“IFRS compliance and stock prices influence: evidence from Jordanian banks”

This study aims to examine the IFRS compliance in Jordanian banks and its relation to stock prices. The impact of compliance with International Financial Reporting Standards (IFRS) on stock prices in Jordanian banks is a rarely researched subject in accounting and finance, but whether IFRS compliance has a serious impact on stock prices, particularly in developing countries, is still unknown. Numerous factors in developing countries, such as cultural, political, and economic circumstances, can create different effects for IFRS compliance from those seen in developed countries. This paper concludes that IFRS compliance negatively affects stock prices, and firm size has a positive relationship with stock prices in Jordanian banks. The paper has sig- nificant implications for IFRS compliance research on stock prices, particularly across Jordanian banks, in responding to recent calls to bridge the gap that has been identi- fied as a result of the revolutions in the Middle East. This study has been carried out in order to attract investors to avoid opposite results compared with prior literature that has studied the same subject. Hence, there are essential implications for the way in which successful IFRS compliance can be positively associated with stock prices in Jordanian banks.


INTRODUCTION
The adoption of International Financial Reporting Standards (IFRS) around the world has different international benefits. On the one hand, it can be considered an economic decision in relation to trade facilitation, since the adoption of IFRS leads to several financial benefits, such as enhanced transparency, greater earnings quality, facilitated trade, and comparability of financial data across firms' sectors (Chua & Taylor, 2008). Recently, a large number of firms started preparing their financial reporting according to mandatory IFRS, leading to a new phenomenon of unified financial reporting. Therefore, most researchers have recently investigated the impact of this change (the adoption of mandatory IFRS) on diverse issues in the accounting (Christensen et al., 2013;Yurt & Ergun, 2015). Few researchers as in this study explore the impact of IFRS compliance on stock prices influence in the banking sector.
parable information, and creation of in-depth information that will make appropriate decisions easier for the investors and other financial statement users, which will affect stock prices as one element of financial statements (Turki et al., 2017).
To investigate the association between IFRS compliance and stock prices in Jordanian banks, the authors performed several experimental analyses. Firstly, they assessed the relationship between IFRS compliance and changing stock price levels during the period of study. The authors find that IFRS compliance significantly influences stock price levels, which initially suggested that a high level of IFRS compliance would correlate with a high stock price. Secondly, however, the authors investigated if the high stock price levels usually related to the high levels of IFRS compliance. Surprisingly, this research documented the opposite results of its suggestion, and a negative relationship was instead found.
This research contributes to the prior studies on stock prices and IFRS compliance by providing indications as to the impact of IFRS compliance on stock prices using Jordanian bank data. This research analysis offers information specific to Jordanian banks, and examines the potential impact of this unique context. This study has significant inferences for decision-makers and financial statement users -whether internal or external -particularly those who assess and interpret the influence of IFRS compliance on stock prices, particularly in emerging markets, such as Jordan.

IFRS compliance development
Recently, IFRS compliance has become the current debate for many researchers. It has received considerable attention from researchers exploring its impact on several aspects of business. A full disclosure of International Financial Reporting Standards (IFRS) brought a huge motivation for financial statement users, whether they are external or internal. Therefore, the users can apply the disclosure information to make proper decisions in order to achieve their desired objectives (Mazzi et al., 2017).
In a recent study in the UK, Ali et al. (2016) document that there are several motivations related to IFRS compliance, such as firm size (e.g., diffusing ownership concentration), operations size (e.g., increasing operations), financing rules (e.g., giving more flexibility to apply more policies in the firms) and increasing foreign capital investments (e.g., providing investors with more accurate and proper information to inform decisions). When this information is not provided, misrepresentation becomes more likely, since each user will use different resources to analyse the available financial information.
IFRS compliance has supporters and opponents in the literature, based on the diverse convictions of the researchers. Supporters of IFRS compliance document several benefits, including: (1) providning more accurate financial information, (2) saving time during the preparation of financial statements,

