The Market Reaction to the Adoption of IFRS in the European Insurance Industry
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The Market Reaction to the Adoption of IFRS in the European Insurance Industry Abed Al-Nasser Abdallaha, Wissam Abdallahb and Feras M. Salamaa a
School of Business Administration, American University of Sharjah, P.O. Box: 26666, Sharjah, UAE. E-mail: [email protected]; [email protected] b Adnan Kassar School of Business, Lebanese American University, P.O. Box: 13-5063, Chouran, Beirut, Lebanon. E-mail: [email protected]
This study examines the market reaction of the European insurance industry to the adoption of International Financial Reporting Standards (IFRS) in Europe. Using an event study methodology, we find that investors in the insurance industry reacted favourably to most of the events that led to the adoption of IFRS. However, the positive reaction is not consistent across all events, which may reveal some investor concern as to whether the benefits of IFRS adoption (i.e. comparability and transparency) exceed the costs (i.e. increase audit fees and/or managerial discretion). We also find that investors’ reaction to IFRS adoption differs between life and nonlife insurers. Specifically, our multivariate results show that investors in the non-life insurance industry react more favourably to IFRS adoption, which indicates that they anticipate the benefits of IFRS will exceed the costs. The Geneva Papers (2018) 43, 653–703. https://doi.org/10.1057/s41288-018-0088-1 Keywords: IFRS; European insurance companies; market reaction; expected return; accounting reforms; life insurance; non-life insurance Article submitted 2 June 2017; accepted 18 March 2018; published online 13 June 2018
Introduction A large body of research in accounting has been devoted to assessing the economic consequences of adopting the International Financial Reporting Standards (IFRS). Citing the notion that IFRS are more comprehensive than most local GAAP,1 proponents of the new standards suggest that adoption of IFRS enhances the quality of financial reporting and increases transparency (e.g. EC Regulation No. 1606/2002). Another argument in favour of IFRS adoption is that adopting a common set of accounting standards improves the comparability of financial results across markets and countries and reduces investors’ transaction costs.2 Utilising an international sample from 21 countries, Barth et al.3 find that firms applying international accounting standards experience less earnings management and report more conservatively. Based on the theoretical arguments and empirical evidence of these studies, it is expected that investors will react favourably to movements towards IFRS adoption. 1 2 3
Ding et al. (2007); Bae et al. (2008). Covrig et al. (2007); Armstrong et al. (2010). Barth et al. (2008).
The Geneva Papers on Risk and Insurance—Issues and Practice
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However, there are also arguments which suggest that the market reaction to the adoption of IFRS could be minor or even negative. For example, Ball et al.4 suggest that because the application of IFRS standards involves making substantial judgements and relying on pri
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