Summary

Summary of stock price synchronicity literature

The previous sections contain a discussion and review of the literature that examined stock price synchronicity. After reviewing the literature, one can conclude that Roll (1988) is among the first

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who comments about the suggested link between firm-specific return variation and the amount of firm private information that is incorporated into the stock price. After Roll’s comments a significant growing amount of theoretical and empirical studies, leaded by the early research of Morck et al. (2000), Wurgler (2000) Durnev et al. (2003), Veldkamp (2006a) and Jin and Myers (2006) provide evidence that the firm-specific return variation reflects the amount of firm- specific information that is incorporated into stock price, and hence measure the informativeness of the stock price.

Where these papers provide evidence that the firms with higher firm-specific return variation are normally located in more highly developed economies; enjoying a higher transparent information environment; have higher investor protection regime; associated with strong legal and institutional development, and are located in more transparent cultures.

The previous literature also suggests that less synchronise firms are associated with efficient investments decisions and efficient resource allocation; have a strong relationship between its stock price and future return; adopt high-quality accounting standards; provide less aggressive financial reporting; have higher quality accounting numbers; do not engage in complex less transparent transaction; do not engaged in offshore operations; have less stock crash risk; have high relationship with stock price informativeness and informed trading; have less government ownership All these findings support the information interpretation of higher firm-specific return variation.

More informative firms also documented to be audited by high-quality auditing firms; have high portion of institutional investor, have high proportion of foreign investors; have a gender diversified board of directors; have improved corporate governance

Admittedly, there is another view that suggests a different interpretation of low stock price synchronicity and argues that the idiosyncratic stock price movement is an indication of the “noise trading” instead of informed trading. However, after examining the literature around these two positions one can argue that the research that adopts an informative interpretation of firm- specific return variation is well established and more mature than that for noise interpretation. The majority of stock price synchronicity literature supports the informative interpretation by providing conceptual and empirical results from a culture level (Eun et al., 2015), country level

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(Morck et al., 2000), provinces level (Hasan et al., 2014), industry level (Durnev et al., 2003), and firms level (Durnev et al., 2003) that links lower stock price synchronicity with more informative stock price.

In addition, evidence from developed markets (Gul, Srinidhi, et al., 2011) and from emerging market (Hasan et al., 2014); and from financial firm (Francis et al., 2015) and non-financial firms (Ben-Nasr & Alshwer, 2016) provide a theoretical and empirical justification for using firm- specific return variation as a measure of stock price informativeness.

In addition, the other view is limited to some research that provides firm levels results that suggest a “noise trading” interpretation of low stock price synchronicity. Because the information interpretation of the firm-specific return variation is more prevalent and well established than the noise interpretation, this thesis will adopt firm-specific return variation as measured by stock price synchronicity to gauge the amount of firm-specific information that is reflected in the stock price in comparison with market wide and/or industry-wide information, thus measure the informativeness of the stock price. Table 2.1 (at the end of the chapter) provide a summary of the papers that examine the informativeness of stock prices and the measures they used to gauge the stock price informativeness

Summary of IFRS literature

The previous section provides discussion about the empirical literature that examines the consequences of IFRS adoption. Past research provides mixed evidence about the consequences of IFRS adoption. Where one stream of research suggests numerous benefits associated with IFRS adoption such as increasing the value relevance of accounting numbers following IFRS adoption (Barth et al., 2008; Devalle et al., 2010; Ismail et al., 2013; Tsalavoutas et al., 2012), higher accounting quality (Ballas et al., 2010; Barth et al., 2008; Ismail et al., 2013), higher disclosure quality (Aksu & Espahbodi, 2012; Daske & Gebhardt, 2006).

IFRS adoption is also documented to increase the number of financial analysts who follow the firm, either local or international (Kim & Shi, 2012b; Landsman et al., 2012; Tan, Wang, & Welker, 2011), improve information environment, analysts’ forecast accuracy and reducing analysts’ forecast dispersion (Horton et al., 2013; Houqe et al., 2014), increase earnings

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information content (Landsman et al., 2012), improve comparability, thus reduce investors information processing cost (Armstrong, Barth, Jagolinzer, & Riedl, 2010; Daske et al., 2008; DeFond et al., 2011), increase the informativeness of stock prices (Beuselinck et al., 2010; Bissessur & Hodgson, 2012; Loureiro & Taboada, 2012; Kim & Shi, 2012a).

The previous literature that examine IFRS adoption also suggest that the IFRS adoption reduce earnings management (Barth et al., 2008; Ismail et al., 2013), increase timely loss recognition (Barth et al., 2008), provide higher quality earnings numbers (Houqe et al., 2012), increase foreign mutual fund ownership (DeFond et al., 2011), increase the US foreign investments in the countries that adopt IFRS (Shima & Gordon, 2011), increase countries foreign direct investment (Gordon et al., 2012; Landsman et al., 2012), reduce reporting lag (Landsman et al., 2012), increase earnings persistent (Doukakis, 2010), provide crash risk, (DeFond et al., 2015), lower firms’ cost of equity capital (Daske et al., 2008; Kim, Shi, et al., 2014; Li, 2010; Palea, 2009), provide more transparent and comparable financial disclosure (Brochet et al., 2013), improve market liquidity (Daske et al., 2008), and increase equity valuation (Daske et al., 2008).

However, some research suggests that these benefits of IFRS adoption are not equal for all the countries and firms that choose to adopt the IFRS. Whereas some research suggests that these benefits of IFRS adoption are limited for countries with strong legal enforcement and strong investors protection regime (Daske et al., 2008; Houqe et al., 2014; Landsman et al., 2012; Shima & Gordon, 2011), and for countries with big differences between local GAAP and IFRS (DeFond et al., 2015; Horton et al., 2013; Moscariello et al., 2014). In addition, DeFond et al. (2011) argue that the benefits from IFRS adoption will not be achieved unless the IFRS adoption is combined with credible implementation by firm’s management. Daske et al. (2013) also highlight the importance of firm’s management reporting incentives in achieving the benefits of IFRS adoption. Clarkson et al. (2011) find that the increase in the value relevance of accounting numbers is limited for Code Low Countries in comparison with Common Low Countries. While Kim, Shi, et al. (2014) suggest that the reduction in the cost of capital is more pronounce in countries with weak institutional infrastructure.

Other papers fail to document any benefits associated with the adoption of IFRS. For example, Liu and Sun (2015) and Doukakis (2014) find that the mandatory adoption of IFRS does not

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have any impact on the earnings quality for their sample firms.8 Moreover, Paananen and Lin (2009) and Watrin and Ullmann (2012) document a reduction in earnings quality for German firms following the mandatory adoption of IFRS. Similar results from Swedish firms provided by Paananen (2008) who document a reduction in the earnings quality for Swedish firms following the IFRS adoption. In addition, Clarkson et al. (2011) find that the mandatory adoption of IFRS leads to lower value relevance of accounting numbers for EU common Low Countries. Moscariello et al. (2014) also document that IFRS adoption has no effect in reducing the cost of debt in the UK.

Collectively, the results of the literature that examine the consequences of IFRS adoption are mix and contradict each other at some point. For this reason, this research will shed more light on the consequences of mandatory IFRS adoption by providing new evidence about the effect of mandatory IFRS adoption on the informativeness of stock prices for the UK firms.