Impact of International Financial Reporting Standards Adoption on the Value Relevance of Accounting Information in Saudi Arabia

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Alomair, Abdulrahman ORCID: 0000-0001-7493-7822 (2022) Impact of International Financial Reporting Standards Adoption on the Value Relevance of Accounting Information in Saudi Arabia. PhD thesis, Victoria University.


The purpose of the study is to examine the impact of the adoption of the International Financial Reporting Standards (IFRS) on the relative and incremental value relevance of the accounting information of non-financial listed firms on the Saudi Stock Exchange (Tadawul) during 2015– 2018. Further, motivated by the competing roles of the income statement and the balance sheet, this study examines the individual role of the book value per equity share (BVPS) versus that of the earnings per share (EPS) in providing value relevant accounting information to equity inventors pre and post IFRS adoption. In an additional analysis, this study examines the influence of firmspecific characteristics (i.e. size, profitability, audit quality, growth, leverage and industry) on the value relevance of accounting information pre and post IFRS adoption. To the best of the author’s knowledge, this study is the first market-based accounting research that examines these objectives with reference to IFRS adoption by non-financial Saudi listed firms Employing the two popular valuation models, the price model of Ohlson (1995) and the return model of Easton and Harris (1991), this study comprehensively measures the value relevance of the accounting information of 110 non-financial listed firms before (2015–2016) and after (2017–2018) IFRS adoption and during the comparative year (2016). The adjusted coefficient of determination (Adj R2) of the models is used as the main metric of the combined value relevance. The change in Adj R2 is measured using the Cramer (1987) test and the Vuong (1989) test for independent and non-independent samples, respectively. The regression coefficients of these models measure the individual value relevance of accounting information. To examine the impact of firm-specific characteristics, this thesis partitions the sample into subsamples to compare the value relevance of accounting information, through Adj R2, of firms that differ in terms of their characteristics, using the Cramer (1987) test. The thesis results demonstrate that accounting information was value relevant to equity investors in making investment decisions during the Saudi Generally Accepted Accounting Principles (GAAP) period as well as the IFRS period as indicated by the yearly Adj R2 values, which are statistically significant at the 1% level. The findings are comparable with those for developed markets, which indicates that Saudi investors are rational when using accounting information for firm valuation. The findings on employing both pre-and post-IFRS and comparative year approaches indicate that although the joint value relevance (R2) has not improved as a result of IFRS adoption, the relative value relevance of BVPS has significantly improved at the 5% level after IFRS adoption became mandatory in Saudi Arabia, reflecting the importance of fair value measurement under IFRS. However, this is not the case for EPS, given that its coefficient did not significantly change after IFRS adoption. The finding of no change in the joint value relevance (R2) from IFRS to Saudi GAAP could be attributed to the fact that IFRS was recently implemented in Saudi Arabia, a country that lacks qualified accountants, research and coverage of IFRS in universities (Nurunnabi, 2018). However, it is expected that the value relevance of accounting information in Saudi Arabia will improve gradually on allowing sufficient time for IFRS effects to emerge. In addition, the results of the additional analysis show that firms with low potential growth, low leveraged firms, profit-making firms, firms with mixed-gender on the board, good news firms, firms audited by the Big4 firms (i.e. the four largest accounting firms in the world: Deloitte; Ernst & Young, KPMG and PricewaterhouseCoopers), and large firms always exhibit significantly higher joint value relevance (R2) than their counterparts do regardless of the implemented accounting standards. These results are consistent with those of prior studies—namely, that investors value profitable firms as a going concern (Joos & Plesko, 2005), have more confidence in accounting information audited by a Big4 firm (J. R. Francis & Wang, 2008) and view large firms (Gaio, 2010), low leveraged firms (Habib & Azim, 2008) and good news firms (Ball & Brown, 1968; Francis & Schipper, 1999) as more stable with predictable operations, superior performance and future growth potential. The results for all subsamples apart from that of lossmaking firms, which were not found to provide value relevant information, confirm the main results that IFRS has a positive and significant impact on BVPS only. Thus, this thesis makes the following significant contributions to the literature on IFRS and value relevance. First, it provides the first known empirical evidence concerning the impact of IFRS adoption on the value relevance of the accounting information of non-financial listed firms. Thus, the findings should be relevant to accounting standards setters (e.g. the Saudi Organization for Chartered and Professional Accountants and the International Accounting Standards Board); the Saudi Capital Market Authority; other countries that have adopted, or are considering adopting, IFRS and have a similar institutional environment to that of Saudi Arabia; and current and potential investors engaged in the Tadawul. Second, this thesis employs a more refined research design methodology by conducting the analysis using both the pre- and post-IFRS and comparative year approaches. This fact could be relevant to empirical researchers interested in the impact of IFRS on the value relevance of accounting information, in that they can adopt the research methodology employed in this thesis. Third, the findings reveal how market participants view the accounting information of firms with different characteristics pre and post IFRS implementation. This information would assist firms that provide accounting information with low value relevance in improving its relevance by advancing their knowledge about IFRS, promoting more disclosure and undertaking training programs to educate managers and other employees responsible for preparing financial statements about the requirements under IFRS.

Item type Thesis (PhD thesis)
Subjects Current > FOR (2020) Classification > 3501 Accounting, auditing and accountability
Current > Division/Research > Institute for Sustainable Industries and Liveable Cities
Current > Division/Research > VU School of Business
Keywords International Financial Reporting Standards; stock exchange; book value per equity share; earnings per share; Saudi Arabia
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