How IFRS Affects Value Relevance and Key Financial Indicators? Evidence from the UK

TL;DR

This study investigates how IFRS adoption influences value relevance and key financial indicators in UK firms, finding positive effects on value relevance and profitability ratios, but not on efficiency or liquidity ratios.

Contribution

It provides empirical evidence on the impact of IFRS adoption on financial statement relevance and key ratios, using non-parametric tests and regression analysis in the UK context.

Findings

IFRS positively impacts value relevance.

Profitability ratios are affected by IFRS.

Efficiency and liquidity ratios are unaffected.

Abstract

This paper has two contributions to the International Financial Reporting Stands (IFRS) adoption literature. First is the scrutinizing impact of IFRS adoption on value relevance in the UK with TEST-A analysis under the H01 hypothesis. The second contribution is capturing the impact of IFRS adoption on key financial indicators of firms with the TEST-B analysis that hypothesizes H02.The statistical differences of items of two different reporting standards are examined with non-parametric tests as all input variables failed the Shapiro-Wilk and Lilliefors normality tests in TEST-A. The finding rejects the H01 hypothesis for BvMv, and agrees that IFRS has impact on value relevance. Besides, Ohlson's (1995) model documents that the coefficient of dummy variable (MODE) is positive. Therefore, the analysis concludes that IFRS has positive impact on value relevance. The aftermath of TEST-B rejects the H02 hypothesis for all profitability ratios (ROE, ROCE, ROA, PM) and gearing ratios (GR). It concludes that profitability and gearing ratios are affected by IFRS adoption, whereas efficiency-liquidity ratios are not. Also, in Forward Stepwise regression analysis only ROCE, ROA, and PM ratios show significant results. The analysis documents positive and significant impact of IFRS on these three ratios.