Does The IFRS Adoption Promote Emerging Stock Markets Development and Performance
Does The IFRS Adoption Promote Emerging Stock Markets Development and Performance
Does The IFRS Adoption Promote Emerging Stock Markets Development and Performance
Economies
To cite this article: Habib Ben Cheikh & Aymen Ben Rejeb (2021) Does the IFRS adoption
promote emerging stock markets development and performance?, Macroeconomics and Finance in
Emerging Market Economies, 14:1, 1-23, DOI: 10.1080/17520843.2020.1773891
Article views: 96
a
Higher Institute of Management, University of Sousse, Sousse-Tunisia; bMember of LAMIDED, ISG Sousse,
University of Sousse, Sousse-Tunisia
1. Introduction
The preparation of financial information according to different national accounting
systems has become a constraint in meeting the needs of users with the increasing
internationalization of economic trade, the emergence of multinational companies and
the internationalization of financial markets. This requires ignorance of purely national
information and the search for adaptable solutions to the new global environment.
In recent years, the international harmonization’s initiatives of accounting standards
have been advanced by several organizations in order to create a coherent set of
accounting standards that allows national and international users to have an information
product comparable and satisfactory. To achieve this goal, the International Accounting
Standards Board (IASB) was created to develop a single set of International Financial
Reporting Standards (IFRS). These international accounting standards are globally quali
fied by high quality and comprehensibility.
IFRS are considered as an accounting revolutionary in relation to the professional
practice of some countries, especially developing countries, through three major changes
in which IFRS are characterized. According to Disle and Noël (2007) these main changes
are: the discrimination of certain users of financial information, namely, creditors and
investors (Paragraph OB 2 of the 2010 conceptual framework), the historical cost that is
replaced by the fair value and finally the transition from a legal approach to an eco
nomic one.
According to the IASB, more than 119 countries have required or authorized the
adoption of these standards or have established a timetable that sets the expected
date for the IFRS adoption. In addition, several emerging and developing economies
such as Mexico, Malaysia and Chile have followed this wave of IFRS adoption. However,
this decision made by developing countries raises the question of the international
accounting standards effectiveness for their stock markets, knowing that they are con
sidered as high-quality standards and well developed, and for the adoption/application to
be successful, a high economic development level is needed. In addition, these countries
are characterized by the predominance of the public sector, the limited development of
the accounting profession and by the low human development indices.
One of the benefits of moving to IFRS is that it can enhance the liquidity of capital
markets and reduce costs of capital by providing investors with better information on
corporate performance. The benefit to investors could also lead to more-informed valua
tion of equity markets, reducing risk of adverse selection for the less-informed investors.
According to Doupnik and Richter (2004), emerging markets need to attract foreign
investment to tackle national development. Nevertheless, accounting and financial infor
mation from these markets are considered unreliable by international investors. Indeed,
despite the uncertainty, the developing countries have taken the initiative to adopt the
IAS/IFRS in order to improve the credibility and quality of accounting information pub
lished in their markets.
Generally, there is a growing importance of IFRS standards around the world. However,
attention is mainly focused on developed countries (Larson and Kenny 1995; Klibi and
Kossentini 2014; Frost, Gordon, and Hayes 2006). In terms of results, there are different
views. Some authors consider that IFRS can generate positive effects on stock markets,
and some other authors advocate for the opposite.
Among the first schools that think and believe in the effectiveness of IFRS adoption in
developing countries we cite, Wallace (1990) and Joshi and Ramadhan (2002). Indeed,
some researchers and international organizations consider that IFRS are sufficiently
flexible to meet the needs of developing countries (Carmona and Trombetta 2008).
Other schools consider that IFRS are not suitable for developing countries because they
are very complicated and highly developed and influenced by the Anglo-American
culture (Hove 1986; Perera 1989). So, there is no guarantee that the IFRS adoption will
provide benefits related to the quality of accounting and to the financial information for
companies domiciled in developing countries.
Today, the financial markets significantly influence the IFRS development. So, the
debate is at the level of economic and financial consequences related to their global
use, and no longer to the factors justifying the diversity of accounting practices as culture
(Gray 1988).
Modern financial theory teaches that investment decisions on stock markets mainly
depend on the level of development, performance and associated risk. Indeed, in his
choice of investment, investor must consider the information efficiency since on an
efficient market, investors are able to easily determine the risk and the profitability of
their investments, since there are no overvalued and/or undervalued securities. In addi
tion, since on an efficient market, the stock price adequately reproduces the outlook for
the firm, the capital will be allocated efficiently to the most profitable investments, which
is beneficial for market development and economic growth. However, efficiency alone is
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES 3
not enough in choosing an investment; market volatility is another main axis for an
investor in his choice of investment, because it is related to the degree of involved risk.
