Market reaction and the information content Essay

This paper purports to analyze the market reaction and the information content while Taiwan authorities promulgates that the International Financial Reporting Standards ( IFRS ) will be adopted for listed companies get downing from 2013.

IFRS are issued by the International Accounting Standards Board ( IASB ) and have been wholly adopted by European populace companies since 2005. Nowadays, more than 120 states in the rich person exerted or will follow IFRS in the close hereafter. Since houses adopt IFRS normally result in legion virtues such as better coverage quality and comparison, the Chinese authorities authorization intends to qualify endeavors to follow IFRS. As a affair of fact, the authorization has endeavoured to do Chinese by and large accepted accounting rules ( Taiwan GAAP ) converge towards IFRS in the recent decennary and enacted accounting criterions harmonizing to IFRS in footings of fiscal instruments, assets impairment, employee benefits and stock lists.

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Subsequently, with a position to accomplishing farther consistency with IFRS, the method of convergence has came to a arrest with the strategy of following IFRS promulgated.Previous surveies have investigated the reaction of stock market to the specific one of foresaid criterions implemented or announced in Taiwan ; nevertheless, it is still obscure how the investors will respond to the information of full set IFRS acceptance, which will be examined in this paper. The virtues of following IFRS such as bettering comparison, better fiscal information quality, cut downing information dissymmetry, lower cost of capital and so forth, have been extensively discussed by legion surveies ( e.g.

, Tarca, 2004 ; Daske and Gebhardt, 2006 ; Daske et Al. 2008 ; Epstein, 2009 ; Iatridis, 2010 ) . Hence, this paper assumes that there would be a positive reaction to capital market provided that investors believe the benefits of IFRS acceptance would outweigh demerits derived from it. Event survey methodological analysis together with market theoretical account would chiefly be employed to bring out the market reaction. The electronic production sector, the nucleus industry of Taiwan, would be selected as samples to carry on this research because houses belong to it normally have more purpose to publish capital overseas and have larger graduated table of foreign operation, which indicates that these houses would be more acute on following IFRS. Besides, sensitive trial would be implemented to relieve the effects of bunch, which could be deemed as the autochthonal failing of regulative event surveies. Based on the empirical consequences, this paper finds that the returns of sampled houses witness positive reaction to the intelligence sing IFRS acceptance, and this reaction normally exists prior to the formal proclamations.

Besides, this paper would follow Armstrong et Al. ( 2010 ) , which contest that house with lower pre-adoption quality fiscal coverage information and higher information dissymmetry would see more positive reactions from IFRS acceptance in European states. They besides hypothesise that houses domiciled in more rigorous enforcement environment would hold more positive reaction to IFRS acceptance. By agencies of cross-sectional analyses, this paper could non happen the indistinguishable decision with Armstrong et Al. On the contrary, a positive relationship between unnatural returns and lower pre-adoption information dissymmetry would be found, which reveals that investors might comprehend convergence cost as a concern in Taiwan capital market.Through afore-mentioned trials, this paper proposes to supply preliminary findings sing the market reaction to IFRS acceptance of Taiwan. These consequences could be extended by a series of following events with respect to the IFRS acceptance program, and hence the hereafter research might render more comprehensive and completed findings.The paper would be comprised of seven parts.

Following the introductory subdivision, which outlines the nature of the survey, Section 2 would present Taiwan GAAP in the facets of its beginning, old convergence with IFRS, major differences with IFRS and the acceptance strategy of IFRS. Then, Section 3 would show reappraisals on related literatures sing the application of event survey to accounting criterions acceptance and economic effect of following IFRS. Section 4 would show and support the paper ‘s selected methodological analysis, and later the empirical consequences would be depicted in Section 5. Section 6 would take the restrictions of this paper into history. Finally, Section 7 would reason the survey based on findings and a set of recommendations.


In this subdivision, the original standard-setting procedures and the strategy of IFRS acceptance would be introduced as background information. Apart from that, the considerable differences between Taiwan GAAP and IFRS prior to the acceptance strategy would be explained in order to be the premises of following analyses.

