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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 aims to investigate 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 regression model to investigate the financial consequences of adopting ISAs. This analysis was supplemented with estimating a fixed-effects and two-stage least squares regression models to address any concerns regarding the possible existence of endogeneity problems. Findings: This study reports three key findings. First, the authors 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, the authors 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 and audited by ISAs simultaneously. Finally, the financialindicators of European stock markets, however, have insignificantly shrank post the mandatory adoption of ISAs in 2006. Practical implications: The 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. The study, therefore, seeks to contribute to the extant literature by examining the influence of ISAs adoption on a wide range of FMIs.

Diffusion of innovation theory, Financial consequences, Financial market indicators, International standards on auditing, Stock markets
0268-6902
819-858
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, 35 (6), 819-858. (doi:10.1108/MAJ-04-2019-2233).

Record type: Article

Abstract

Purpose: This paper aims to investigate 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 regression model to investigate the financial consequences of adopting ISAs. This analysis was supplemented with estimating a fixed-effects and two-stage least squares regression models to address any concerns regarding the possible existence of endogeneity problems. Findings: This study reports three key findings. First, the authors 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, the authors 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 and audited by ISAs simultaneously. Finally, the financialindicators of European stock markets, however, have insignificantly shrank post the mandatory adoption of ISAs in 2006. Practical implications: The 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. The study, therefore, seeks to contribute to the extant literature by examining the influence of ISAs adoption on a wide range of FMIs.

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More information

Accepted/In Press date: 22 April 2020
Published date: 22 July 2020
Additional Information: Publisher Copyright: © 2020, Emerald Publishing Limited. Copyright: Copyright 2020 Elsevier B.V., All rights reserved.
Keywords: Diffusion of innovation theory, Financial consequences, Financial market indicators, International standards on auditing, Stock markets

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

Catalogue record

Date deposited: 28 Apr 2020 16:30
Last modified: 17 May 2022 01:27

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Contributors

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

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