Stock prices influence
Stock price can be defined as the cost of purchasing the financial instrument from an exchange market, which some studies also call share price. Stock price is changeable from one period to another based on market forces results, such as demand and supply.
Moreover, stock price is influenced by different factors, including firms' financial health, firm information, economic circumstances, and world-and nation-wide news (Byun & Rozeff, 2003).
Generally, stocks can be divided into two types: (1) common stocks (ordinary shares) and (2) preferred stocks (preference shares), in the prior literature. Stock is widely considered one of the most important investment tools. Investors have, in previous studies, offered several reasons for increasing their investments, such as buying stock with low prices, particularly in new firms, in order to achieve long-term investment growth or expecting long-term stock growth stability from well-established firm stockholders (Masum, 2014).
The literature has documented that the financial users, whether internal or external (e.g., investors, government, and suppliers), based their decisions on the disclosed financial information (Foster, 1973). Therefore, stock price is not independent from the financial information published in annual financial reports. Sletten (2012) stated that the financial information hiding -or bad news publication -is likely to lead to decreased stock price. Sletten (2012) found a negative relationship between the disclosure of bad news and stock price variations; that is, higher instances of bad news lead to lower prices. Study findings to date have revealed, though, that an association does not necessarily exist between the publications of good news and increased stock prices for a firm. Furthermore, some studies document that financial users, such as investors, react more clearly to bad news than good news, since good news is published early and consequently is not a surprise to investors (Kothari, Shu, & Wysocki, 2009).
A perception that a firm is withholding bad or good news that is directly related to a firm's financial statements likely has a direct impact on stock price. For example, Tucker and Zarowin (2006) and Skinner (1997) introduced significant empirical evidences that the early disclosure, by managers, of bad news that might affect stock prices leads to reduced litigation costs. Dye (1985) used a different model than prior studies and pointed out that the full disclosure of financial information leads to higher stock prices. His conclusion was that a solid base of reliable, extant financial information increases trust in the firms and in firms' financial reports. In another context of Egypt, Ansary and El-Azab (2017) assume that the announcement of a stock split is likely to lead to preferred stock prices, because this decision is seen as improving firm profitability and liquidity.

IFRS compliance and stock price influence
The literature has argued that stock issues may offer incentives for managers to manipulate firm earnings in order to achieve certain, desirable goals. Therefore, the accounting regulators established, first, the international accounting standards (IAS), then IFRS, to reduce the potential for embezzlement and manipulation in financial statements, where the stock price offers one statement of financial position (Rudra & Bhattacharjee, 2012). Furthermore, three theories have been introduced in the literature to address stock issue manipulation. Agency theory is focused on separating between managers (agency) and ownership (principal) responsibilities. Efficient contracting theory is focused on using managers to develop accounting discretion, particularly for long-term solutions. Opportunist theory states that the managers' incentives for manipulating firm earnings should be reduced by using particular financial tools, particularly in the short term. Ball (2006) stated that the IFRS was established as a new system to integrate all the financial systems in the world under one system for different purposes. For example, providing accurate, timely and comprehensive financial statement information; allowing small investors to easily understand financial statements; reducing the difference between firms' financial statements by creating an integrated system; and mitigating the cost and time required to obtain information. On the other hand, Ball clarifies that there are some obstacles that might face IFRS, such as a shortage of qualified people during the system transition. The weaknesses in IFRS compliance could lead to negative effects on firms' financial statements, increasing earnings at the management level and decreasing firm performance. In other words, earnings at the management level are negatively related to IFRS compliance. Stock price is considered a motivation for opportunistic earnings management (Rezaei, 2012 Based on a sample of 3,994 firms in thirty countries, Loureiro and Taboada (2011) studied the impact of mandatory and voluntary IFRS adoption on stock prices. Their findings were as follows: increased stock prices are strongly related to IFRS adoption, particularly when the managers have incentives to improve their financial reporting quality, and increased stock prices are positively related to voluntary IFRS adoption, particularly in countries that have stronger public enforcement.
In the context of Canada, Anderson et al. (2016) found that compliance with IFRS correlated to higher stock prices and firm values compared with compliance with GAAP. In the context of emerging countries (e.g., Greece), Maggina and Black (2016) found that ignoring some factors, such as political and macroeconomic ones, negatively affected the relationship between IFRS compliance and earnings, shareholder's equity, and financial ratios. Accordingly, they inserted consideration of these factors to explore the association between IFRS compliance and financial statement data, such as earnings stock prices and some financial ratios. Their findings showed that the IFRS compliance positively related to financial ratio improvement; on the other hand, no relationship was found with stock price. Based on the discussion offered in the prior literature, this research used the two hypotheses below to investigate the nature of the relationship between IFRS compliance and stock prices in Jordanian banks and to explore some factors that might affect this relationship.
H1: The stock price is higher for the banks that have higher levels of IFRS compliance, compared with those who do not comply.
H2: The effects of IFRS compliance on stock price differ between banks with higher IFRS compliance and firms with lower compliance.

