The Impact of IFRS Adoption on Stock Price Informativeness

Abstract

We examine how changes in the information environment affect real investment decisions. The managerial learning hypothesis posits that managers can learn from the information contained in stock prices; improvements in the informational content of stock prices should thus enable superior decision-making by guiding managers’ investment decisions. We test this prediction by analyzing changes in the sensitivity of investment to stock prices around an exogenous information shock – the mandatory adoption of IFRS. We employ a difference-in-differences methodology and find an increase in investment-to-price sensitivity post-IFRS that persists for years after the adoption. We document that this increase is stronger for firms that experience a more pronounced increase in the informational content of their stock prices and for those in countries with better enforcement and weaker ex-ante transparency. We further show that higher investment-to-price sensitivity is associated with improvements in performance, adding further support to the managerial learning hypothesis.