The effect of IFRS adoption on the value relevance of accounting information: evidence from South Korea

Do Hoon Ki,Wook Bin Leem,Jee Hoon Yuk

doi:10.21511/imfi.16(2).2019.07

Abstract

This study investigates whether the value relevance of accounting information was changed after IFRS adoption in South Korea. Related prior studies have found mixed empirical evidence depending on research methodologies or research periods. Moreover, the effect of IFRS adoption on value relevance can be different between Korean stock markets (KSE and KOSDAQ) because they have different characteristics. Also, the main financial statements reported by Korean firms had changed from individual financial statements to consolidated financial statements after IFRS adoption. Thus, this study analyzes the effect of IFRS adoption on the value relevance of individual and consolidated accounting numbers expanding research periods (5 years before and after IFRS adoption) and comparing changes in explanatory powers of Ohlson (1995) model on each listing market. The empirical results indicate that the value relevance of Korean listed firms generally decreased after IFRS adoption. However, the value relevance of KSE listed firms decreased, while the value relevance of KOSDAQ listed firms increased after IFRS adoption. In addition, it was found that the effects of IFRS adoption on value relevance of individual and consolidated financial information were different depending on listed markets. This implies that different level of demand for information environment may induce differential effects of IFRS adoption on value relevance.

Highlights

South Korea had developed its own accounting standards (Korean GAAP) and applied it to all firms including listed and unlisted firms until 2010
Korean GAAP had characteristics that they were developed by rule-based approach, which allowed managers’ discretion less than IFRS (International Financial Reporting Standards) applying principle-based approach and the main financial statements disclosed under Korean GAAP were not consolidated financial statements, but individual financial statements[1]
Sample firms are selected from the foled financial statements data for two reasons. lowing criteria: First, it allows to find whether changes in value relevance are incurred from the change of main 1) firms listed in Korea Stock Exchange (KSE) and Korea Securities Dealers Association Automated Quotation (KOSDAQ) from 2006 financial statements

Summary

INTRODUCTION

South Korea (hereafter, Korea) had developed its own accounting standards (Korean GAAP) and applied it to all firms including listed and unlisted firms until 2010. Korean GAAP had characteristics that they were developed by rule-based approach, which allowed managers’ discretion less than IFRS (International Financial Reporting Standards) applying principle-based approach and the main financial statements disclosed under Korean GAAP were not consolidated financial statements, but individual financial statements[1] Those different characteristics of Korean GAAP had been a major factor, which devaluated accounting transparency of Korean firms and brought about so-called ‘Korea Discount’. Kim (2015) and Park (2016) reported insignificant effect and positive significant effect of IFRS on value relevance in different analysis period These results can be attributed to a possibility that firms’ financial status and performance might not be properly reflected in the accounting information under IFRS, because it’s too complex to apply and allows managers’ discretion on accounting choices more than local GAAP. This study analyzes if there were changes of value relevance between listed markets (KSE and KOSDAQ), as well as types of financial statements (individual and consolidated)

Korean government officially runs two stock markets

Research models

Descriptive statistics and correlation analysis

Results of hypothesis test

CONCLUSION