Study objectives and motivations
This research aims to study the processes of stock prices in Jordanian banks and their relationship with IFRS adoption. In order to do this, the authors set out a few objectives as follows: to explain the nature of the relationship between stock price and IFRS adoption in Jordanian banks; to identify the characteristics of IFRS adoption that are most influential on stock price; to analyse the motivations that could potentially lead Jordanian banks to improve and develop their systems in order to achieve the IFRS requirements; to assess the econometric power and appropriateness of study model in providing more accurate results that exist between stock price and IFRS in the context of Jordanian banks. ty carries with it requirements for a high-quality accounting system, and the possibility of increasing bank capitalisation. Published stock prices are one of the most influential financial report items and, as such, are known to have an effect on bank activities, management decisions, and investment decisions. Finally, the existence of strong IFRS adoption in a bank can lead to improvements in professional conduct in banking transactions and can help to restrict the chances of financial report mistakes.  (4) cash from operating activities. Each of these variables is measured as follows:

METHODS
1) firm size was measured using the natural logarithm of total assets at the end of each year, and was expected to relate positively to stock prices; 2) ROA was measured by dividing net income over average total assets, and was expected to have a positive association with stock prices; 3) firm leverage was measured by dividing Tier 1 capital 2 by the bank's average total consolidated assets; and 4) cash from operating activities was measured by dividing cash flow from operating activities by total assets at the beginning of a year and was expected to relate positively to stock prices.
As The effect of IFRS compliance on stock prices in Jordanian banks is examined using panel data methodology. Several criteria related to panel data methodology added more accuracy to this research results, such as increased variability, heter-ogeneity, reduced multicollinearity among study variables, and increased data information and efficiency. However, to accomplish the main aim of this research -to examine the impact of IFRS compliance on stock prices in Jordanian banksformula below was established.
where STOpi is the stock return, IFRSco is the IFRS compliance, Fsize is the firm size, ROA is return on assets, Flev is firm leverage, and CFOA is cash from operating activities.

RESULTS
The research results, examining the effect of IFRS compliance on stock price for Jordanian banks, are presented in the following sections. The descriptive statistics analysis is presented, followed by the Pearson's correlation coefficient to show the nature of the relationship between IFRS compliance and explanatory and control variables. This research panel data used regression analysis to determine the impact and relationship of the dependent, independent, and control variables in Jordanian banks on the Amman Stock Market.

Descriptive statistics and univariate analysis
This section presents the descriptive statistics and univariate analysis results for this research variables, which measure the relationship between IFRS compliance and stock prices in Jordanian banks. In addition, the authors present descriptive measures for the control variables. As shown in Table 1, the mean values of stock return are 0.08, which means that this result is consistent with prior literature, particularly in developing countries (Masum, 2014

