Abstract
This thesis investigates the impact of the widespread adoption of International Financial Reporting Standards (IFRS) in 2005, focusing on three key empirical questions. First, it examines whether IFRS adoption led to structural changes in financial reporting, particularly in net income and cash flows, during the early transition period. Second, it evaluates the impact of IFRS adoption on the usefulness of financial ratios in predicting stock performance from an investor’s perspective. Third, it explores whether cash flows offer incremental value relevance over earnings during the IFRS transition period.To address the first question, this study employs a structural change model to analyse a dataset of 3,826 firms from 24 IFRS-adopting countries. The findings indicate a significant structural change in net income post-IFRS adoption, with higher reported figures compared to the pre-adoption period, while cash flows show no significant changes. These results suggest that IFRS significantly influences accrual accounting but has limited impact on cash flows, which are less prone to managerial discretion. Temporal analysis highlights a notable increase in net income during 2005– 2006, followed by declines in 2008–2009, likely influenced by the global financial crisis. These patterns underscore the interplay between IFRS adoption, managerial discretion, and external economic conditions during the transition period.
The second question examines the predictive utility of financial ratios for stock performance before and after IFRS adoption. Using a 10-year research window, financial ratios are condensed into six principal components—profitability, cash flow, asset utilization, liquidity, leverage, and efficiency/market ratios—through principal component analysis. Logit models reveal a decline in the predictive relevance of these ratios post-IFRS adoption, with cash flow ratios remaining significant predictors, while profitability and other ratio groups lose significance. These findings suggest that IFRS adoption alters the relationship between financial ratios and stock performance, with market turbulence during the financial crisis potentially amplifying these effects.
The third question evaluates the incremental value relevance of cash flows relative to earnings under IFRS using a modified Ohlson pricing model. The results indicate that while earnings and book value remain key determinants of stock prices, the value relevance of net income diminishes post-IFRS adoption, whereas cash flows provide incremental explanatory power on stock price movements. Further analysis shows that during the pre-crisis IFRS adoption period (2005–2007), cash flows emerge as a robust predictor, highlighting their relative informativeness for investors during periods of economic transition.
This thesis makes several contributions to the literature. First, it extends prior IFRS research by documenting the structural shifts in financial reporting immediately and over time following IFRS adoption. Second, it provides novel insights into the declining predictive utility of financial ratios under IFRS, enriching the debate on the benefits and limitations of IFRS adoption. Finally, it contributes to value relevance research by incorporating cash flow components into a modified pricing model, while accounting for the concurrent financial crisis. Collectively, these findings deepen our understanding of IFRS adoption’s impact on financial reporting quality, investor decision- making, and the evolving role of accounting information in global capital markets.
Date of Award | 5 Jan 2025 |
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Original language | English |
Awarding Institution |
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Supervisor | Khaled Hussainey (Supervisor) & Imam Arafat (Supervisor) |