MARKET SYNCHRONICITY AMONG AFRICAN MARKETS: IS IFRS ADOPTION AN AUGMENTOR OR INHIBITOR?

Yaw  Ndori Queku; Baba  Adibura Seidu; Lawrence   Ayine Adaane; Emmanuel  Carsamer; Francis  Kofi Sobre Frimpong; Dianah  Ndori Queku

doi:10.2478/eoik-2024-0006

Authors

Yaw Ndori Queku Cape Coast Technical University, Cape Coast, Ghana
Baba Adibura Seidu University of Professional Studies, Accra, Ghana
Lawrence Ayine Adaane Cape Coast Technical University, Cape Coast, Ghana
Emmanuel Carsamer University of Education, Winneba, Ghana
Francis Kofi Sobre Frimpong Kaaf University College, Accra, Ghana
Dianah Ndori Queku NYQ Knowledge Solution, Cape Coast, Ghana

DOI:

https://doi.org/10.2478/eoik-2024-0006

Keywords:

Market synchronicity, International Financial Reporting Standards (IFRS), Market-wide synchronicity, firm-level synchronicity, Dynamic Ordinary Least Square (DOLS), Generalised Method of Moments (GMM)

Abstract

This paper investigates the dynamics of market synchronicity and International Financial Reporting Standards (IFRS) adoption in Africa. It seeks to determine whether or not IFRS is an augmentor or inhibitor of market synchronicity in Africa. This study is not only a foundational study that unfolds the dynamics of market synchronicity and IFRS adoption in Africa but also extends the scope of synchronicity from firm-level assessment to country-level market synchronicity. It is one of the few studies which have shifted the literature on synchronicity from one largely limited to firm-level synchronicity to country-level synchronicity through analyses of cross-border market synchronisation. It employs Dynamic Ordinary Least Square (DOLS) and Generalised Method of Moments (GMM) to investigate the market synchronicity-IFRS nexus. The study uses monthly data from March 2005 to November 2021 in five African markets: Botswana, Ghana, Namibia, Nigeria, and South Africa generating 1005 observations in an 18-year data span. The paper reveals a significant negative consequence of IFRS on market synchronicity. Thus, IFRS exhibits an inhibition role in market synchronicity (reduces synchronicity) and improves price informativeness. A decreasing pattern was also observed immediately after IFRS was adopted by the stock markets and persisted for about five years. It implies that the price informativeness of stock markets through IFRS makes them good candidates for intra-Africa portfolio diversification due to reduced investors’ risk exposure to market synchronicity.

References

Akalpler, E. (2020), The impact of IFRS Adoption as Control Variable on the Stock Market-Growth Nexus: Model Countries Germany and Poland (December 15, 2020). https://ssrn.com/abstract=4012656

Akitoby, B., Baum, A., Hackney, C., Harrison, O., Primus, K., & Salins, V. (2020). Tax revenue mobilization episodes in developing countries. IMF Working Papers. https://doi.org/10.5089/9781484361535.001

Anastasiou, D. (2016). Management and Resolution methods of Non-performing loans: A Review of the Literature, 187-201. Available at SSRN 2825819.

Ball, R. (1996) ‘The theory of stock market efficiency: accomplishments and limitations’, Journal of Financial Education, 22, 1-13. https://www.jstor.org/stable/41948810

Ball, R. (2016). IFRS–10 years later. Accounting and business research, 46 ( 5), 545-571. https://www.tandfonline.com/doi/full/10.1080/00014788.2016.1182710

Beuselinck, C. A. C., Joos, P., Khurana, I. K., & Van der Meulen, S. (2010). Mandatory IFRS reporting and stock price informativeness. CentER Discussion Paper; (2010-82). Accounting. Available at SSRN 1381242. http://dx.doi.org/10.2139/ssrn.1381242

Bissessur, S., & Hodgson, A. (2012). Stock market synchronicity – An alternative approach to assessing the information impact of Australian IFRS. Accounting and Finance, 52(1), 187–212. http://dx.doi.org/10.1111/j.1467-629X.2010.00388.x

Braga, R. N. (2017). Effects of IFRS adoption on tax avoidance. Revista Contabilidade and Finanças, 28, 407-424. https://doi.org/10.1590/1808-057x201704680

Bruno, B., Nocera, G., & Resti, A. (2017). Are risk-based capital requirements detrimental to corporate lending? Evidence from Europe. CEPR Discussion Papers 12007, C.E.P.R. Discussion Papers. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2961770

