainty of accounting information, which increases the investor’s disclosure risk and reduces market liquidity (Khan et al., 2021).
In recent decades, several studies investigated the impact of adopting IFRS on the value relevance as a proxy of disclosure quality. We can categorize evidence from previous research into three directions. The first direction conclude a significant and positive correlation between IFRS adoption and value relevance (Kwon, 2018; Avwokeni, 2018; Cormier & Magnan, 2016). The second direction identified a significant and negative (or no improvement) effect of IFRS adoption on the value relevance (Roca, 2021; Flores & Alexsandro, 2019). Finally, the third direction consists of studies that have shown an enhancement in the value relevance of specific variables, instantaneously with a worsening in the value relevance of others (Eng et al., 2019; Elbakry et al., 2017; Cascino & Gassen, 2015; Kargin, 2013). It is clear that there are mixed results regarding the impact of adopting IFRS on value-relevant accounting information. Therefore, additional research is required to understand the economic implications of adopting IFRS on disclosure quality. On the other hand, several investigations of the economic implications of IFRS adoption on the stock market demonstrated positive effects on both cost of equity and capital market liquidity (Li et al., 2021; Khan et al., 2021; Nejad et al., 2020; Abad et al., 2017; Armitage et al., 2014).
The main purpose of this paper is to empirically examine the impact of adopting IFRS as a moderator variable on the relationship between the quality of disclosure and market responses. This study used the value relevance as a proxy of disclosure quality, while market liquidity and share prices are proxies for market reactions. Furthermore, this study used earnings per share and the book value of equity per share as indicators of value relevance.
We developed three hypotheses to study the impact of adopting IFRS as a moderator variable on the relationship between disclosure quality and market responses. The adoption of IFRS in the Kingdom of Saudi Arabia became effective from January 2017. We used a selected sample of non-financial firms listed on the Saudi exchange over the five-year period from 2015 to 2019, giving a two-year period prior to adoption and three years after. The study resulted in two key results. First, we found a significant and positive relationship between IFRS adoption and value relevance of accounting information for firms listed on the Saudi exchange. Second, the conclusion shows that the adoption of IFRS leads to improved market liquidity and higher stock prices for firms listed on the Saudi exchange.