Product market competition, stock price informativeness, and IFRS adoption: evidence from Europe

Jing Wang (), Wei Li () and Arno Forst ()
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Jing Wang: California State University
Wei Li: Kent State University
Arno Forst: University of Texas Rio Grande Valley

Review of Quantitative Finance and Accounting, 2021, vol. 56, issue 4, No 11, 1537-1559

Abstract: Abstract This study examines whether and how policy changes that aim to improve market efficiency, specifically the mandatory adoption of International Financial Reporting Standards (IFRS), influence the relation between product market competition and stock price informativeness. Using a sample of European firms, we find a negative association between product market competition and stock price informativeness as evidenced by larger (smaller) stock price changes surrounding earnings announcements for firms facing more (less) product market competition. These findings are consistent with prior studies examining the U.S. capital market. We further find that IFRS adoption alleviates the negative association. This positive effect is more pronounced among firms domiciled in countries with stronger legal enforcement and among smaller firms. Our results provide insights into the interrelation between product and capital markets in the European setting. More importantly, our results highlight the importance of policy changes, which aim to improve market efficiency, in influencing the relation between the two markets and document the benefit of IFRS adoption in mitigating the negative competition-informativeness relation.

Keywords: Product market competition; Stock price informativeness; IFRS adoption; International accounting (search for similar items in EconPapers)
JEL-codes: G15 M41 N24 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11156-020-00933-6

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