Carsamer, E., Abbam, A. & Queku, Y.N., (2021). Bank capital, liquidity and risk in Ghana. Journal of Financial Regulation and Compliance, 30(2), 149-166. https://doi.org/10.1108/JFRC-12-2020-0117

Chan, Z. C., Fung, Y. L., & Chien, W. T. (2013). Bracketing in phenomenology: Only undertaken in the data collection and analysis process. The qualitative report, 18(30), 1-9. https://doi.org/10.46743/2160-3715/2013.1486

Chan, K., & Chan, Y (2014). Price informativeness and stock return synchronicity: Evidence from the pricing of seasoned equity offerings, Journal of Financial Economics,114(1), 36-53. http://dx.doi.org/10.1016/j.jfineco.2014.07.002

Chan, K. & Hameed, A. (2006) ‘Stock price synchronicity and analyst coverage in emerging markets’, Journal of Financial Economics, 80(1), 115-147. https://doi.org/10.1016/j.jfineco.2005.03.010

De Simone, L. (2016). Does a common set of accounting standards affect tax-motivated income shifting for multinational firms?. Journal of Accounting and Economics, 61 (1), 145-165. https://doi.org/10.1016/j.jacceco.2015.06.002

Deloitte, A. B. (2021). 2021 Transparency Report.

https://www.deloitte.com/content/dam/Deloitte/lt/Documents/audit/Transparency%20

Report%202021%20(ENG).pdf

Doyle, M. W. (2017). Kant, liberal legacies, and foreign affairs. In Immanuel Kant (pp. 503-533). Routledge. https://www.taylorfrancis.com/chapters/edit/10.4324/9781315252629-22/kant-liberal-legaciesforeign-affairs-michael-doyle

Durnev, A., Morck, R., Yeung, B., & Zarowin, P. (2003). Does greater firm‐specific return variation mean more or less informed stock pricing?. Journal of Accounting Research, 41(5), 797-836. https://www.jstor.org/stable/3542377

Emudainohwo, O. B. (2020). IFRS and stock exchange development in sub-Saharan Africa: A logistic model. Investment Management and Financial Innovations, 17(3), 397-407. https://doi.org/10.21511/imfi.17(3).2020.30

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. The Journal of Finance, 25(2), 383-417. https://www.jstor.org/stable/2325486

Fernandes, N., & Ferreira, M. (2008). Does international cross-listing improve the information environment? Journal of Financial Economics, 88, 216–244. https://doi.org/10.1016/j.jfineco.2007.06.002

Figlioli, B., Lemes, S., & Lima, F. G. (2017). IFRS, synchronicity, and financial crisis: the dynamics of accounting information for the Brazilian capital market, R. Cont. Fin. – USP, São Paulo, 28(75), 326-343. https://www.redalyc.org/pdf/2571/257152718003_5.pdf

Dasgupta, S., Gan, J., & Gao, N. (2010). Transparency, price informativeness, and stock return synchronicity: Theory and evidence. Journal of Financial and Quantitative analysis, 45(5),1189-1220. https://www.jstor.org/stable/27919561

Gordon, L. A., Loeb, M. P., & Zhu, W. (2012). The impact of IFRS adoption on foreign direct investment. Journal of Accounting and Public Policy, 31(4), 374-398. https://doi.org/10.1016/j.jaccpubpol.2012.06.001

Gul, F. A., Kim, J. B., & Qiu, A. A. (2010). Ownership concentration, foreign shareholding, audit quality, and stock price synchronicity: Evidence from China. Journal of financial economics, 95(3), 425-442. https://doi.org/10.1016/j.jfineco.2009.11.005

Hasan, E., Mala, S., Finau, G., & Rani, P. (2014). The 2012 Review of IFRS for SMEs: Possible responses from the FIJI Institute of Accountants. Accounting and Taxation, 6(2), 71-83. https://ideas.repec.org/a/ibf/acttax/v6y2014i2p71-83.html

Hutton, A. P., Marcus, A. J., & Tehranian, H. (2009). Opaque financial reports, R2, and crash risk. Journal of Financial Economics, 94, 67-86. https://doi.org/10.1016/j.jfineco.2008.10.003

Jensen, M. C. (1978). Some anomalous evidence regarding market efficiency. Journal of financial economics, 6(2-3), 95-101. https://doi.org/10.1016/0304-405X(78)90025-9

Jin, L., & Myers, S. C. (2006). R2 around the world: new theory and new tests. Journal of Financial Economics, 79, 257-292. https://doi.org/10.1016/j.jfineco.2004.11.003