The Original Process of Generating Accounting Standard in Taiwan

Taiwan is an interesting paradigm to exhibit the procedure of accounting criterions transferred from U.

S. by and large accepted accounting rules ( US GAAP ) to IFRS. In 1983, the Ministry of Finance in Taiwan convoked a conference with a position to bettering the effectivity of accounting system, and so the Accounting Research and Development Foundation ( the Foundation ) was established based on the decision of this convention.

One of important function of the Foundation is to develop Chinese accounting criterions with the purposes that “ promote accounting cognition and heighten the quality of accounting and auditing patterns ” ( Lai[ 1 ], 1992, preface, in Ong, 2005 ) . The Foundation consists of four separate commissions. Among these four commissions, the Financial Accounting Standards Committee ( FASC ) takes charge of accounting standard-setting and comprises of 14 members. Apart from two members who are representatives of the authorities, the FASC still include six accounting faculty members and six comptrollers from the professional kingdom ( Ong, 2005 ) .Taiwan originally compiles its by and large accepted accounting rules based on US GAAP. Since the late 1990s, Taiwan GAAP is bit by bit shifted towards IFRS by agencies of the method of convergence. As of to day of the month, the FASC has promulgated several accounting criterions in conformity with IFRS with minor differences ( See Appendix I ) .

The Introduce of Adoption Scheme in Taiwan

US GAAP and IFRS Convergence

Accounting harmonization is regarded as the planetary leaning and there is no exclusion in the United States.

In March 2008, the United States Securities and Exchange Commission modifies current regulations and signifiers. These amendments would allow foreign private issuers ( i.e. , non-U.S. domiciled houses with a bulk of their stockholders and operations located outside the U.

S. ) to register their fiscal statements without registering Form 20-F, the rapprochement to US GAAP, provided that their fiscal statements that are prepared in conformity with full set of IFRS ( Epstein, 2009 ) . This ordinance is besides one of the most of import impulses to further Taiwan to follow full-set IFRS.

The Scheme of Adopting IFRS in Taiwan

In order to farther Foster globalisation, decrease the obstructions to international funding and do domestic more attractive to foreign investors, Financial Supervisory Commission ( FSC ) , the governmental bureau with the duty for pull offing the fiscal personal businesss, announced that Taiwan would change its scheme of accounting harmonization from convergence to adoption on 28 October, 2008. Then, FSC promulgated a roadmap with specific advancement towards IFRS acceptance in Taiwan on 14 May, 2009. In order to relieve the material effects of acceptance program on domestic houses, Chinese public companies would be divided as two classs in this strategy ( i.e.

, class I: listed companies and fiscal establishments supervised by the FSC, which excludes recognition co-ops, recognition card companies and insurance mediators ; and category II: Unlisted public companies, recognition co-ops and recognition card companies ) . Companies of Category I should use in IFRS get downing from January 1, 2013. Their program with regard to acceptance of IFRS and possible influence should be disclosed in the year-end fiscal studies in financial twelvemonth 2011 every bit good as 2012 and interim fiscal studies in financial twelvemonth 2012. On the other manus, class II companies should prorogue following IFRS until the financial twelvemonth 2015. The discourse of above-named program and possible influence is besides mandatory from two old ages prior to the acceptance. This paper will merely concentrate on the class I company since these houses are traded in public capital market with just market value per portion.

