The impact of mandatory IFRS reporting on institutional trading costs: Evidence from Australia

Abstract

This study examines the impact of mandatory International Financial Reporting Standards (IFRS) on the market quality of the Australian Securities Exchange (ASX) 200 constituent stocks. Using traditional metrics that are consistent with prior literature (i.e., bid‐ask spreads), the first stage analysis confirms that stock liquidity has improved. However, when the analysis is extended to consider the trading costs incurred by market participants (i.e., execution shortfall), results suggest liquidity has not changed significantly. The paper utilizes rich unique datasets that contain detailed trade information, and findings are robust after controlling for trade difficulty and market conditions. In the era of High Frequency Trading (HFT) and occurrences of ‘fleeting’ liquidity, this paper provides some evidence that while IFRS may have enhanced ‘visible’ bid‐ask spreads, tangible liquidity for market participants, particularly global institutional investors, has not improved significantly.

The impact of IFRS convergence on market liquidity: evidence from India

“…Abad et al (2017) claim that the liquidity benefits of IFRS adoption can also appear in a weaker reporting enforcement regime, like Spain. Outside the EU, Lepone and Wong (2018) studied the impact of IFRS adoption in a sample of Australian firms. Consistently, they found that both quoted and trade-weighted spreads decreased under IFRS reporting.…”

Adoção Obrigatória De Ifrs, Governança Corporativa E Valor Da Firma

“…They show that market liquidity, equity valuation, and the cost of capital improved after IFRS adoption (market liquidity and equity valuation increased, whereas the cost of capital decreased). Lepone and Wong (2018) find IFRS adoption reduces the bidask spread of Australian stocks, and Charoenwong, Chong, and Wang (2014) show the relationship between asset liquidity and stock liquidity is reduced due to improved transparency after IFRS adoption.…”

Institutional trading and Abel Noser data

“…Total transaction costs of large block trades indicate that improvements in market quality also have benefited large institutional traders. Lepone and Wong (2018) examine the impact of mandatory International Financial Reporting Standards (IFRS) on the market quality of the Australian Securities Exchange (ASX) 200 constituent stocks. In the era of High Frequency Trading (HFT) and occurrences of 'fleeting' liquidity, the authors provide some evidence that while IFRS may have enhanced 'visible' bid-ask spreads, tangible liquidity for market participants, particularly global institutional investors, has not improved significantly, echoing the findings in Brogaard, Hendershott, Hunt, and Ysusi (2014).…”