Jirásková, S., & Molín, J. (2015). IFRS adoption for accounting and tax purposes: An issue based on the Czech Republic as compared with other European countries. Procedia economics and finance, 25, 53-58. https://doi.org/10.1016/S2212-5671(15)00712-1

Khandaker, M. U. (2011). High purity germanium detector in gamma-ray spectrometry: High-Purity Germanium detector. International Journal of Fundamental Physical Sciences, 1(2), 42-46. https://fundamentaljournals.org/index.php/ijfps/article/view/86

Kim, J. B., & Shi, H. (2012). IFRS reporting, firm-specific information flows, and institutional environments: international evidence. Review of Accounting Studies, 17(3), 474-517. https://link.springer.com/article/10.1007/s11142-012-9190-y

Klibi, M. F., & Kossentini, A. (2014). Does the adoption of IFRS promote emerging stock markets development? Evidence from MENA countries. International Journal of Accounting, Auditing and Performance Evaluation, 10(3), 279-298. https://ideas.repec.org/a/ids/ijaape/v10y2014i3p279-298.html

Kyiu, A. K. (2019). Stock return synchronicity, earnings informativeness, and institutional development: evidence from African markets (Doctoral dissertation, Heriot-Watt University). https://www.ros.hw.ac.uk/bitstream/handle/10399/4225/KyiuAK_0319_soss.pdf?sequence=1

Landsman, W. R., Maydew, E. L., & Thornock, J. R. (2012). The information content of annual earnings announcements and mandatory adoption of IFRS. Journal of accounting and economics, 53(1- 2), 34-54. https://ideas.repec.org/a/eee/jaecon/v53y2012i1p34-54.html

Leuz, C., & Verrecchia, R. E. (2000). The economic consequences of increased disclosure. Journal of Accounting Research, 91-124. https://www.jstor.org/stable/2672910

Lopes, A. B. (2006). Financial accounting in Brazil: an empirical examination. Latin American Business Review, 6, 45-68. https://doi.org/10.1300/J140v06n04_03

Loureiro, G., & Taboada, A. G. (2012). The impact of IFRS adoption on stock price informativeness. https://www.efmaefm.org/0efmameetings/efma%20annual%20meetings/2012-Barcelona%20

old/papers/EFMA2012_0091_fullpaper.pdf

Morck, R., Yeung, B., & Yu, W. (2000). The information content of stock markets: why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58, 215- 260. https://doi.org/10.1016/S0304-405X(00)00071-4

Nnadi, M., & Soobaroyen, T. (2015). International financial reporting standard and foreign direct investment: the case of Africa. Advances in Accounting, Incorporating Advances in International Accounting, 31, 228-238. https://ideas.repec.org/a/eee/advacc/v31y2015i2p228-238.html

Okafor, O. N., Akindayomi, A., & Warsame, H. (2019). Did the adoption of IFRS affect corporate tax avoidance. Canadian Tax Journal/Revue fiscale canadienne, 67(4), 947-979. https://ssrn.com/abstract=3510246

Okafor, O. N., Mains, D., Olabiyi, O. M., & Warsame, H. A., (2018) How Did the CRA Expect the Adoption of IFRS To Affect Corporate Tax Compliance and Avoidance? Canadian Tax Journal/ Revue Fiscale Canadienne, 66(1), 1-22. https://ssrn.com/abstract=3195488

Okoye, P. V., Okoye, J. F., & Ezejiofor, R. A. (2014). Impact of the IFRS adoption on stock market movement in Nigerian corporate organization. International journal of academic Research in business and social sciences, 4(9), 202-2018. https://ideas.repec.org/a/hur/ijarbs/v4y2014i9p202-218.html

Patro, A., & Gupta, V. K. (2014). Impact of international financial reporting standards on cost of equity capital for Asian countries. International Journal of Accounting and Financial Reporting, 4(2), 148. https://doi.org/10.5296/ijafr.v4i2.6462

Patro, A., & Gupta, V. K. (2016). Impact of international financial reporting standards on stock price synchronicity for Asian markets. Contemporary Management Research, 12(1). https://doi.org/10.7903/cmr.14160

Piotroski, J. D., & Roulstone, D. T. (2004). The influence of analysts, institutional investors, and insiders on the incorporation of market, industry, and firm‐specific information into stock prices. The Accounting Review, 79(4), 1119-1151. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=299931

Procházka, D. A. (2014). The IFRS as Tax Base: Potential Impact on a Small Open Economy. European Financial and Accounting Journal, 9(4), 59-75. https://ideas.repec.org/a/prg/jnlefa/v2014y2014i4id130.html