Besides, early optional acceptance is applicable for houses which have already issued securities overseas, registered an abroad securities issue with FSC, or had a market capitalisation of greater than ten billion of New Taiwan Dollar. These houses would be permitted to fix extra amalgamate fiscal statements in conformity with IFRS get downing from January 1, 2012 ; of class, these companies are required to unwrap the possible influences of following IFRS in their one-year studies of financial twelvemonth 2010 and 2011 ‘s interim fiscal statements every bit good as one-year studies.As noted in the acceptance strategy, the important undertakings that need to be accomplished consist of following points:IFRS need to be translated into Taiwan-IFRS, which would be issued after appropriate reappraisal ;Analyzing on possible execution issues sing IFRS and happening out executable declarations ;Revising related ordinances and supervisory mechanisms in order to be consistent with IFRS ; andEnhancing related promotion and preparation activities with a position to carry oning the program more expeditiously and efficaciously.Followings are the predicted benefits which the governments hope to achieve by agencies of the acceptance program,Reinforcing the efficiency of ordaining domestic accounting criterions and enhancing of the fight and evaluation of local capital markets in the universe ;Bettering comparison of the fiscal statements between local and foreign companies ;It is unneeded for companies to restatement of fiscal statements while publishing abroad securities, which lessens the cost of raising capital overseas ; andUsing a individual set of accounting criterions would diminish the cost of history transitions every bit good as better direction efficiency, particularly for companies with legion foreign subdivisions or subordinates.

Material Differences between Taiwan GAAP and IFRS prior to Adoption

Even though the FASC has endeavoured to do Taiwan GAAP align with IFRS in the recent decennary, there is still important inconsistence between these two criterions owing to the fact that FASC possess of limited resource to revise full-set criterions and come up with the latest alterations IASB makes. Harmonizing to Taiwan Stock Exchange ( 2009a ) , these differences could be chiefly divided into three classs: ( 1 ) Taiwan GAAP does non develop specific accounting criterions which IFRS has generated ; ( 2 ) Taiwan GAAP could non revise in clip as some of old converged accounting criterions are modified by IASB ; and ( 3 ) The differences derived from non-converged accounting criterions. Followings are the inside informations of these three classs.

Taiwan GAAP does non develop specific accounting criterions which IFRS has generated

Taiwan GAAP does non qualify accounting interventions in footings of investing belongingss, agribusiness and mineral assets, whilst ISAB has developed IAS 40: Investing Property, IAS 41: Agribusiness and IFRS 6: Exploration for and the Evaluation of Mineral Assets in order to modulate these minutess.

Taiwan GAAP could non revise in clip as some of old converged accounting criterions are modified by IASB

The accounting interventions with regard to fiscal instruments are illustrations of this sort of differences. IFRS7: Fiscal Instruments: Disclosures is effectual for financial twelvemonth get downing from 1 January, 2007 and supersedes IAS 30 together with the revelation demands regulated in IAS 32. However, as can be seen in Appendix I, the FASC compiles Statement of Financial Accounting Standards ( SFAS ) No.

36 based on IAS 32. The revelations required by IFRS 7 have non been incorporated.

The differences derived from non-converged accounting criterions

This sort of differences are summarised as the comparings between IFRS and Taiwan GAAP clause by clause. Su ( 2002 ) and Deloitte & A ; Touche ( 2009 ) have documented elaborate differences. Due to the fact that the figure of these differences is excessively enormous, this paper would name several stuff and noteworthy 1s as below:Retrospective application of IFRS is required as a general rule while first clip acceptance, and moreover, some optional freedoms and compulsory exclusions are described in IFRS 1. However, there are no specific criterion with respect to first-time acceptance mentioned in Taiwan GAAP. First clip acceptance is normally regarded as an accounting rule alteration unless the particular transitional commissariats permitted.

Harmonizing to IFRS, particular purpose entities should be combined in the amalgamate fiscal statement, while, there is no similar ordinance in Taiwan GAAP.Given the nature of dealing is infrequent and unusual, Taiwan GAAP permits endeavor to recognize extraordinary income or losingss in the income statement ; nevertheless, extraordinary points are prohibited in IFRS regardless of their nature.Based on IFRS, Properties, workss and equipments might be measured at revalued sum, which equals to fair value at the day of the month of reappraisal less subsequent accumulated depreciation and impairment losingss. In add-on, reappraisal should be implemented on a regular basis so that the transporting sum of assets does non divert significantly from its just value. Nevertheless, turning to Taiwan GAAP, belongingss, works and equipments might be recorded at cost or at cost plus grasp if assets are revalued in conformity with Taiwan authorities ‘s ordinances. Revaluation value of land is based on the assessed present value[ 2 ]; on the other manus, belongingss other than land revalued harmonizing to the sum approved by the revenue enhancement governments.Taiwan GAAP stipulates that deferred income revenue enhancement assets or liabilities should be divided into current or non-current points based on their expected settee day of the months, whereas all deferred income revenue enhancement points should be recognised as non-currents points in conformity IFRS.