In addition, several studies have shown that stock markets provide services such as
fundraising, risk diversification, liquidity creation, information dissemination and business
management. Indeed, the development of these markets can significantly influence the
volume and efficiency of investment. (Saint 1992; Levine and Zervos 1998; Beck and
Levine 2004).
Thus, the purpose of our study is to analyse the impact of the IFRS adoption on the
development and performance of emerging equity markets. We aim at verifying two main
assumptions related to investment decisions in a sample of emerging countries. The focus
is, first, on the analysis of the impact of IFRS adoption on the development of emerging
equity markets. Secondly, focus is put on modelling low efficiency and volatility, while
taking into account the evolving characteristics of emerging markets. Indeed, we consider
the thesis that the low efficiency and volatility of these markets are evolving e over time.
Next, the focus shifts to determine the impact of IFRS adoption on low efficiency and
volatility in order to identify the overall impacts on stock market performance.
The remainder of this paper is organized as follows. Section 2 presents a brief literature
review and describes our research hypothesis. Section 3 outlines the empirical methodol
ogy. Section 4 describes the data and their statistical properties. Section 5 reports the
empirical results and section 6 concludes the paper.
improvement of share prices is more important for countries that voluntarily adopt IFRS
standards than countries that require it.
According to Covrig, DeFond, and Hung (2007), the IFRS adoption has a positive effect
on the cost of capital of the firms that had been studied between 1999 and 2002 in 29
countries. In fact, IFRS improves the company’s financial information comparability, which
reduces their user’s costs for investors and minimizes information asymmetry, ultimately
resulting in a lower cost of capital.
Daske et al. (2008) analyse the impact of the IAS/IFRS adoption by many companies in
26 countries around the world on the cost of capital, the firm value and the liquidity of
equities. Empirical results show a decrease in the cost of capital and an increase in the firm
value, but only if these effects may occur before the official date of IFRS adoption. These
international standards also improve market liquidity. According to several authors, these
three variables present changes in the financial information quality.
Munteanu (2011) deems a broad review of the scientific literature that is interested in
studying the IFRS adoption impact. The author confirms that most studies have distin
guished, first, companies that voluntarily apply IFRS of those who mandatory apply them.
Daske et al. (2013) attempt to assess the IFRS voluntary adoption impact based on
a sample of 69 528 companies in 30 countries around the world between 1 January 1990
and 31 December 2005. The main results don’t show benefits for companies that adopt
the IFRS standards voluntarily. However, results show that for companies, where the IFRS
application is mandatory, the liquidity of the market has increased along with a decline in
capital.
The adoption of IFRS standards by several countries around the world has motivated
researchers to analyse the impact of IFRS on result management. Among these research
ers Cai, Rahman, and Courtenay (2008), think that to have positive effects of IFRS adop
tion, this action must be mandatory and required by law. For this reason, in this discussion
paper the authors examine the IFRS effect and its imposition on the result management
based on a sample of 100 000 observations in 32 countries around the world. This study
sustains that the level of result management is reduced in recent years following the IFRS
application. In addition, the study attests that in countries where adoption was mandatory
and forced by law, the level of result management is lower.
It is important to mention that until now, the researches carried about developing
country are not numerous, especially when it comes to combining different financial or
economic concepts and different countries in order to have an overview of the IFRS
adoption impact.
Ebrahimi and Zaini (2014) believe that the IFRS application is of importance for
developing countries. This idea leads the authors to examine if there are any benefits of
the IFRS adoption regarding the financial information quality in an emerging market,
namely Malaysia. The study focuses on 143 companies listed on the Malaysian stock
exchange. As expected, the main results show that the financial information quality
announced by listed companies during the period following the IFRS adoption is
improved compared to the pre-adoption period. This has made the capital market more
efficient and accessible to investors.
We can also cite the study conducted by Alnodel (2015), which analyzes the possible
impact of the IFRS adoption on the Saudi stock market efficiency as a general indicator of
the improvement of information and performance content. This study examines the weak
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES 5
form of efficiency. The main results show that the IFRS adoption may not have an impact
on the efficiency of this emerging market. In the same line, Larson and Kenny (1995) focus
on the relationship between the adoption of IAS (international accounting standards), the
financial market development and economic growth in 27 emerging countries that have
adopted IAS standards, found no major association between the decision to adopt IAS
standards, the financial market development activity and economic growth.
