The explanatory power of earnings for stock returns in the pre‐ and post‐IFRS era

Abstract

PurposeThis study aims to examine the effects of the introduction of the International Financial Reporting Standards (IFRS) on the explanatory power of earnings for stock returns in Greece.Design/methodology/approachThe study uses variants of the Easton and Harris model. Moreover, the study controls for asymmetries in the information content of earnings and losses.FindingsThe findings show that the IFRS had several effects on the value relevance of earnings. In particular, the available information content of both earnings and earning changes decreased after the introduction of the IFRS. The reduction in the information content of earnings for returns (or the information content of book values of equity for stock prices) could be attributed to the IFRS and, in particular, to the introduction of the fair value principle. Moreover, even after controlling for the existence of asymmetries, the findings of reduced information content of earnings and earning changes for stock returns persist.Originality/valueThe study makes a significant contribution to the research of the implementation of the IFRS. In particular, the study examines the adoption of a set of high quality standards in a country where accounting was dominated by tax laws and governmental intervention.