An examination of international financial reporting standards (IFRS) impact on market liquidity in the Kingdom of Saudi Arabia

Purpose - This research investigates the impact of IFRS adoption on market liquidity for first-time adopter firms in the Saudi Stock Exchange. It explores the possible relationship between IFRS adoption and market liquidity. To examine market liquidity for first-time adopters, variances were analysed between a treatment group (first time adopters’ firms) and a control group (already adopting IFRS) throughout three years pre-adoption and three years post-adoption. Additionally, the research examines market liquidity through a pooled regression analysis pre-and post-adoption using a cross-sectional study to display the explanatory (R2) changes for the years using PB, EPA, ROE and Market Cap. The regression was also controlled by firm size and industry.

Research Methodology - This research investigates the influence of IFRS adoption on market liquidity over time, particularly for first-time adopters, by comparing them with a control group and considering firm size and industry. The analysis employs a quantitative approach and deductive reasoning based on secondary market data. Market liquidity is assessed using the turnover ratio, a measure of trading volume relative to outstanding share capital. Differences between the treatment and control groups are evaluated using the ANOVA test, followed by a cross-sectional regression analysis of the treatment group pre- and post-adoption. The analysis is further nuanced by considering the firm size and industry variables.

Results - Empirical results show no increase in market liquidity for the first-time adopters’ firms post-adoption. However, it was observed that there were significant differences between the groups pre-adoption; these differences were significantly reduced post-adoption, and these differences decreased further over time. Also, the regression model showed a significant increase in the explanatory R2 post-adoption with a structural data break for the group as a whole, meaning market liquidity is more explained by firm-wise market liquidity determinates post-adoption, this was not the case with regression was controlled from size and industry.

Contributions – The Research probed the impact of IFRS adoption on market liquidity in KSA, revealing nuanced results that enrich academia and practical applications. The findings show that while IFRS adoption does not immediately boost market liquidity, it mitigates the severity of liquidity decline compared to nonadopters. IFRS adoption effect becomes more evident over time, especially for smaller firms, and it is also significantly influenced by microeconomic, macroeconomic, and institutional factors. Notably, the research emphasises that the benefits of IFRS adoption are not immediate as firms navigate the implementation challenges. The insights offer valuable guidance to policymakers and regulators, emphasising the need for a comprehensive approach to IFRS adoption that considers enforcement and corporate governance alongside other factors.