Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)

Abstract

Impact of Compliance with IFRS Disclosure Requirements on ERC

Author(s): Basheer Ahmad Khamees

The aim of this study is to examine the effect of compliance with IFRS disclosure requirements on Earnings Response Coefficient (ERC). The rationale behind this goal is that great compliance will lead to an increase in the information available to users which in turn will increase the response of stock returns to the earnings news. Expected and unexpected earnings and stock returns are used to test the relationship between the earnings and the stock returns response. In addition, company size and company sector are used to control the relationship between stock returns and earnings. The study population includes all public shareholding companies listed in Amman Stock Exchange during the period 2010-2013. Accordingly, an index consists of (305) disclosure requirements, has been used to collect data and to calculate a compliance score of each company. Financial data was collected from the annual reports of the companies. In addition, the publications of Amman Stock Exchange were used to calculate stock returns. Data was analysed and processed by using descriptive statistical measures, correlation, along with multiple regression. The results show that compliance with IFRS disclosure requirements modifies the form of the relationship between earnings and stock returns whether it is expected or unexpected but in two different directions. It has a negative effect on expected earnings and returns relationship, but it has a positive effect on the relationship between unexpected earnings and return relationship. The results of the study suggest that high compliance with IFRS may enable the investors to relay on other factors, in addition to expected earnings, to evaluate the expected stock returns. Meanwhile, it increases the investor's reliance on unexpected earnings to evaluate unexpected stock returns. The main limitation of the study was to consider all variables that affect stock returns, which is a function consisting of many variables. Taking into consideration all these variables and the interaction terms among them is not possible. That is because they are not known or because they cannot be quantified.