The Saudi Stock Market Reaction to, and Valuation of, IFRS Reconciliation Adjustments.

Abstract

A significant change in Saudi Arabia over the last decade was the mandatory adoption of International Financial Reporting Standards (IFRS). The conversion to reporting under IFRS required listed companies to publish reconciliation statements between the previous Saudi Generally Accepted Accounting Principles (S-GAAP) and IFRS, as mandated by IFRS 1. IFRS was established to meet the global economy's demand for high-quality and transparent financial reporting, and to harmonise financial reporting practices and address challenges from variations in accounting practices across different financial and legal systems, and cultures. The extant literature on IFRS adoption, market response, and value relevance has primarily concentrated on the European context. However, there is a need for research regarding IFRS adoption in Saudi Arabia. The country unique characteristics, such as its high reliance on oil revenue and its Vision 2030 initiative to diversify its economy underscore the need for adopting IFRS. Challenges like necessary changes to financial reporting systems and cultural barriers complicate this transition, which may impact market responses and the relevance of financial information. Consequently, this thesis seeks to fill this gap by examining (i) how the Saudi stock market responded to the release of IFRS reconciliation statements; and (ii) how the level of value relevance has developed over time. The aim of the current study is threefold. First, the study determines how market participants reacted to the mandatory adoption of IFRS, using a sample of 150 companies listed on the Saudi stock market during the period 2017 to 2019. Studies suggest that investors' perceptions of IFRS adoption are affected by their expectations of the future benefits and costs associated with IFRS adoption (Comprix et al., 2003; Daske et al., 2008; Armstrong et al., 2010; Joos and Leung, 2013). The findings show that the market reacted positively to IFRS adoption, suggesting that investors perceived it as being beneficial. However, for some sectors, the reaction to the publication of IFRS Reconciliation Statements was negative, and suggested that some information leakage may have occurred. Second, and building on the foundation established in the first empirical chapter, this thesis analyses the value relevance of IFRS using a sample of 105 listed companies for the three years before and after the adoption of IFRS in Saudi Arabia. The findings indicate that adopting IFRS enhanced the value relevance of accounting information, as demonstrated by an increase in explanatory power following the implementation. Third, the thesis examines the impact of IFRS adoption on accounting quality in Saudi Arabia by utilising three accounting quality models, using a comprehensive dataset of 101 listed firms over the period 2014 to 2020. The findings reveal that IFRS adoption improves certain aspects of accounting quality, including earnings persistence, and earnings smoothing. These results contribute to the ongoing discussion about the effects of IFRS adoption on financial markets and accounting practices in emerging economies. As such, the thesis offers valuable insights for policymakers, standard-setters, and financial statement users in Saudi Arabia and other developing countries that are considering similar regulatory changes. The findings of this study have important implications. They support Saudi Arabia's transition to IFRS, showing a positive stock market reaction that suggests investors see benefits in this adoption. This may encourage regulators to tailor standards to user needs. In addition, the stock market reaction may indicate how investors in other developing countries view IFRS modifications, offering insights for policymakers in similar economies. Finally, the thesis reveals that adopting IFRS in Saudi Arabia has enhanced certain aspects of accounting quality, indicating that the standards meet some objectives.