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

Abstract

Purpose

This study aims to investigate the effects of IFRS convergence on market liquidity and to analyze the firm-level heterogeneity in liquidity effects based on reporting incentive, firm size, ownership structure and firm leverage.

Design/methodology/approach

The empirical analysis is based on firm-fixed effect regression using several proxies of market liquidity as dependent variables. The sample consists of 337 firms listed on the National Stock Exchange (NSE) who shifted to IFRS from the financial year 2016–2017.

Findings

The empirical findings indicate that IFRS convergence has contributed to the significant increase in market liquidity in a weaker enforcement country, i.e. India. Additionally, when the study performs the heterogeneity test of IFRS impact, the results indicate the presence of significant cross-sectional differences in such liquidity effects across firms. Thus, altogether the findings suggest that both accounting convergence and firm-level factors are likely to be the mechanism underlying the observed improvement in market liquidity.

Originality/value

In the current literature, there is an ongoing debate about whether the observed post-IFRS effects are driven by the change in accounting standard per se or by other related factors. Therefore, by studying the liquidity effects of IFRS convergence in India, this study provides evidence regarding the sources of the documented IFRS effects. Moreover, the study indicates the significance of firm-level factors in determining the observed liquidity outcomes around IFRS adoption, which is unique to the literature.

Citation

R., S. and Firoz, M. (2024), "The impact of IFRS convergence on market liquidity: evidence from India", Journal of Financial Reporting and Accounting, Vol. 22 No. 4, pp. 1062-1081. https://doi.org/10.1108/JFRA-02-2022-0055