Using samples of 37 emerging countries that have adopted IFRS, and 37 emerging
countries that have not adopted IFRS over a ten-year period spanning from 2005 to 2015.
Zehri and Abdelbaki (2013) try to analyse the association between economic growth and
the IFRS adoption in emerging countries. The results show that there is an association
between the developing countries decision to adopt IFRS standards and economic growth.
Patro and Gupta (2016) attempt to analyse the IFRS adoption impact on the stock
prices synchronization in Asian markets. Based on data from four stock markets (China,
Hong Kong, Israel and the Philippines) between 2006 and 2011, the results show that the
IFRS adoption improves the capitalization of company-specific information in share prices,
and subsequently the stock price synchronization will be reduced.
Klibi and Kossentini (2014) analyse the extent to which the financial markets devel
opment improves following the IFRS adoption. They have focused their analysis on 14
developing countries in the Middle East and North Africa. The panel data analysis
results reveal that the IFRS adoption significantly favours the stock markets
development.
Ismail et al. (2013) examine the quality of Malaysian companies’ results and the IFRS
adoption effect as far as the management of their results is concerned. The empirical
investigation results show that the published results quality is improved following the
IFRS application.
During the last decades, the international financial scene assigned more importance to
the developing financial markets. Indeed, in 2007, the contribution of these markets to the
international economic growth reached 50% even though in the 90 s their contribution was
only 4%. But for some countries, this contribution remains limited because of several factors
such as the nature of applied accounting systems that are known by impertinence follow
ing several international assessments and studies. Indeed, the inability of these systems to
provide reliable financial information and to guarantee the quality demanded by interna
tional investors, which is not available in emerging markets, requires the need for a very
profound change by the bodies in charge of accounting standardization. For this reason,
that the IASB organized the preparation of IFRS standards to mainly meet financial market
users’ expectations (Ding et al. 2007; Chamisa 2000).
The researcher opinions concerning the adequacy of the IFRS application in devel
oped/emerging financial markets have always been varied. For example, according to
Barth (2008), the application of a single set of accounting standards in different countries
may favour the reduction of the processing cost of prepared and published information’s.
However, according to Bartov, Goldberg, and Kim (2005) which try to clarify with evidence
that the application of IFRS did not contribute to the improvement of financial and
accounting quality. In addition, developing countries are notorious for the weak power
of public institutions and eco-politics, which confound the assimilation of IFRS. But
despite these arguments, many countries and companies have adopted IFRS standards.
The need to evaluate their impact has been paramount.
6 H. BEN CHEIKH AND A. BEN REJEB
In addition, it is argued that a single accounting system used in a set of countries does
not reflect the differences in national business practices that exist as a result of cultural
variety (Armstrong et al. 2010). In addition to their effect on the comparability of
accounting practices, the application of the international accounting standards can
positively affect the equity cost through its important role in the development of the
information disclosure by listed companies.
Thereby, the conversion to IFRS involves much more than a simple change in account
ing rules, it contains a whole process of change for the whole company. The implementa
tion of these standards would reduce information asymmetry and facilitate
communication between managers, shareholders, lenders and other interested parties/
stakeholders (Bushman and Smith, 2001), resulting in more agency costs (Healy and
Palepu, 2001). A weak information asymmetry would also reduce the cost of capital (El-
Gazzar, Finn, and Jacob 1999; Botosan and Plumlee 2002). It also allows greater compar
ability, lower transaction costs and more openness to international investment. IFRS also
allows an improvement in the presentation of the company’s performance of companies
by providing more transparency by means of predictive information (Conceptual frame
work) and a better consideration of the risks inherent in companies (IAS 32 and IFRS 7).
Consequently, IFRS standards would tend to reduce manipulation of results and improve
the efficiency of stock markets (Kasznik 1999).
In the same context, previous studies have shown a divergence regarding the IFRS
adoption impact on financial markets volatility. Some studies have shown that if IFRS was
able to increase the amount of firm-specific information incorporated into stock prices, it
could reduce synchronicity (Kim and Shi 2012), and idiosyncratic volatility would have
become more intense relatively to systematic volatility. Others have suggested that it
could increase synchronicity (Beuselinck et al. 2010; Dasgupta, Jie, and Gao 2010), vola
tility would, then, have become less intense.