Vacation is regarded as a short-run compensation. Based on IFRS, the expected cost of short-run accumulated remunerated absences should be recognised when employees render service. However, there is no related ordinance in Taiwan GAAP.

Literature Review

This subdivision would dwell of five major parts which start from the old articles in footings of the applications of event surveies in the freshly issued specific accounting criterions every bit good as full-set accounting criterions. Subsequently, the advantages and drawbacks with regard to the following IFRS would be extensively discussed. Last but non least, this paper would present old research sing the relationship between IFRS acceptance and market reaction as the premiss of following trials.

Previous Research sing Adopting Specific Accounting Standards

Using event survey in the acceptance of accounting criterions has been extensively discussed. For case, Leftwich ( 1981 ) trials if there is unnatural return while the two compulsory accounting criterions, Accounting Principles Board Opinion No.16: Accounting for Business Combination and Opinion No.17: Accounting for Intangible Assets, are issued. It is found by Leftwich that there is negative impact on stock monetary value provided these new criterions cause inauspicious consequence on houses.

However, Dechow et Al. ( 1996 ) indicate that there is no systematic grounds to back up that investors reacted to intelligence refering compulsory expensing of stock options while FASB denoting Exposure Draft sing stock compensation undertaking. So far as the surveies sing freshly accounting criterions issued during the period of convergence phase in Taiwan are concerned, legion domestic academic articles dedicate to bring outing the market reaction via the methodological analysis of event survey.

For illustration, Lin ( 2005 ) argues that there is negative consequence on the equity market while the SFAS No.35: Damage of Assets is announced. In add-on, the higher ratio of fixed assets over entire assets, the greater cumulative negative abnormal returns have been found ( ibid ) . Furthermore, a negative consequence on the equity market is found by Huang ( 2009 ) while she tests the market reaction to revised SFAC No.10: Inventory. The consequence is more terrible on the companies with higher sum of stock lists or with lower border rate.

Previous Research sing Adopting Full-set Accounting Standards

There are legion surveies discoursing the relationship between stock monetary values and the acceptance of individual accounting criterion ; however, research on the implementing the full set of accounting criterion is comparatively rare.Daske et Al.

( 2008 ) discuss research by Comprix et Al. ( 2003 )[ 3 ]which investigate unnatural returns of houses domiciled in European Union on four cardinal event day of the months of public proclamations that could raise the possibility of compulsory IFRS coverage. A decrepit important, albeit negative, market reaction to these four event day of the months has been found by them. However, significantly positive returns would be on certain predating event day of the months provided that houses are audited by one of Large 5 hearers, domiciled in states that are perceived to see the greatest addition in quality of fiscal information as a effect of IFRS acceptance, or capable to stricter legal enforcement.

Armstrong et Al. ( 2010 ) analyze the market reaction to 16 events occurred from 2002 to 2005 in relation to the likeliness of compulsory acceptance of IFRS in the EU. In comparing with Comprix et Al. ( 2003 ) , which surveies the events from 2000 to 2002, Armstrong et Al. ( 2010 ) analyse later events between 2003 and 2004 that are associated with the indorsement of the IFRS criterions in general together with IAS 32/39 peculiarly. A positive ( negative ) reaction to events which increase ( lessening ) the possibility of IFRS acceptance has been discovered by them. They besides explain that this phenomenon consequences from grounds that investors anticipate benefits of consonant accounting criterions under IFRS.

