Has IFRS raised the standard of accounting?  : value relevance of financial statements for stock prices in light of IFRS changes

2019

This thesis measures the value relevance of the financial statement through analyzing

the explanatory power and coefficients of earnings per share and book value of equity

per share on next quarter’s stock price. The analysis is done for the time period of

2005-2019Q2 in Europe to assess the effect of new IFRS Standards using quarterly data

and a large sample size covering over 90 percent of free-float market capitalization in

Europe. The contribution should be seen as an overall assessment of IFRS policymakers

and whether they succeed in making financial statements more relevant, which is one of the

two desired characteristics highlighted in the IFRS Conceptual Framework. Researchers

carry a big responsibility as a watchdog to understand and assess actions taken by actors

who influence capital market effectiveness, and this thesis tries to do just that with IFRS.

Hypothesis on the value relevance effect of new IFRS Standards is created for each defined

period. A synthesis of the different hypotheses is that many of the issued Standards are not

superior to the IAS Standards which they supersede, and often create noise. Hypotheses

are tested empirically with linear regression on the Ohlson-model from Ohlson (1995)

and a decomposition model used in Collins et al. (1997). Lastly, additional testing on

cash flows versus accruals utilizing the approach of Sloan et al. (2018) shows findings that

indicate a steady persistence of accruals anomaly.

In the analysis, a significant fall in value relevance in the tested period of around 0.7

percentage points per year is observed. However, compared to previous research, we find

higher overall value relevance and informational overlap between the income statement

and balance sheet. These findings are robust to changes in both time intervals and model

specifications. The implication from our findings is that IFRS Standards should be placed

under stronger scrutiny before their EU endorsement and that further research should

focus on the underlying mechanisms that lead to the fall in value relevance.

Keywords – Value relevance, IFRS