Was the Introduction of IFRS in Europe Value-Relevant?

The introduction of IFRS in Europe was intended to improve accounting quality and facilitate cross-border financial transactions. This study examines whether IFRS increases value-relevance of corporate disclosure using traders' response in financial markets of 15 EU countries. If the regulatory reform improves informativeness of financial reporting, there will be a significant decrease in the bid-ask spread, and more particularly in its information asymmetry component (AIc). Using AIc of 3,907 companies in the period 2003-2005, we investigate how information asymmetry changes when legal origin, country earnings management and corporate disclosure scores differ. On average, the spread decreases over the period, whereas AIc does not. We suggest that IFRS adoption is positively associated with a significant increase in both size and volatility of AIc for UK firms. The increased and stable proportion of free float shares for UK and Scandinavian firms we also attribute to the regulatory change. It seems that AIc does not become more volatile under IFRS for French and Scandinavian origin groups, whereas it changes greatly for the UK and German groups. Our results show that firms with a higher country score for earnings management have a lower AIc. Additionally, higher disclosure is positively correlated with larger information asymmetry. Using aggregate AIc obtained with rolling regressions, we explain variance in information asymmetry with market value, spread size, volume, free float and returns. Our empirical results confirm that, when spread size increases, AIc decreases across the four country groups. The marginal effect of the spread size on information asymmetry is stronger for UK firms. We argue that although average bid-ask spread decreases over the period 2003-2005, it does not necessarily lead to a lower AIc in 2005