According to the literature review previously advanced the knowledge of the IFRS
potential impact on financial market development and performance is essential for
companies, investors and other financial information users. So, it has become imperative
to investigate the IFRS adoption impact on the emerging stock development and perfor
mance (measured by informational efficiency and volatility).
3. Research methodology
After theoretically exposing the global importance of IFRS standards, this section is
reserved for empirical analysis and hypothesis testing. In this section, we mainly present
the empirical models adopted to identify the impact of IFRS adoption on development
and performance of emerging equity markets.
The stock market activity level: One of the main indicators of the stock market development is
its level of activity (Adhikari and Tondkar 1992). Indeed, the released volume of transactions
to GDP will be retained as a first development indicator;
The stock market size: Stock market activity cannot be the only development indicator.
According to Adhikari and Tondkar (1992) and Larson and Kenny (1995), the stock market
size is another relevant indicator for measuring the development degree. It will be
measured in our study by market capitalization to GDP;
The dispersion of share ownership: According to Nobes (1983) and Frost, Gordon, and
Hayes (2006) the dispersion of equity ownership in the stock market is an important
indicator in measuring the stock market development degree. The number of the listed
companies adjusted by the population will be retained as a proxy for the dispersion of
share ownership.
The first independent variable is the IAS/IFRS adoption. This is a dichotomous variable
that takes the value 1 after the IAS/IFRS adoption date and 0 otherwise.
Referring to the financial and accounting literature and considering the availability of
data, we have retained the following variables that explain the variation in the stock
market development degree as control variables:
The banking sector development level: Measured by the private sector credit as
a percentage of GDP;
The country investment level: Measured by gross fixed capital formation to GDP;
The country wealth level: Measured by GDP per inhabitant;
Macroeconomic stability: Measured by the real interest rate;
The stock market liquidity: Measured by the TURNOVER ratio, which is equal to the
shares’ traded value divided by the market capitalization of domestic market.
efficient, investors can easily determine the risk and return on their investments since there
are no overvalued and/or undervalued securities. In addition, on an efficient market, stock
prices correctly reflect the prospects of the listed firm, capital will be allocated efficiently to
the most profitable investments, which is beneficial for market development and economic
growth.
It should be noted that emerging markets are characterized by poor quality of information
disclosure, thin exchanges and inadequate accounting regulations. This results in high
price dependence over time. Then, the market is considered inefficient in this case. It is for
these reasons that the financial literature is inclined to focusing on testing the weak form
of efficiency in emerging markets. This involves checking if future price movements of
financial assets can be predicted from past price movements;
Stock market volatility: Financial market performance can also be measured by the
level of risk attributed to the market. Since investment decisions depend mainly on the
expected profitability and risk related to the portfolio’s assets. Indeed, our second indi
cator is the stock market conditional volatility.
To determine the impact of the IFRS adoption on the emerging equity markets
performance through the simultaneous analysis of the impact on information efficiency
and conditional volatility, we adopt several control variables that represent some correla
tion with the stock market performance level:
The interest rate;
The Bilateral Real Exchange Rate;
The Inflation rate;
The stock market liquidity;
The MCAP/GDP ratio which refers to the ratio between the national market capitaliza
tion and the GDP;
The market investment quality: Measured by dividend per share;
The dispersion of share ownership.
Moreover, to analyse the IFRS adoption impact on informational efficiency and volatility,
we use the panel data regression, which is presented in the following general equation:
According to Fama (1970, 1998), there are three types of efficiency and this depends on all
the information available on a market. This is the weak, semi-strong and strong form of
efficiency.
Although literature about developed markets is concerned with all three forms of
efficiency, recent studies in emerging markets have focused on testing the weak form of
efficiency. According to Fontaine and Nguyen (2006), several factors explain this choice,
the most important of which are the poor quality and reliability of information, the
scarcity of trade, inappropriate accounting regulations and, above all, low liquidity. The
authors argue that most emerging market companies publishes their financial reports
with some time lag.
Since the weak form of efficiency requires the instantaneous incorporation of available
information contained in past prices into financial assets prices. As a result, past returns
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES 9
have no predictive power over future returns. Thus, the low efficiency can be tested using
a linear model linking the current profitability based on past profitability.
