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

Abstract

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