Compared with Armstrong et Al. ( 2010 ) , which emphasises on whether compulsory IFRS is good or bad as perceived by investors, Christensen et al. , ( 2007 ) focal point on the differences in the economic effects of compulsory IFRS among houses that are likely to incur comparative benefits and costs due to the determination. Exploiting the extent of similarity with German voluntary IFRS and U.S. GAAP adoptive parents as a placeholder for U.K.

houses ‘ purpose to follow IFRS, they argue that this placeholder is positively ( negatively ) associated with the stock monetary value reaction to events increasing ( diminishing ) the chance of compulsory IFRS coverage. In add-on, they find a similar relation for alterations in the cost of equity capital every bit good. In other words, UK houses with similar characteristics to German voluntary adoptive parent would see greater benefits from accounting harmonization.

Advantages of IFRS Adoption

The advantages of following IFRS would chiefly be discussed in this subdivision. In general, unvarying accounting criterions with better quality would ensue in fiscal studies with higher quality, and moreover, it could further higher liquidness of fiscal market and cut down information dissymmetry. Ultimately, it could be predicted that the cost of capital besides would diminish ; viz. , investor would accept lower return from their investing given that they have the belief that perceived peril would be reduced. So far as peril is concerned, Epstein ( 2009 ) references that there are legion dimensions of peril and accounting hazard is one of relevant concerns.

He regards accounting hazard as “ the hazard in puting derived from troubles in understanding the accounting rules applied by describing entity, and the possibility that fiscal coverage criterions might non be uniformly adhered to. ”Followings are the inside informations of important virtues sing IFRS acceptance which have been suggested in pervious literatures.

Enhance quality of Financial Information

Historically resistance to allowing IFRS based fiscal statement was attributed to the concern that the quality of IFRS is non every bit good as it of US GAAP. With the evolvement of IASB from former IASC in 2001 and well indistinguishable following due procedure to that of the FASB, IFRS has been bit by bit recognised as a label of better quality and IFRS-based fiscal coverage would do certain sensible intents of achievement of fiscal statements ( Epstein, 2009 ) . Similarly, regulators expect that every bit long as endeavor adopts IFRS, the comparison of fiscal statements, corporate transparence and the quality of fiscal coverage would be reinforced, and hence IFRS acceptance could profit investors ( e.g. , EC Regulation No.

1606/2002 ) .Tarca ( 2004 ) finds that competitory market force per unit area could ease houses to exercise international criterions because legion endeavors believe using international criterions would enable comparable information and better communicating with users.Through the assistance of ‘quality mark ‘ extracted from the annual ‘Best Annual Report, ‘ Daske and Gebhardt ( 2006 ) suggest that revelation quality experiences important addition while following IFRS in the some European states. Their consequence is applicable non merely to houses which voluntarily adopt IFRS or U.S. GAAP, but besides to houses which suffer from compulsory acceptance of such criterions.

Their findings render extended grounds on the ‘missing nexus ‘ in the line of statement that ‘higher quality ‘ international accounting criterions consequence in higher quality accounting studies which should finally lend to higher liquidness in the capital markets ( Leuz and Verrecchia, 2000 )[ 4 ]and take down the cost of capital to the endeavors ( Daske, 2006 )[ 5 ].

Curb Earning Management

In comparing with many local GAAP, IFRS are normally regard as a set of accounting criterions with better quality and could cut down describing discretion. Ewert and Wagenhofer ( 2005 ) competition that fastening the accounting criterions could control the grade of net incomes direction every bit good as better coverage quality. Similar statement has been contended by following research that houses which adopt IFRS exhibit less grounds of net incomes smoothing together with managing net incomes ; to boot, these houses normally recognise losingss more seasonably and have more value relevancy of accounting figures ( Barth et al.

, 2008 ; Iatridis, 2010 ) . Above-mentioned documents besides sustain that quality of fiscal statements would be reinforced after acceptance IFRS.

Foster International Capital Market and Cross-border Capital Flows

Nowadays, many major stock exchanges around the universe ( e.g.

, London, Frankfurt, Bangkok, Hong Kong, and Kuala Lumpur stock exchange ) accept that foreign-listed houses prepare their fiscal studies in conformity with IFRS without any rapprochement ( Hope et al. , 2006 ) . They besides find that IFRS could be deemed as a vehicle for states to reenforce investor protection and heighten the handiness of capital markets to foreign investors.

