IFRS Adoption and Capital Markets

Abstract

The need to deregulate financial markets has created a unified goal geared towards having uniform standards of accounting in order to help in the smooth flow of capital across economies and across the various global capital markets. Through a review of relevant literature, the study aimed at studying the theories related to financial disclosure, analyze to, by a review of literature, review the various theories related to financial disclosure, critically analyze various empirical studies on the IFRS adoption effects on the functioning and operations of capital markets, identify knowledge gaps and point out areas of further studies on IFRS and capital markets. The review observed significant efforts geared towards the harmonization of the standards of accounting globally as evidenced by the many countries which have since adopted and incorporated IFRS in their regulatory reporting requirements. Further, while IFRS adoption was expected to result in accounting reporting quality improvements and other capital market benefits, the benefits have not been realized uniformly throughout the globe, this is due to factors inherent in firms, cultural, economic and political variations among different nations. From the review it was noted that majority of the studies reviewed were mainly drawn from the developed nations, that is, European Union, United States and other developed countries fewer studies are available for developing countries like Kenya. The studies indicate mixed results as to the benefits of IFRS adoption which can be attributable to the political, economic and legal differences among nations. The review further noted that the studies reviewed did not consider the effects of other variables such as political, institutional, legal, firm specific and macroeconomic factors despite the fact that they are likely to affect IFRS adoption, contributing to varied results across nations. Majority of the studies reviewed used regression analysis, however, the test to ascertain the robustness of the regression models like linearity; multicollinearity; normality and heteroscedasticity were not performed casting doubts on the reliability of the models used. The findings of the review indicate tremendous benefits arising from IFRS adoption to capital markets, this include, enhance liquidity of markets, higher following by analysts, minimized information asymmetry, lower costs of capital, increase of cross listings by firms, improved foreign holdings and higher turnover of capital markets. At formulation of IFRS by IASB there were expectations of enhanced usefulness of accounting reports to capital markets, attainment of this objective however, is dependent on the legal and institutional framework related to financial disclosures which when weak, the achievement of this objective may not be guaranteed. As a result the IASB should have in place measures to ensure nations having weak enforcement of laws are assisted to improve IFRS enforcement so as to reap maximum benefits of IFRS adoption benefits. Further, nations should include IFRS into their laws in order to make it mandatory for firms to adopt IFRS. In conclusion, more country and region specific studies should be conducted in order to analyze the unique variation across countries in relation to IFRS adoption benefits. Keywords: IFRS, liquidity, comparability, cross listing, integration