In this research, weak efficiency is also examined. Unlike traditional methods, we focus
on the evolution over time of efficiency. The logic behind this intuitive approach is based
on the fact that the IFRS adoption naturally leads to greater sophistication of market
actors and greater information availability. These transformations will undoubtedly
induce the level of efficiency to change over time. Such characteristic (evolution over
time), if it exists, could only be considered by a dynamic return modelling. To this end, we
use the efficiency evolution test proposed by Zalewska-Mitura and Hall (1999), and
extended by Fontaine and Nguyen (2006), in which the autocorrelation coefficient can
vary according to market conditions. Indeed, the weak efficiency can be tested by
adopting the following model:
ð0Þ ð1Þ
Ri;t ¼ βi;t þ βi;t Ri;t 1 þ Ui;t (3)
that this model has been tested by several authors, including mainly Zalewska-
Mitura and Hall (1999) who have shown that in the case of the Kalman filter, the
model is quite powerful in the detection of the variability over time of various
degrees of market efficiency, except for a minimum number of observations at the
beginning of the period. The same model has been used in many of works to
evaluate the weak form of informational efficiency in emerging markets. We cite
as an example, Jefferis and Smith (2005), Fontaine and Nguyen (2006) and
recently Arouri and Nguyen (2010) in a study that examines the dynamic beha
viour of crude-oil prices in four Gulf Cooperation Council countries.
Conditional volatility series are calculated by fitting an AR(1)-GARCH(1,1) model. It
is worth mentioning that the General Autoregressive Conditional Heteroskedasticity
(GARCH) model was introduced by Bollerslev (1986). It is an extension of the ARCH
model initially developed by Engle (1982). This model evokes an autoregressive
representation of the process conditional variance, which allows it to be used in
particular for forecasting volatility in the financial markets. The main advantage of
this model is that it alludes to considering an essential characteristic of the markets,
namely the overtime volatility evolution. In general term, taking this phenomenon
into account increases the predictive potential of the models, so it will be more
judicious to use it in the context of emerging markets given their evolutionary
nature.
It’s worth noting that the choice of the standard GARCH specification is far from being
arbitrary. Indeed, various empirical studies have shown that the standard GARCH model is
the most efficient at predicting the volatility given the existence of an ARCH effect in these
series (see among others, Alexander and Leigh 1997; Sarma, Thomas, and Shah 2003;
Bredin and Hyde 2004; Charles and Darne 2006; Nikkinen et al. 2008; Ramlall 2010). We
also highlight the relevance of this model in terms of theoretical stability conditions.
Parameters estimation of the conditional variance model that has been reported in Table
6 turned out to be positive and statistically significant at the 1% level.
The sources of the used data are essentially the DATASTREAM economic and financial
data base and the World Bank’s online database (WDI).
We have used monthly frequency data covering the period from January 1986 to
December 2014 for a set of thirteen emerging countries. The choice of these countries
is mainly based on the availability of data.
Our data is of two types. Market data composed by S&P/IFCG (Standard and Poor’s
International Finance Corporation Global) market indices and macroeconomic data used
to estimate the overall efficiency regression (Eq.3). These macroeconomic data are useful
for determining the economic environment impact on the weak efficiency of emerging
markets.
Table 3 presents descriptive statistics of the monthly returns. Regarding this table we
can make the following remarks: First, according to the Jarque-Bera test, market returns
are significantly departed from normality. Second, the Dicky-Fuller unit root test clearly
shows that the market returns distributions are stationary at the 1% confidence level,
since the ADF calculated value is strictly below the critical threshold. Finally, the Engle’s
(1982) test for conditional heteroskedasticity rejects the null hypothesis of no ARCH effect
in monthly returns which justifies the use of the GARCH specification.
5. Empirical results
5.1. The effect of the IFRS adoption on stock markets development
It should be noted that, in order to be more relevant in measuring the IFRS adoption
impact on the emerging stock markets development, we have chosen to simulta
neously use three indicators for approximating the stock markets development
degree.
Reading the Table 4 results, we note that the IAS/IFRS adoption has a positive and
significant impact on the three indicators of stock market development. So, we can
confirm our first hypothesis.
In terms of our control variables, the results are also interesting since they show that all
the information variables have significant impacts on the development of emerging
markets across the three indicators.
An examination of the coefficients associated with these variables shows that an
appreciation of private sector credit rates and the per capita GDP rate contribute to the
rise in the emerging markets development level. However, an appreciation of the real
interest rate and the gross fixed capital formation contributes to significantly weakening
the development of the stock markets. Finally, observing the coefficients associated with
the liquidity level, we note that it contributes to significantly improving the stock market
development.
Our results are in line with the previous empirical work. Overall, we can state that the
IFRS adoption increases significantly the development of emerging markets over the
study period, from January 1986 to December 2014. These results appear consistent
with those of Damont, (1992), Ben Naceur, Ghazouani, and Omran (2007), Yartey (2008)
and Billmeier and Massa (2009).
