The Capital Market Effect of the IFRS Mandate on IPO Underpricing and Long-term Performance: Evidence from Saudi Arabia

Abstract

Abstract Current accounting disclosure literature documents economic benefits for mandating International Financial Reporting Standards (IFRS) for European Union (EU) and developed non-EU countries. The critical question is whether there are economic benefits from mandating IFRS on accounting quality in emerging non-EU countries. From an emerging market perspective, this question has not yet been investigated. This thesis examines the economic benefits that IFRS mandating brings to the underpricing and long-term performance of Initial Public Offerings (IPO) firms in one of the largest emerging non-EU countries, Saudi Arabia, and provides the first empirical evidence of its effect. This is attained by investigating the singular effects of the IFRS mandate and intertemporal changes in transparency, and the joint impact of these two elements. This empirical investigation provides answers to four research questions: 1) What is the effect of the IFRS mandate on the underpricing of IPO firms in Saudi Arabia? 2) What is the effect of the IFRS mandate on the long-term performance of IPO firms in Saudi Arabia? 3) Is there a joint effect of the IFRS mandate and intertemporal changes in transparency on IPO underpricing in Saudi Arabia? 4) Is there a joint effect of the IFRS mandate and intertemporal changes in transparency on the long-term performance of IPO firms in Saudi Arabia? Data from January 2003 to December 2017 for 102 IPOs, covering 15 industries, is acquired from secondary sources. The quantitative techniques inherent in the Difference-in- Differences (DiD) research design are used to test the 9 research hypotheses, employing 174 balanced cross-sectional regression models and a battery of robustness tests. Findings show that while IFRS reduces the underpricing of IPO firms, it provides no benefits in relation to the aftermarket performance for those companies. Furthermore, although a significant joint effect on IPO underpricing in Saudi Arabia is seen from both IFRS mandating and intertemporal changes in transparency, this concurrent effect vanishes in the long-term. Intertemporal improvements in formal institutional quality are only relevant for IPO firms in the long-term and do not have any effect on underpricing. Collectively, the findings reveal that IFRS mandating has only a short-lived effect and has no lasting influence on information asymmetry for IPO firms. A number of empirical contributions for researchers, policymakers, and local and international investors in emerging non-EU countries, especially Saudi Arabia, are provided.