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Financial market consequences of early adoption of international standards on auditing: international evidence

Financial market consequences of early adoption of international standards on auditing: international evidence
Financial market consequences of early adoption of international standards on auditing: international evidence
Purpose: This paper investigates the effects of the early adoption of International Standards on Auditing (ISAs) on Financial Market Indicators (FMIs) from a Diffusion of Innovation (DOI) theory perspective.

Design/methodology/approach: Using panel data from 110 countries in a period that spans from 1995 to 2014, this study applies an ordinary least squares (OLS) regression model to investigate the financial consequences of adopting ISAs. This analysis was supplemented with estimating a fixed-effects and two-stage least squares (2SLS) regression models in order to address any concerns regarding the possible existence of endogeneity problems.

Findings: This study reports three key findings. First, we find that early ISAs adoption has a negative effect on several financial market consequences, namely stock market integration, market capitalisation, market turnover, market return, market development, stock price volatility, and stock trading volume. Second, using an alternative measure to the one that is proposed by DOI theory, we found that some financial indicators have been significantly improved after ISAs adoption, but only for listed firms that prepared their financial statements under International Financial Reporting Standards (IFRS) and audited by ISAs simultaneously. Finally, the financial indicators of European stock markets, however, have insignificantly shrank post the mandatory adoption of ISAs in 2006.

Practical implications: Our empirical evidence raises questions about how ISAs were enforced and implemented. For example, countries that adopted ISAs at early stages may have been dominated mostly by recently established stock exchanges. This implies a crucial need to determine and apply the best type of auditing regime that can increase investors trust and enhance the credibility of stock markets information, which might ultimately advance the FMIs over time significantly.

Originality/value: To-date, studies investigating the impact of the adoption of ISAs on FMI from a DOI theory perspective are virtually non-existent. Our study, therefore, seeks to contribute to the extant literature by examining the influence of ISAs adoption on a wide range of financial market indicators.
Keywords: International Standards on Auditing, Financial Market Indicators, Financial Consequences, Diffusion of Innovation Theory, Stock Market.

Research Classification: Research paper
International Standards on Auditing, Financial Market Indicators, Financial Consequences, Diffusion of Innovation Theory, Stock market
0268-6902
Elmghaamez, Ibrahim
c2c3497c-8172-48ea-9e31-b713713dc86a
Gerged, Ali
ef241d29-b4ff-4032-ab6c-90d1a54c0675
Ntim, Collins
1f344edc-8005-4e96-8972-d56c4dade46b
Elmghaamez, Ibrahim
c2c3497c-8172-48ea-9e31-b713713dc86a
Gerged, Ali
ef241d29-b4ff-4032-ab6c-90d1a54c0675
Ntim, Collins
1f344edc-8005-4e96-8972-d56c4dade46b

Elmghaamez, Ibrahim, Gerged, Ali and Ntim, Collins (2020) Financial market consequences of early adoption of international standards on auditing: international evidence. Managerial Auditing Journal. (doi:10.1108/MAJ-04-2019-2233). (In Press)

Record type: Article

Abstract

Purpose: This paper investigates the effects of the early adoption of International Standards on Auditing (ISAs) on Financial Market Indicators (FMIs) from a Diffusion of Innovation (DOI) theory perspective.

Design/methodology/approach: Using panel data from 110 countries in a period that spans from 1995 to 2014, this study applies an ordinary least squares (OLS) regression model to investigate the financial consequences of adopting ISAs. This analysis was supplemented with estimating a fixed-effects and two-stage least squares (2SLS) regression models in order to address any concerns regarding the possible existence of endogeneity problems.

Findings: This study reports three key findings. First, we find that early ISAs adoption has a negative effect on several financial market consequences, namely stock market integration, market capitalisation, market turnover, market return, market development, stock price volatility, and stock trading volume. Second, using an alternative measure to the one that is proposed by DOI theory, we found that some financial indicators have been significantly improved after ISAs adoption, but only for listed firms that prepared their financial statements under International Financial Reporting Standards (IFRS) and audited by ISAs simultaneously. Finally, the financial indicators of European stock markets, however, have insignificantly shrank post the mandatory adoption of ISAs in 2006.

Practical implications: Our empirical evidence raises questions about how ISAs were enforced and implemented. For example, countries that adopted ISAs at early stages may have been dominated mostly by recently established stock exchanges. This implies a crucial need to determine and apply the best type of auditing regime that can increase investors trust and enhance the credibility of stock markets information, which might ultimately advance the FMIs over time significantly.

Originality/value: To-date, studies investigating the impact of the adoption of ISAs on FMI from a DOI theory perspective are virtually non-existent. Our study, therefore, seeks to contribute to the extant literature by examining the influence of ISAs adoption on a wide range of financial market indicators.
Keywords: International Standards on Auditing, Financial Market Indicators, Financial Consequences, Diffusion of Innovation Theory, Stock Market.

Research Classification: Research paper

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Accepted/In Press date: 22 April 2020
Keywords: International Standards on Auditing, Financial Market Indicators, Financial Consequences, Diffusion of Innovation Theory, Stock market

Identifiers

Local EPrints ID: 439606
URI: http://eprints.soton.ac.uk/id/eprint/439606
ISSN: 0268-6902
PURE UUID: 691925d7-ab5f-4dc2-89d8-8cfbf335d9b7
ORCID for Collins Ntim: ORCID iD orcid.org/0000-0002-1042-4056

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Date deposited: 28 Apr 2020 16:30
Last modified: 07 Oct 2020 01:27

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Contributors

Author: Ibrahim Elmghaamez
Author: Ali Gerged
Author: Collins Ntim ORCID iD

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