Financial consequences of IAS adoption : the case of Jordan
Past studies have recognised that a country's accounting system, including disclosure requirements and practice, does not develop in a vacuum but is shaped by a number of influences. Although several studies have been undertaken to identify factors affecting disclosure in various countries including Jordan, disclosure in compliance with all related and relevant International Accounting Standards (IAS), factors influencing disclosure in compliance with IAS and the financial consequences of increased disclosure in compliance with IAS have not been explored. This research therefore has looked at the development of disclosure in compliance with all related and relevant IAS, the factors influencing disclosure in compliance with IAS and the financial consequences of increased disclosure in compliance with IAS in Jordan. The investigation concentrated on the empirical analysis of- 1) The impact of IAS adoption on the Jordanian Industrial Companies (JIC) listed on Amman Stock Exchange (ASE) extent of disclosure over the period 1995-2000, and: 2) The impact of five company-specific factors (company size, audit firm, industry type, profitability, and capital structure) on the extent of disclosure in compliance with IAS of JIC overt he period 1995-2000, and: 3) The financial consequences of adopting IAS, more specifically the impact of adopting IAS on systematic risk, unsystematic risk, risk premium, cost of equity capital, and share price volatility of JIC listed on ASE over the period 1996-2000. The development of accounting reporting and regulations in Jordan in connection with the country economy development was reviewed by highlighting the reasons forced toward adopting the IAS through the Companies Act and Amman Stock Exchange requirements. Such a review provides relevant background to the issue to be investigated in this study. A survey of accounts of 50 JIC over the period 1995-2000 was undertaken to investigate the influence of the IAS on the extent of disclosure in Jordan. In this investigation, the selected companies' extent of disclosure in compliance with the IAS over the years was examined by conducting both parametric and nonparametric tests. The impact of company-specific factors, on the other hand, was assessed by looking at the association between selected factors and the extent of disclosure in compliance with IAS in the annual reports of all JIC that met the criteria required over six differenty ears (1995,1996,1997,1998,1999a, nd2 000). Both univariate (parametric and non-parametric statistics) and multivariate( multiple regression) analyses were carried out in testing the significance of the association. As far as the financial consequences are concerned, the study investigated the impact of adopting the IAS on the JIC systematic risk, unsystematic risk, risk premium, cost of equity capital, and share price volatility over five different years (1996,1997,1998,1999, and 2000). For such an investigation, the Capital Asset Pricing Model (CAPM) and the Market Model were employed. In this investigation, the selected companies' systematic risk, cost of equity capital, and share price volatility over the years was examined by conducting both parametric and non-parametric tests. The selected companies' unsystematic risk, however, was investigated by conducting the F-test. In addition, clearly it could be argued that the change in the cost of equity capital as a financial consequence of adopting the IAS might be influenced by other factors, namely: business risk and financial risk. Multivariate (multiple regression) analyses were carried out, therefore, in testing the significance of the association between the cost of equity capital and the extent of disclosure in compliance with IAS after controlling for the variables business risk and financial risk. The study results revealed that although the adoption for the IAS started in the year 1998, the significant change in the extent of disclosure started before that year. As a consequence, it can be seen that there was a drift up in the extent of disclosure regarding the mandatory action in 1998 for implementing the IAS and not a jump up as was expected to be seen. The study has found that JIC were not fully adopting the IAS. Chosen company specific factors, therefore, were tested for possible explanation of the variation in the extent of disclosure in compliance with IAS. The results revealed that there were considerable variations in the extent of disclosure by JIC for each of the six years covered in this study. Company size and, to a lesser extent, audit firm and industry type appear to be the best explanatory variables in explaining differences in the extent of disclosure in compliance with IAS among JIC included in this study over the period 1995-2000 suggesting that JIC have been influenced by company-specific factors. Regarding the financial consequences of adopting the IAS, however, the systematic risk and cost of equity capital, to some extent, was found to be significantly influenced by the extent of disclosure in compliance with IAS of JIC. Such an influence is described as a'cumulative' influence. Whereas, it has not been found that unsystematic risk, and share price volatility was significantly influenced by the adoption of IAS.