Harmonizing to Hope et Al. ( 2006 ) , it is held by Carnachan ( 2003 )[ 6 ]that following IFRS could non merely lessen costs of accommodating fiscal studies from original GAAP to foreign GAAP for companies which seek to finance overseas but salvage investors attempts to grok multiple sets of criterions.In add-on, Covrig et Al. ( 2007 ) demonstrate grounds that the planetary convergence towards IFRS coverage may further cross-border investing every bit good as the integrating of capital markets. They besides find that IAS adoptive parents could supply more information and/or more familiar signifier of information with foreign investors. Hence, following IFRS could relieve the cost of information about foreign investing and facilitate investors to set their money in cross-border investing.

That is to state, a common set of accounting criterions would help investors in distinguishing between lower and higher quality houses ; at the same time, it would take down appraisal hazard and ameliorate information dissymmetries among investors ( Daske et al, 2008 ) . Besides, Merton ( 1987 ) contends that doing foreign investors easy invest a state ‘s houses easier would ensue in certain virtues such as reenforcing the liquidness of the capital markets and spread outing houses ‘ investor base, which enhances hazard sharing and reduces the cost of capital.

Improve Liquidity and Information Asymmetry

Epstein ( 2009 ) contests that if investors become more assured that describing entities ‘ fiscal statement exactly represent their economic places and consequences of operation, the market for those houses ‘ securities would be more liquid. He farther defines liquidness as “ the easiness of selling assets, as evidenced by lower dealing costs and narrower bid-ask spreads. ” Daske et Al. ( 2008 ) execute the empirical trials and happen that the market liquidness of compulsory adoptive parents witness statistically important additions after IFRS coverage alterations into mandatary. Similar consequence has been asserted by Leuz and Verrecchia ( 2000 ) , which examine German houses which alter from national to international criterions.

They assert that the information dissymmetry and liquidness, which is estimated by the placeholder variables, bid-ask spread and trading volume, is reduced.

Lower the Cost of Capital

It has been suggested by several seminal documents ( Botosan, 1997 ; Hail, 2002 ; Botosan and Plumlee, 2002 ; and Francis et al. , 2008 ) that companies are equipped with high degrees of revelation would bask low information hazard ; at the same time, it is more likely for them to hold a lower cost of capital, compared with those houses with low revelation degrees and high information hazard.

In add-on, as noted by Dinging et Al. ( 2007 ) , IFRS normally requires more comprehensive revelations than do most counties ‘ accounting criterions. Hence, it is extensively asserted that following IFRS would decrease the cost of capital by many seminal documents. For illustration, Daske et Al. ( 2008 ) figures out a lessening in houses ‘ cost of capital with a corresponding addition in Tobin ‘s Q, but merely if they account for the likeliness which these effects occur before the official IFRS acceptance day of the month ; hence, this state of affairs indicate that the market could foretell the economic effects of the authorization.

Other Merits

Apart from above-named advantages, there are besides some positive effects of following IFRS are asserted by legion surveies. Take El-Gazzar et Al. ( 1999 ) for illustration, they province that exposing to new market, obtaining abroad debt and equity capital, heightening client acknowledgment and lessening political costs could be the grounds why endeavors voluntarily comply with IFRS.


Although the virtues of following IFRS have been comprehensively discussed supra, there are legion surveies bespeaking that enforcement is a important factor which would hinder the awaited effects derived from IFRS acceptance. Daske et Al. ( 2008 ) find that the capital-market effects on the compulsory deduction of IFRS describing are non indistinguishable across states and houses.

These effects around compulsory IFRS acceptance exist merely in states equipped with rigorous enforcement governments and in states which the institutional environment renders strong inducements to houses so as to render crystalline fiscal information. Furthermore, Daske et Al. ( 2009 ) divide houses into ‘serious ‘ and ‘label ‘[ 7 ]in harmonizing to their attitudes towards following IFRS.