Table 4. Multivariate linear regression results (IFRS adoption % Stock market development).
Model 1 Model 2 Model 3
Variables (Stock market activity level) (Stock market size) (Dispersion of share ownership)
PANEL A: Development equation
Dependent variable: Stock market
development (DEVEM)
IFRS adoption 2.352043 8.311982 1.0221
(2.38)** (8.02)*** (6.26)***
Private sector credit rates to GDP 0.7117356 0.7026171 0.1458
(35.0)*** (30.43)*** (39.34)***
Gross fixed capital formation −0.3784621 1.917185 −0.2451
to GDP (−4.37)*** (20.14)*** (−15.67)***
GDP per capita 1.415667 1.249441 0.0443
(12.22)*** (11.27)*** (2.43)**
Real interest rate −0.1172747 −0.3961262 0.0166
(−2.28)** (−7.48)*** (1.91)*
Turnover 224.2436 103.033 20.1145
(19.26)*** (8.07)*** (9.55)***
Constant −18.41405 −36.32902 8.0095
(−8.35)*** (−4.76)*** (2.90)***
Number of observation 3384 3516 3720
Number of countries 13 13 13
Fisher statistics (F)
Prob> F 0.0000 0.0000 0.000
Notes: z-statistic (in parentheses). Results significant at 1%, 5% and 10% levels are indicated by ***, ** and *.
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES 13
Table 5. Estimation results for the state space model with GARCH effects.
Conditional mean equation State equations Conditional variance equation
Likelihood
ð0Þ ð1Þ ð0Þ ð1Þ ð0Þ ð1Þ ð2Þ ð1Þ ð2Þ
Markets βi (%) βi (%) Vi Vi αi αi αi αi þ αi value
Argentina 1.640 12.263 0.000 0.000 0.007** 0.510** 0.482** 0.992 184.831
(0.036) (0.098) (0.002) (0.014) (0.000) (0.007) (0.000)
Brazil 0.399 5.993 0.000 0.000 0.003** 0.510** 0.454** 0.964 341.328
(0.021) (0.114) (0.002) (0.008) (0.001) (0.032) (0.000)
Chile 1.411 18.142 0.000 0.031* 0.002** 0.457** 0.531** 0.988 356.562
(0.017) (0.164) (0.001) (0.014) (0.000) (0.051) (0.000)
Colombia 0.894 39.010 0.000 0.003 0.002** 0.201** 0.585** 0.786 402.252
(0.013) (0.112) (0.001) (0.020) (0.000) (0.061) (0.000)
India 1.322 7.995 0.000 0.011 0.006** 0.182** 0.607** 0.789 453.722
(0.024) (0.232) (0.000) (0.013) (0.001) (0.067) (0.000)
Korea 1.365 7.135 0.000 0.001 0.003** 0.299** 0.532** 0.831 415.561
(0.021) (0.153) (0.000) (0.008) (0.000) (0.051) (0.000)
Mexico 2.001 13.132 0.000 −0.014 0.003** 0.273** 0.562** 0.835 348.862
(0.013) (0.157) (0.002) (0.013) (0.004) (0.059) (0.000)
Thailand 0.698 4.925 0.004* 0.004 0.001** 0.412** 0.492** 0.904 471.857
(0.029) (0.101) (0.003) (0.005) (0.000) (0.007) (0.000)
Jordan 0.682 8.018 −0.002* 0.000 0.002** 0.299** 0.552** 0.851 603.114
(0.014) (0.096) (0.001) (0.023) (0.006) (0.000) (0.000)
Malaysia 0.812 5.895 0.000 0.006 0.001** 0.392** 0.512** 0.904 401.531
(0.015) (0.169) (0.001) (0.010) (0.000) (0.050) (0.000)
Pakistan 0.432 5.724 0.000 −0.033 0.002** 0.284** 0.544** 0.828 276.937
(0.009) (0.195) (0.001) (0.029) (0.001) (0.084) (0.000)
Philippines 1.325 25.024 −0.002 0.009 0.002** 0.214** 0.532** 0.746 241.651
(0.023) (0.087) (0.001) (0.032) (0.000) (0.081) (0.000)
Venezuela 0.657 −0.751 0.000 0.032 0.017** 0.189 0.145 0.333 244.101
(0.017) (0.394) (0.000) (0.036) (0.004) (0.121) (0.240)
Notes: The standard deviations of estimated parameters are given in parenthesis. For the estimated parameters in the
conditional mean equation, we report their averages since they are allowed to vary over time. The significance of these
ð1Þ
coefficients (βi in particular) in each time period is examined by using a standard t-test and shown in the graph of
time-varying predictability (see, Figure 1). * and ** indicate that coefficients are respectively statistically significant at
5% and 1% level.