Queku, Y. N. (2020). Value Relevance of Fair Value Measurement and Stock Price Predictability: Incremental Effect and Synergetic Analysis of Listed Banks in Ghana. ADRRI Journal of Arts and Social Sciences, 17(5), 85-110. https://journals.adrri.org/index.php/adrrijass/article/view/607

Queku, Y. N., Seidu, B. A., Kubaje, T. A., Kwakye, B., Antwi-Agyei, E., Apeku, T., & Yamoah, K (2023): IFRS Adoption and Tax Revenue Performance in Africa: Does Africa Need IFRS-Based Tax Reforms. Cogent Business & Management, 10(2). https://www.tandfonline.com/doi/full/10.1080/23311975.2023.2212500

Queku, I. C. (2018). International financial reporting standards (IFRS) compliance and earning predictability: Evidence from banks in Ghana. International Journal of Innovative Research and Advanced Studies, 4(8), 102-111. https://www.semanticscholar.org/paper/International-Financial-Reporting-Standards(IFRS)- Queku/b85ffd5a10e1eb9401513858142c124121ab70a5

Queku, I. C. (2017). Value relevance of international financial reporting standards (IFRS) and shareholders’ wealth maximisation: Evidence from Banks in Ghana. International Journal of Advanced Research, 5(8), 305-316. http://dx.doi.org/10.21474/IJAR01/5063

Queku, I. C., & Carsamer, E. (2016). Stock market and macroeconomic performance in Ghana: new evidence. International Journal of Social Science and Humanities Research (IJSSR), 4(4), 436-447. https://www.econstor.eu/bitstream/10419/142653/1/EERI_RP_2013_01.pdf

Queku, I.C., Gyedu, S. & Carsamer, E., (2022). Stock prices and macroeconomic information in Ghana: speed of adjustment and bi-causality analysis. International Journal of Emerging Markets, 17(1), 47-70. https://doi.org/10.1108/IJOEM-05-2019-0342

Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86-136. https://doi.org/10.1177/1536867X0900900106

Rosmianingrum, D. A., Mohammed, N. F., Bujang, I., & Leo, L. (2023). IFRS adoption, stock price synchronicity and firm-specific information in Indonesia stock market. Cogent Business & Management, 10(1). https://ideas.repec.org/a/taf/oabmxx/v10y2023i1p2170520.html

Salmeron Gomez, R., Rodríguez Sánchez, A., García, C. G., & Garcia Perez, J. (2020). The VIF and MSE in raise regression. Mathematics, 8(4). https://www.mdpi.com/2227-7390/8/4/605

Seidu, B. A., Queku, Y. N., Tackie, G & Mensah, J (2022). Working Capital-targeting and Firms Life Cycle: Analysis of Persistence and Speed of Adjustment. African Journal of Business and Economic Research, 17(3), 117-143. https://doi.org/10.31920/1750-4562/2022/v17n3a6

Seidu, B. A., Queku, Y. N., & Carsamer, E. (2021). Financial constraints and tax planning activity: empirical evidence from the Ghanaian banking sector. Journal of Economic and Administrative Sciences. 39(4), 1063-1087. https://doi.org/10.1108/JEAS-12-2020-0199

Shin, H. (2019). The effects of industry characteristics on stock price synchronicity around IFRS adoption. Investment Management and Financial Innovations, 16(1), 89–99. http://dx.doi.org/10.21511/imfi.16(1).2019.07

Stock, J. H., & Watson, M. W. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica: Journal of the Econometric Society, 783-820. https://www.jstor.org/stable/2951763

Tawiah, V. (2019). The state of IFRS in Africa. Journal of Financial Reporting and Accounting, 17(4), 635-649. https://doi.org/10.1108/JFRA-08-2018-0067

Wang, J. W., & Yu, W. W. (2015). The information content of stock prices, legal environments, and accounting standards: International evidence. European Accounting Review, 24(3), 471-493. https://www.tandfonline.com/doi/full/10.1080/09638180.2014.977802

Wieczynska, M. (2016). The “Big” consequences of IFRS: How and when does the adoption of IFRS benefit global accounting firms?. The Accounting Review, 91(4), 1257-1283. https://www.jstor.org/stable/43867316

Yi, Z., Heng, C., & Wong, W. K. (2009). China’s stock market integration with a leading power and a close neighbor. Journal of Risk and Financial Management, 2(1), 38-74. https://doi.org/10.3390/jrfm2010038

Zohar, M. (2012). Re-estimating the epicenter of the 1927 Jericho earthquake using spatial distribution of intensity data. Journal of Applied Geophysics, 82, 19-29. https://doi.org/10.1016/j.jappgeo.2012.03.004