They notice that serious houses would bask significantly stronger effects than label 1s in footings of the cost of capital and market liquidness. Namely, market participants could separate these two classs of houses.Ball ( 2006 ) argues that uneven execution, which derived from the inevitable political and economic factors around the universe, would restrict the ability of common set of criterions to decrease information costs every bit good as information hazard. In add-on, information processing costs might increase by plunging accounting incompatibilities at a less crystalline and deeper degree than more-readily discernible differences in criterions ( ibid. ) . Ball believes that the foresaid state of affairs would well act upon the possible benefits of IFRS acceptance.

Similar consequence has been asserted by KPMG ( 2006 ) who surveys 187 houses across 10 states in order to gain the different accounting rules or patterns selected although these houses have prepared their accounting studies in conformity with IFRS. This study indicates that despite significant convergence, a strong national individuality is still included in IFRS fiscal statements, which complies with the positions sing describing inducements.

Drawbacks of acceptance of IFRS

In the foresaid subdivision, the virtues of following IFRS have been comprehensively discussed.

On the contrary, it is possible that investors would respond negatively to the IFRS acceptance when they anticipate that the costs come from acceptance outweigh the benefits of it. Followings are the inside informations of possible disadvantages sing the execution of IFRS.


Epstein ( 2009 ) argues that accounting hazard consists of several implicit in phenomena. One is hazard that accounting rules exerted could non to the full and accurately reflect the existent economic concepts. ( e.g. , historical cost could non mensurate the economic value of durable assets ) .

On the other custodies, Epstein believes that the inability of users to treat information is besides a ground for bring forthing accounting hazard. Equally long as investors could non to the full comprehend the steps and revelations of some complicated accounting information, they call for higher returns to counterbalance higher hazard they bear. Hence, it is still possible that following IFRS would deteriorate the cost of capital due to the fact that users of fiscal statements are non capable of understanding information presented in conformity with IFRS, comparatively unusual to them.

Direct and Indirect Cost

Harmonizing to Carnachan ( 2003 ) , it is held by Hope et Al. ( 2006 ) , that meeting to IFRS will bring forth “ both erstwhile transitional costs and the ongoing costs of keeping a standard-setting system. ” The erstwhile transitional costs manifests a immense sum of money and clip disbursement because successful convergence calls for engagement of dialogues among the IASB, authorities governments, national standard-setters, regulators, and professionals in take parting in the convergence procedure.

Simultaneously, direct conformity costs derived from retraining preparers, investors, hearers, and regulators to use and construe IFRS are inevitable. Apart from that, there will be ongoing costs ( e.g. , mechanisms need to come up with the latest IFRS and readings and future criterions ) after the convergence.

Jermakowicz et Al. ( 2007 ) discourse the study conducted by Ernst and Young ( 2002 ) , which argue certain obstructions in the procedure of following IFRS. For illustration, following IFRS normally require paralleled accounting system in the periods of passage. Furthermore, it is compulsory to fix comparative fiscal studies for past old ages. Apart from that, the necessary preparation for comptrollers, directions and hearers is besides notable. On the other manus, although following IFRS would increase disclosed information and, in bend, heighten the information quality, Dumontier and Raffournier ( 1998 ) competition that application IAS to Swiss houses would be more. It consequences from the fact that houses apply IAS entail to fix extra revelation and give up critical discretion in accounting picks.

The foresaid paragraph chiefly describes the direct costs of IFRS acceptance ; nevertheless, the indirect costs of it are besides deserving detecting. Hail and Leuz ( 2007 ) reference that proprietary costs could be a concern while consider indirect costs. Propriety costs are the costs come from the revelation of properness information to other parties ( e.

g. , rivals, regulator and revenue enhancement governments ) in the market. Firms which adopt IFRS would unwrap more information than they used to making under domestic GAAP. The extra revelation might include important competitory information ( e.g.

, section information ) , which non merely would bring forth properness costs but discourage companies ‘ revelation inducements ( Verrecchia, 1983 ) .


There are legion documents discoursing that houses ‘ coverage inducements ( e.g. , states ‘ legal establishments, a assortment of market forces, and houses ‘ features of operating ) genuinely cause important effects on the coverage quality ; conversely, the accounting criterions merely play a limited function ( e.g. , Ball et al. , 2000 ; Leuz, 2003 ; and Burgstahler et al. , 2006 ) .