As for the variable related to the liquidity level represented by the TURNOVER ratio, our
results show that this variable tends to significantly improve the degree of efficiency. This
result seems consistent with the empirical findings in financial literature which proves
that liquidity is an important condition for the verification of informational efficiency, as it
speeds up the incorporating process of new information into the financial assets price. For
the dividend yield variable, we note that it also contributes to the improvement of
informational efficiency, which confirms that, a good quality of investors who generally
seek to invest in high-paying stocks, participate to improve efficiency.
Notes: The variance equation for the GARCH model is written as follows:ht ¼ φ þ ω ε2t 1 þ λ ht 1 . * and ** indicate that coefficients are respectively statistically significant at 5% and 1% levels. +
and ++ indicate that the null hypothesis of statistical tests (no autocorrelation, normality, homogeneity and no stationary) is rejected, respectively, at 5% and 1% levels.
15
16 H. BEN CHEIKH AND A. BEN REJEB
standard GARCH specification seems to be adequate to explain the stock returns varia
tions, since the residuals and squared residuals are not serially correlated. In addition, we
note the absence of ARCH effect among residual series.
Regarding the impact of the IFRS adoption on the second financial performance
indicator (volatility), we can conclude from the estimated results presented in Table 7
that the IFRS adoption has a negative and significant impact on the conditional stock
market volatility.
We can notice that control variables have a significant impact on volatility; but the
sense of the impact differs from one variable to another. An examination of the coeffi
cients associated with these variables shows that an appreciation in interest rates, infla
tion rates and real exchange rates contributes to the increase in volatility in emerging
markets.
The market capitalization variable contributes to significantly weakening stock market
volatility. This suggests that more the domestic market size increases, more the volatility
decreases. This impact is entirely explainable. Indeed, the increase in the market size is
indicative of the fact that the stock market has become more mature. It is undoubtedly
that this greater maturation of the market leads to lower volatility.
Finally, when looking at the coefficients associated with the TURNOVER variable, we
notice that it participates in significantly increasing stock market volatility. This result
seems consistent with the empirical financial literature, according to which the financial
assets prices are even more volatile than the transaction volume increase. Therefore, the
TURNOVER ratio increases.
In accordance with previous analysis, we can generally state that the IFRS adoption did
not significantly increase the volatility of emerging markets over the study period, from
January 1986 to December 2014. These results appear consistent with those of De Santis
and Imrohoroglu (1997) and Bekaert and Harvey (1997).
5.3. Discussion
By reference to our empirical analyzes, we have concluded that the emerging stock
markets have become more and more developed and performing in the last two decades.
In addition, emerging country regulators have succeeded in establishing a favourable
political and economic environment for investment. In fact, international investors allow
a high value on the political stability of the country where they invest, which means that
financial markets suffering from political uncertainties cannot achieve foreign investment
satisfaction. Thus, the economic characteristics of the financial market can indirectly
influence investment decisions. When a private company plays an important role in the
market functioning, a state company domination is reduced, which allows the forging of
an efficient market.
Regarding the IFRS adoption, at the economic level, the promoters of these stan
dards argue that they have reduced the costs of information in a stock market. It is
easier for capital market actors to become familiar with a set of global standards than
with several local standards (Leuz 2003; Barth 2008). Thus, concerning the political
consequences of IFRS resulting from the potential political nature of the establishment
of international accounting standards, we can affirm that if the establishment of IFRS
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES 17
Table 7. Multivariate linear regression results (IFRS adoption % Informational efficiency % Conditional
volatility).
