Product market competition, stock price informativeness, and IFRS adoption: evidence from Europe
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Product market competition, stock price informativeness, and IFRS adoption: evidence from Europe Jing Wang1 · Wei Li2 · Arno Forst3
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This study examines whether and how policy changes that aim to improve market efficiency, specifically the mandatory adoption of International Financial Reporting Standards (IFRS), influence the relation between product market competition and stock price informativeness. Using a sample of European firms, we find a negative association between product market competition and stock price informativeness as evidenced by larger (smaller) stock price changes surrounding earnings announcements for firms facing more (less) product market competition. These findings are consistent with prior studies examining the U.S. capital market. We further find that IFRS adoption alleviates the negative association. This positive effect is more pronounced among firms domiciled in countries with stronger legal enforcement and among smaller firms. Our results provide insights into the interrelation between product and capital markets in the European setting. More importantly, our results highlight the importance of policy changes, which aim to improve market efficiency, in influencing the relation between the two markets and document the benefit of IFRS adoption in mitigating the negative competition-informativeness relation. Keywords Product market competition · Stock price informativeness · IFRS adoption · International accounting JEL Classification M41 · N24 · G15
We thank participants at the 2015 American Accounting Association (AAA) Annual Meeting and the 2016 International Conference of the Journal of International Accounting Research joint with Accounting, Organizations and Society for their helpful comments. * Wei Li [email protected] Jing Wang [email protected] Arno Forst [email protected] 1
Department of Accounting and Finance, California State University, Bakersfield, CA 93311, USA
2
Department of Accounting, Kent State University, Kent, OH 44240, USA
3
Department of Accounting, University of Texas Rio Grande Valley, Edinburg, TX 78539, USA
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1 Introduction This study examines whether and how policy changes, which aim to improve market efficiency, influence the relation between product market competition and stock price informativeness. Research in finance and accounting (Peress 2010; Kubick et al. 2015) finds a negative relationship between product market competition and stock price informativeness in the United States (U.S.), as evidenced by larger (smaller) stock price changes surrounding earnings announcements for firms facing more (less) product market competition. There are at least two reasons for this negative association. Firstly, according to the economic models developed in Peress (2010), the profitability of firms that operate in more competitive product markets is less certain, which will lead investors to decrease their trading volume. Fewer trades, in t
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