With respect to this phenomenon, Daske et Al. ( 2008 ) contents the ground for that is the application of accounting criterions involves material judgements and exercising private information. As a consequence, it is likely that IFRS supply houses with significant discretion which is related to their coverage inducements.

Leuz ( 2006 ) further indicates that describing behavior is still expected to differ across houses provided that accounting criterions offer some discretion and endeavors have inconsistent coverage inducements even under the premise of perfect enforcement. Furthermore, material discretion could be damaging to the comparison of fiscal studies.

Compulsory Adopter

Daske et Al. ( 2008 ) assert that capital-market effects would be different across voluntary and compulsory adoptive parents. They believe that voluntary adoptive parents respects acceptance IFRS as a lodger scheme that enhances transparence of fiscal coverage and its quality ; hence, these houses could hold more purpose to do considerable alterations in their coverage patterns, such as prosecuting hearers with higher quality, reenforcing corporate administration, seeking cross-listing and etc. On the contrary, compulsory adoptive parents are basically compelled to follow IFRS, and thereby they would see less response to the intervention ( Daske et al. , 2008 ) . In amount, the capital-market effects sing voluntary acceptances are more likely to be outstanding, but they can non be ascribed to IFRS entirely.

As mentioned in the Section 2.1, Taiwan has converged towards IAS/IFRS since the late 1990s ; hence, it would worth detecting that if the full-set IFRS mandatary acceptance would elicit important influence in its capital market.

Economic Consequence of IFRS Adoption and Market Reaction

In this subdivision, this paper would analyze the relationship between above-named economic effect of IFRS acceptance and stock reaction.

First, it is noted by Nobes and Parker ( 2008:76 ) that there is a negative relationship between quality of fiscal coverage and the cost of capital. Besides, Diamond and Verrecchia ( 1991 ) suggests that increased revelation by houses could cut down dealing costs for investors, lending to greater liquidness of the market and greater demand for the houses ‘ stocks. Baiman and Verrecchia ( 1996 ) besides demonstrate that “ as investors ‘ possible liquidness needs addition, the optimum degree of revelation rises, the liquidness of the market additions and the cost of capital lessenings. ”The foresaid documents indicate the relationship between fiscal statement quality or economic effect of following international accounting criterions and the cost of capital or even stock monetary value. Apart from that, Easley and O’hara ( 2004 ) happen a seminal function for truth of accounting information. They indicate that an single house could act upon its cost of capital by agencies of choosing characteristics such as its accounting interventions, market microstructure and fiscal analyst coverage. They besides contend that impacting the accurancy and measure of information available to fiscal statement users could hinder the cost of capital ; viz.

, precise accounting information would diminish an endeavor ‘s cost of capital due to lower peril of the assets to be acquired. In add-on, Aboody et Al. ( 2004 ) examines the voluntary acknowledgment of stock-based compensation disbursal harmonizing to Statement of Financial Accounting Standards No. 123.

They emphasis on the market reaction to houses ‘ disbursal acknowledgment proclamations and happen that houses experience important and positive proclamation unnatural returns when they voluntarily adopt expense acknowledgment. This consequence is more obvious for houses that explicitly manifest that their determination is motivated by increased fiscal coverage transparence. Both Easley and O’hara ( 2004 ) and Aboody et Al. ( 2004 ) explain that information hazard is priced and hence, it could be predicted that the lessening of information hazard resulted from IFRS acceptance could lend to a noticeable market reaction.With the proclamation of IFRS acceptance strategy, the governments, professional accounting houses and educational establishments in Taiwan make their attempts to cover with the possible jobs in the procedure of acceptance.

However, the reaction of the capital market of IFRS acceptance strategy is still vague although there are a broad assortment of old articles concentrating on the event survey of single criterions which are promulgated or implemented in the convergence phase. Hence, this paper would analyze the market reaction while the authorization announces the full-set IFRS acceptance. Following subdivision would later picture how the research would be designed and developed.