Model 1
Time-varying return Model 2
Variables predictability Conditional volatility
PANEL A: Performance equation
Dependent variable: Time-varying return predictability (Model 1)
Conditional volatility (Model 2)
IFRS adoption −0.0187 −0.0039
(−6.31)*** (−5.93)***
Interest rate 0.0047 0.0038
(1.68)* (6.13)***
Bilateral real exchange rate 0.0215 0. 0375
(1.17) (8.99)***
Inflation rate 0.0012 0.0084
(0.19) (5.45)***
Turnover −0.0557 0.0295
(−2.31)** (5.50)***
Market Capitalization to GDP −0.0010 −0.0001
(−3.15)*** (−2.35)**
Dividend yield −0.0098 0.0005
(−16.60)*** (4.36)***
Number of listed companies 0.0053 0.0000
(19.91)*** (1.62)
Constant 0.1084 0.1084
(29.57)*** (6.25)***
Observation number 4408 4408
Number of countries 13 13
Fisher statistics (F)
Prob> F 0.0000 0.0000
Notes: z-statistic (in parentheses). Results significant at 1%, 5% and 10% levels are indicated by ***, ** and *.
The return predictability index (dynamic autocorrelation index) is used as a proxy for informational inefficiency.
can be influenced by political lobbying, the most powerful countries are more likely to
shape IFRS.
However, the economic characteristics of financial markets are not the only determi
nants of the effects of applying IFRS. In fact, the difference in how the new standards are
adopted, either mandatory or voluntarily, also determines their impact.
In addition, voluntary adoption is relevant for private companies. In fact, in most
jurisdictions they are not obliged to apply IFRS. According to Ball (2001), this flexibility
attributed to certain firms makes it possible to place a broader strategy to increase their
commitment in favour of transparency through significant changes to their reporting
policies.
Thus, the voluntary adoption of IFRS standards unlike mandatory adoption means that
the standards are spread over time. This feature makes it easier to eliminate the effects of
economic shocks and institutional changes.
6. Conclusion
Through this research paper, we sought to analyse the impact of IFRS adoption on the
development and performance of emerging stock markets. This analysis is of great
importance for emerging market regulators who are still trying to boost economic growth
18 H. BEN CHEIKH AND A. BEN REJEB
in their countries. The accounting literature has focused on the issue of IFRS adoption and,
more specifically the impact on the development and performance of emerging equity
markets.
This paper joins the literature in order to verify two main hypotheses, the most
important related to making investment decisions (Stock market development and
performance). In fact, first, attention focused on the effect of IFRS on the development
of emerging equity markets. Indeed, for more robustness, the development degree has
been measured by three different indicators. Secondly, attention focused on modelling
weak efficiency and volatility, while considering the evolving characteristics of emerging
markets. We consider the thesis that the weak efficiency and the volatility of these
markets evolve over time. Next, the impact of IFRS adoption on weak efficiency and
volatility is highlighted in order to identify the overall impact on stock market
performance.
Our results showed, firstly, that the development of stock markets is positively and
significantly affected by the application of international accounting standards. Secondly,
there is a strengthening process of efficiency in the weak sense and a reduction of
volatility in recent years in emerging markets. This is a reliable indicator for the regulators
in these countries, as greater efficiency and lower volatility naturally lead to increased
investment.
Overall, we demonstrated that the IFRS adoption helps to improve efficiency and
reduce volatility of emerging equity markets, leading us to confirm our second hypothesis
about improving performance.
We also showed that improving efficiency and volatility necessarily depend on several
internal market characteristics, including the development level, the liquidity degree and
the investment quality that are themselves a function within the IFRS adoption evolution
process.
In conclusion, we can say that emerging countries have benefited from the IFRS
adoption in terms of efficiency and volatility (performance) and therefore they now
constitute good investment sites either for domestic or international investors.
The obtained results have several economic and financial implications. For regulators
in emerging countries, these results mainly provide answers to the impact of IFRS
particularly on the risk management of stock markets.
Note
1. The optimization is carried out in GAUSS using the BFGS algorithm (Broyden, Fletcher,
Goldfarb and Shanno).
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes on contributors
Habib Ben Cheikh is a PhD student in Accounting and Finance at the Higher Institute of
Management of Sousse, University of Sousse (Tunisia). He has presented many research papers in
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES 19
various international conferences. His research interest includes emerging markets accounting,
inflation, stock market, financial crisis.
Aymen Ben Rejeb is an Associate Professor in Finance at the Higher Institute of Management of
Sousse, University of Sousse (Tunisia), and member of the research laboratory LAMIDED (Laboratory
of Management of Innovation and Sustainable Development). His research interest includes stock
market, financial crisis, Islamic finance, emerging markets https://www.researchgate.net/profile/
Aymen_Rejeb
ORCID
Aymen Ben Rejeb http://orcid.org/0000-0001-6336-2461
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Appendix
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. 10 . 012 . 025
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.03 .03
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Venezuel a
IFRS adoption
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.08
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87 90 93 96 99 02 05 08 11 14
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES