Macroeconomics and Finance in Emerging Market

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Does the IFRS adoption promote emerging stock

markets development and performance?

Habib Ben Cheikh & Aymen Ben Rejeb

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

To link to this article: https://doi.org/10.1080/17520843.2020.1773891

Published online: 16 Jun 2020.

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MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES
2021, VOL. 14, NO. 1, 1–23
https://doi.org/10.1080/17520843.2020.1773891

Does the IFRS adoption promote emerging stock markets

development and performance?
Habib Ben Cheikha and Aymen Ben Rejeb a,b

a
Higher Institute of Management, University of Sousse, Sousse-Tunisia; bMember of LAMIDED, ISG Sousse,
University of Sousse, Sousse-Tunisia

ABSTRACT ARTICLE HISTORY

Recent accounting and financial researches suggest that the IFRS Received 2 November 2019
adoption leads to high-quality financial information characterized Accepted 21 May 2020
by their honesty. The purpose of this paper is to analyse the KEYWORDS
impact of IAS/IFRS adoption on key aspects of investment deci­ Developing countries; IFRS
sion-making in emerging stock markets. The paper uses a state- adoption; economic impact;
space model combined with a standard GARCH specification and volatility; informational
a multidimensional panel data model. The results of our empirical efficiency; stock market
investigation show that the IFRS adoption contributed to improv­ performance
ing development and performance of emerging markets. It leads
JEL classification
to considerable development, reduced volatility, and prompt B26; C32; C58; D53; F15; G14
convergence towards information efficiency.

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.

CONTACT Aymen Ben Rejeb [email protected]

© 2020 Informa UK Limited, trading as Taylor & Francis Group
2 H. BEN CHEIKH AND A. BEN REJEB

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.

2. Literature review and hypothesis

The IFRS adoption on a global scale is a significant economic transformation and has
resulted in a significant line of research. But, despite the increasing IFRS adoption by
developing countries (Malaysia, Jordan, Chile, Mexico, etc.). Studies that examine the
impact of adoption on the two factors, most often responsible for making investment
decisions (market development and performance) are not numerous, especially when it
comes to combining the two factors together.
Normally, accounting systems set the preparation and publication rules of financial and
economic performance information of companies. What makes the main objective of
accounting harmonization is the fact of ensuring high quality information for investors on
the financial markets, as well as improving the performance of these markets and redu­
cing the cost of capital.
In the financial and economic literature there are many studies on the impact of the
IFRS adoption, that confirm the importance of international accounting harmonization
and the need to adopt IFRS standards. However, they resulted in various divergences in
terms of empirical results.
Wang and Yu (2009) analyse the data of 44 different countries over a period of 10 years,
in order to define the relationship between the IFRS adoption and the synchronization of
stock prices. The results did not show any significant relationship between the high-
quality accounting standards (eg, US GAAP accounting standards, IAS/IFRS standards) and
the informational content of stock prices. In the same context, Kim and Shi (2012) examine
the implications of voluntary IFRS adoption on companies in 34 countries and demon­
strate that stock price synchronization declines as a result of voluntary IFRS adoption.
Loureiro and Taboada (2012) confirm the same results and suggest that the informative
4 H. BEN CHEIKH AND A. BEN REJEB

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.

Stock markets development analysis

According to the accounting and financial literature, we can identify three main indicators
as proxies for stock market development (Adhikari and Tondkar 1992; Larson and Kenny
1995; Zehri and Abdelbaki 2013; Klibi and Kossentini 2014). In this paper we use simulta­
neously the three indicators in our estimates for more robustness:
 MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES 7

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.

The estimated equation is formulated as follows:

DEVEMi;t ¼ α0 þ α1 IFRSi;t þ α2 BANKi;t þ α3 INVESTi;t þ α4 RICHi;t þ α5 SMACi;t þ
(1)
þ α6 TURNi;t þ εi;t

Stock market performance analysis

The stock market performance is the second variable of interest in this research paper.
According to the financial literature, information efficiency alone is not enough to
measure the performance. Indeed, stock market volatility is another main axis of invest­
ment decision, because it is related to the incurred risk degree. Therefore, a successful
stock market should be efficient and less volatile at the same time (Ebrahimi and Zaini
2014; Negi, Srivastava, and Bhasin 2014).
In this context we simultaneously adopt two proxy-variables of financial performance
(informational efficiency and volatility).
Stock market efficiency: According to Fama (1991), an efficient market is a market where
prices completely reflect all available information. This has very strict implications on stock
market analysis and portfolio management. Indeed, in the case of efficient markets, abnormal
profits are non-existent. Fontaine and Nguyen (2006) explain that where the market is
8 H. BEN CHEIKH AND A. BEN REJEB

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:

PERFOMi;t ¼ y0 þ y1 IFRSi;t þ y2 IRi;t þ y3 RERi;t þ y4 CPIi;t þ y5 TURNi;t þ

(2)
þ y6 MCAPi;t þ y7 DYi;t þ y8 NSC POPi;t þ ei;t

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)

Ui;t ¼ hi;t zi;t (4)

ð0Þ 2 ð1Þ ð2Þ

hi;t ¼ αi þ αi Ui;t 1 þ αi hi;t 1 (5)

ðkÞ ðkÞ ðkÞ

βi;t ¼ βi;t 1 þ ηi;t ; k ¼ 0; 1 (6)
ð0Þ ð1Þ
Rit represents the stock market returns at time t.βi;t and βi;t respectively measure, for
country i, the long-term trend and the potential serial dependency of stock market
returns. They can change over time according to a first-order random-walk process
described in Eq. (4). ht represents the residuals conditional variance ðUi;t Þ, which is
assumed to follow the standard GARCH(1,1) specification proposed by Bollerslev (1986).
ðkÞ
zi;t and ηi;t represent random noises, assumed to be normally distributed with a mean of
ðkÞ
zero and respective variances of 1 and Vi . In order to apply the Kalman filter, innovations
in Eq. (1) are further assumed to be uncorrelated with those in Eq. (4). One can note that to
ð1Þ
validate the hypothesis of weak form efficiency, the estimated value of βi;t should be
equal to ‘zero’ or statistically insignificant.
This model belongs to the state-space models which main property is the
presence of hidden variables. Its estimation requires the application of an optimal
algorithm, called the Kalman filter, because the usage of usual estimation techni­
ques is impossible. Generally, the Kalman filter delivers recursively the optimal
estimation of the system’s current states, depending on the available information
at that time by a two-step process. It first calculates the expectations of the
unobserved state vector based on previously available information, and then
updates the state vector when a new observation becomes available. To obtain
estimated values of the set of other unknown parametersðVi;tk ; αð0Þ ; αð1Þ ; αð2Þ Þ, we
have to construct a log-likelihood function based on the Kalman gain under the
normality assumption (Harvey 1995). Estimation of the model is then carried out
using the quasi-maximum likelihood 1 method introduced by Bollerslev and
Wooldridge (1992), which provides asymptotic and robust estimations even
though the conditional returns are not normally distributed. It should be noted
10 H. BEN CHEIKH AND A. BEN REJEB

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.

4. Data and descriptive analysis

In order to test our research hypotheses in a relevant way, we proceed in a preliminary
phase to the selection of our target population and the exact sample, as well as the study
period. Indeed, we adopt a filtering system according to several criteria. Our sample
covers a set of 13 emerging markets which have the most developed stock market and
have adopted international accounting standards or established a timetable that sets the
IFRS adoption expected date.
Our sample selection process is summarized in Table 1. Table 2 shows the selected
countries by region.

Table 1. Countries selection criteria.

Selection steps Total number
Steps 1 Initial sample 31
Steps 2 (-) countries that ignore IAS/IFRS 8
Steps 3 (-) Countries with unavailable data 10
Final sample 13
 MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES 11

Table 2. Country overview.

Latin America Asia
(6 countries) (7 countries)
Argentina India
Brazil Korea
Chile Thailand
Colombia Malaysia
Mexico Pakistan
Venezuela Philippines
Jordan

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.

Table 3.. Basic statistics of stock markets monthly returns.

Jarque- Statistique
Pays Moyenne Ecart-type Skewness Kurtosis Bera ADF Q(6) Q(12) ARCH (12)
Argentina 1,125 15,234 −0,097 17,710 3138,284++ −20,503++ 14,906+ 19,804 77,885++
Brazil 0,982 14,664 −0,762 7,114 279,098++ −18,938++ 5,260 16,336 44,286++
Chile 1,442 7,542 −0,443 4,022 26,526++ −14,924++ 14,449+ 21,920+ 27,859++
Colombia 1,289 8,471 0,157 4,594 38,286++ −13,739++ 30,708++ 33,633++ 58,181++
Korea 0,850 9,837 0,136 6,423 170,944++ −17,494++ 8,067 12,222 103,169++
India 0,630 8,584 −0,113 3,222 1,455 −16,867++ 11,112 12,731 21,977+
Jordan 0,328 5,744 1,023 9,999 771,026++ −16,682++ 19,261++ 23,137+ 50,380++
Malaysia 0,460 8,453 −0,304 7,756 333,308++ −10,512++ 18,833++ 41,777++ 92,651++
Mexico 1,307 10,902 −2,424 19,646 4358,715++ −14,071++ 34,664++ 39,938++ 44,351++
Pakistan 0,641 8,960 −0,281 6,364 168,665++ −17,204++ 8,378 13,939 48,018++
Philippines 0,986 9,005 0,059 5,937 125,309++ −14,173++ 28,655++ 39,940++ 35,927++
Thailand 0,665 10,746 −0,540 5,049 77,775++ −16,929++ 14,555+ 38,139++ 62,879++
Venezuela 0,342 13,123 −1,041 7,807 397,840++ −18,906++ 6,336 12,784 13,750
Notes: The table presents basic statistics of monthly returns. Q (6) and Q (12) are statistics of the Ljung-Box autocorrela­
tion test applied on returns with lags between 6 and 12. ARCH (12) is the statistics of the conditional heteroskedasticity
test proposed by Engle (1982) using the residuals of the AR (1) model. ADF is the statistics of the ADF unit root test
proposed by Dicky and Fuller (1981). The ADF test is conducted without time trend or constant. +, ++ and +++ denote
that the null hypothesis of tests (no-autocorrelation, normality, no-stationarity and homogeneity) are rejected at
respectively 10%, 5% and 1% levels.
12 H. BEN CHEIKH AND A. BEN REJEB

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

5.2. The effect of the IFRS adoption on stock market performance

5.2.1. The effect of the IFRS adoption on stock market informational efficiency
The estimation results of the state space model presented in the Table 5 show that the
mean of coefficientsβit is generally very close to zero, which means that past returns do
not contribute much to anticipate future returns.
ð0Þ
Focusing first on the coefficientβi;t , which represents the constant term in Eq. (3), we
promptly found out that the mean values of this coefficient for all countries in our sample
are near to zero. This suggests a low level of return predictability related to other
potentials, such as macroeconomic effects, political events and external shocks (Arouri
ð1Þ
and Nguyen 2010). Then, regarding the coefficientβi;t , which variations indicate the time-
varying predictability (autocorrelation) levels in stock returns; their averages are not very
different across markets and stand around an average of 11%. This relatively supports the
hypothesis of weak serial interdependence between past and future returns.
ð0Þ ð1Þ
Finally, regarding the global significance of the two coefficientsðβi;t and βi;t Þ, we
suggest a relative stability over time given the lowest estimated values of the innovations
variance issued from the state equations (Eq. 6). Moreover, it seems that the GARCH (1, 1)
model seems to be performing to explain the variations of emerging stock market returns
since it can detect the leptokurtic behaviour and conditional heteroscedasticity in the
returns. Indeed, the parameters of the conditional variance equation are positive, statis­
tically significant at 1% confidence level and satisfy the conditions of theoretical stability
ð0Þ ð1Þ ð2Þ
(αi > 0; αi � 0 et αi � 0). Furthermore, the persistence of the conditional volatility is
ð1Þ ð2Þ
verified for most stock markets, since the premium risk measured by ðαi þ αi Þ is
superior to 0.9.
As for the IFRS adoption impact on the efficiency level, we can conclude that the IFRS
adoption has a positive and significant impact on this first stock markets performance
indicator (informational efficiency). Indeed, the Table 6 results show positive and signifi­
cant effects on the stock market efficiency at the 1% threshold. Note that, in general,
information efficiency reacts by almost 2%. This allows us to confirm in advance our first
hypothesis specific to the financial market performance.
Our results are consistent with several previous studies that have analysed the effects
of international accounting standards on financial markets (Ebrahimi and Zaini 2014;
Haller, Ernstberger, and Froschhammer 2009; Bartov, Goldberg, and Kim 2005).
The significant link between the IFRS adoption and the informational efficiency is
always verified even with the presence of other explanatory variables, related to the
liquidity level, the development level, in addition to four other macroeconomic variables:
the interest rate, the real exchange rate, the inflation rate and the dividend yield. It should
be noted that the main purpose of introducing these macroeconomic variables is to
dissociate the impact of economic environment and other reforms on the predictability of
returns.
Hence, the market capitalization variable as an indicator of stock market develop­
ment, contributes significantly to improving information efficiency. In fact, this impact
can be fully explained by the fact that a higher level of market development implies
a greater maturation and consequently a greater instantaneous incorporation of
information.
14 H. BEN CHEIKH AND A. BEN REJEB

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.

The effect of IFRS adoption on the stock market volatility

In this section, we present both the results of the conditional volatility model and the
general regression that will help us to determine the IFRS adoption impact on conditional
stock market volatility.
Table 6 presents empirical results of the standard GARCH parameters estimation along
with a detailed descriptive analysis of volatility series. We note that the conditional
variance equation parameters, for all markets, are positive and statistically significant at
1% and then satisfy conditions of theoretical stabilityðφ > 0; ω � 0 and λ � 0Þ. Moreover,
persistence of the conditional volatility is verified, as far as the risk premium ðω þ λÞ is
close to one. The diagnostics of standardized residuals (Table 6, part II) suggest that the
Table 6. Estimation results of conditional volatility using the AR(1)-GARCH (1,1) model.
Country Argentina Brazil Chile Colombia India Jordan Korea Malaysia Mexico Pakistan Philippines Thailand Venezuela
Part I: Estimated parameters
μ 0.014 0.017 0.014 0.012 0.006 −0.000 0.013 0.011 0.015 0.005 0.013 0.011 0.000
(0.006) (0.008) (0.004)* (0.004)* (0.004) (0.002) (0.005)* (0.003)* (0.004)* (0.003) (0.004) (0.005) (0.006)
φ 0.000 0.000 0.000 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.004
(0.000)* (0.000)* (0.000) (0.000) (0.001) (0.000)* (0.000)* (0.000)* (0.000)* (0.000) (0.000)* (0.000)* (0.001)**
ω 0.160 0.122 0.087 0.150 0.073 0.227 0.183 0.210 0.222 0.142 0.133 0.139 0.243
(0.019)** (0.035)** (0.042) (0.050)* (0.035) (0.035)** (0.049)** (0.041)** (0.048)** (0.027)** (0.028)** (0.035)** (0.048)**
λ 0.817 0.857 0.848 0.610 0.745 0.750 0.739 0.756 0.717 0.874 0.848 0.790 0.483
(0.018)** (0.033)** (0.100)** (0.133)** (0.178) (0.026)** (0.066)** (0.042)** (0.060)** (0.017)** (0.028)** (0.056)** (0.079)**
ðω þ λÞ 0.977 0.979 0.935 0.760 0.818 0.977 0.922 0.966 0.939 1.016 0.981 0.929 0.726
Log- 227.702 214.283 412.398 381.772 364.850 544.218 362.519 419.925 338.867 387.603 377.906 312.666 233.410
likelihood
Part II: Basic Statistics of Conditional Volatility Series
Mean 0.029 0.026 0.005 0.006 0.007 0.003 0.010 0.008 0.013 0.011 0.009 0.012 0.019
Standard D. 0.050 0.020 0.001 0.002 0.001 0.004 0.010 0.010 0.021 0.009 0.005 0.010 0.016
Minimum 0.0062 0.0058 0.0032 0.0040 0.0063 0.0007 0.0042 0.0018 0.0039 0.0009 0.0030 0.0031 0.0081
Maximum 0.393 0.132 0.014 0.024 0.016 0.040 0.101 0.067 0.221 0.053 0.033 0.057 0.164
Jarque-Bera 7899.830++ 484.610++ 977.553++ 1154.262++ 1592.319++ 6483.495++ 9227.967++ 1303.050++ 22424.50++ 156.071++ 146.214++ 562.067++ 7600.995++
ADF test −4.236++ −3.228++ −4.313++ −3.793++ −6.268++ −3.221++ −4.206++ −3.078+ −5.215++ −2.945+ −3.663++ −2.901+ −8.645++
Q(12) 960.11++ 1824.8++ 895.32++ 625.36++ 338.80++ 1104.3++ 963.67++ 1490.3++ 578.75++ 1759.5++ 1256.2++ 1507.4++ 120.72++
Part III: Diagnosis of standardized residuals
Mean −0.011 −0.039 −0.001 −0.0007 0.010 0.055 −0.066 −0.055 −0.0008 0.021 −0.012 −0.020 0.051
Standard D. 1.002 1.003 1.001 1.001 1.002 1.000 1.000 1.000 1.002 0.999 1.005 1.000 0.999
Minimum −3.924 −4.296 −4.413 −3.141 −2.411 −3.039 −4.328 −5.038 −5.595 −4.473 −3.001 −3.862 −3.461
Maximum 5.390 2.498 2.593 4.054 2.767 3.654 2.511 2.590 2.441 4.339 3.895 3.664 3.431
Skewness 0.552 −0.667 −0.315 0.161 −0.052 0.607 −0.214 −0.638 −1.358 0.046 0.229 −0.302 −0.334
Kurtosis 7.143 4.894 4.152 4.202 2.870 4.419 3.651 6.049 7.912 6.767 4.289 4.363 5.109
Jarque-Bera 210.741++ 61.560++ 19.802++ 17.757++ 0.319 39.992++ 6.972+ 125.241++ 361.050++ 162.759++ 21.459++ 25.494++ 56.089++
Q(12) 3.790 6.713 10.378 5.068 7.326 12.134 9.098 11.450 18.083 8.473 10.347 22.389+ 9.202
Q2(12) 4.843 9.505 19.169 5.652 5.851 14.560 9.523 7.321 4.998 6.269 6.039 8.670 12.346
ARCH(12) 5.197 9.704 17.707 5.457 6.444 12.374 8.827 5.958 4.605 6.683 6.856 7.368 10.601
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES

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

Argentine B résil Chili Colombie

Argentina IFRS adoption Brazil IFRS adoption Chile IFRS adoption Colombia IFRS adoption
.4 . 14 . 016 . 035

. 12 . 014 . 030
.3
. 10 . 012 . 025

. 08 . 010 . 020
.2
. 06 . 008 . 015

. 04 . 006 . 010
.1
. 02 . 004 . 005

.0 . 00 . 002 . 000
87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14

Korea India Jordan Malaysia

Corée Inde Jordanie Malaisie
IFRS adoption IFRS adoption IFRS adoption IFRS adoption
.10 .020 .05 .08

.08 .04
.016 .06

.06 .03
.012 .04
.04 .02

.008 .02
.02 .01

.00 .004 .00 .00

87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14

Mexique Pakistan Thaïlande

I F R S adopti on I F R S adopti on
Philippines
Philippines
Mexic Pakistan Thailand IFRS adoption
.30 .05 .05 IFRS adoption .06

.25 .05
.04 .04

.20 .04
.03 .03
.15 .03
.02 .02
.10 .02

.01 .01
.05 .01

.00 .00 .00 .00

87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14 87 90 93 96 99 02 05 08 11 14

Venezuel a
IFRS adoption
.20

.16

.12

.08

.04

.00
87 90 93 96 99 02 05 08 11 14
MACROECONOMICS AND FINANCE IN EMERGING MARKET ECONOMIES

Figure 1. Predictability return index evolution with a 95% confidence interval.

23