Variance Inflation Factor (VIF), tolerance (1/VIF) tests and heteroskedasticity test
In this section, the authors discuss the results of VIF and tolerance results (Lin, 2008). Hair (1995) documented 'if variance inflation factor test is greater than 10 and tolerance test is less than 0.2 that means there is multicollinearity. Table 2 presents the no multicollinearity problem in this study model. All VIF values are less than 10 and tolerance values are more than 0.2. This, in turn, means that collinearity is not an issue in this study. Heteroskedasticity means that the variances of random errors in ordinary least square regression (OLS) are inconstant (Seekell et al., 2012;Kaufman, 2013). Therefore, the heteroskedasticity problem possibility occurs when the magnitude of the residuals appears to be correlated to the independent variable value. This study used Breusch-Pagan/ Cook-Weisberg test to determine whether the data set of this research has been affected as a result of the heteroskedasticity problem. Table 3 shows that study model is not affected by heteroskedasticity since the chi2 value (1.33) is insignificant, which means that the authors have to accept the null hypothesis; this stated, 'All variances of random errors in OLS regression for study model are constant'. This, in turn, led the OLS regression in the proper method to test the relationship across the study variables. The existence of the multicollinearity and heteroscedasticity problems has led the researchers to seek to identify proper methods to test their hypotheses: for example, generalized Least Square Regression (GLS), which is considered an alternative way to solving multicollinearity and heteroskedasticity problems.

Correlation analysis
Prior literature has stated that a higher degree of association between variables may lead to a multicollinearity problem -predominantly when the correlation coefficients are more than ±0.8 (Abdul Rahman & Haneem Mohamed Ali, 2006). Consequently, this multicollinearity problem may bias the results when using the regression model, and thus may influence the capability to use regression to identify the association between dependent and independent variables.
This analysis presents the correlation matrix for this research variables. Table 4 is presented in order to show the correlation between variables. The table shows that stock return is negatively asso-ciated with IFRS and firm size, significant at the 0.01 level, with IFRS compliance at the 0.1 level with firm size variables. ROA, financial leverage ratio and cash from operating activities are positively associated with stock return but are seen to be insignificant; these results are consistent with the results garnered in the work by Masum (2014), where the correlation coefficients for dividend yield and retention ratio are significant at levels of 0.1. Finally, a negative relationship was established between cash from operating activities and financial leverage ratio. Table 4 shows that, for the model sample, the variables that have a positive degree of correlation with IFRS are firm size and return on assets. On the other hand, firm leverage and cash from operating activities are negatively related to IFRS. These results support the results in Tables 2 and 3, which show no existence of multicollinearity and heteroscedasticity problems (see Section 3.2).  Notes: ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Augmented Dickey-Fuller test (ADF)
This test has been applied in order to clarify that this research variables (dataset) are clear from non-stationary problem. The ADF test stated that the variable follows a unit-root process; the null hypothesis is that the variable contains a unit root (non-stationary). On the other hand, the alternative hypothesis shows that stationary process as generating the variable (the variable is stationary). Accordingly, the existence of the unit root led to biased results through the use of the OLS regression model (Diebold & Kolian, 2000;Perron & Qu, 2007), where: if probability = zero, the variable is stable for the period of time, and can, therefore, use any method of least squares, such as OLS. If probability < 0, this means that the researchers cannot use the least method because it leads to biased results (Johansen, 1995). Table 5 presents the results of the ADF test.
As shown in Table 5, all the variables in this current study are stationary and stable, since the p-value is 0.00 for all variables (SP, IFRS, firm size, ROA, leverage ratio, and cash from operating activities). This means that there is 0% chance that this research model has unit root, which is equivalent to saying, 'there is 0% chance that its process is non-stationary'. Therefore, the authors can reject the null hypothesis and conclude that the process is stationary. Accordingly, the use of ordinary least squares (OLS) is suitable for our dataset.

EMPIRICAL RESULTS
Hypotheses 1 and 2 were tested by examining the relationship between IFRS compliance and stock return in Jordanian banks, using the evidence and theoretical framework discussed above. A multi-regression model was used, as discussed in section 2, to show the nature of the effect of each control variable on IFRS compliance, as the independent variable. R is also high with 16%. In comparison with the prior studies (e.g., Sletten, 2012), the authors found that their 2 R values ranged is closed to this research, which means that the model in this research has better explanatory power.  Notes: STOpi is the stock return; IFRSco is the IFRS compliance; Fsize is the firm size; ROA is return on assets; Flev is firm leverage, and CFOA is cash from operating activities. ***, ** and * indicate significant at the 0.001, 0.05 and 0.10 levels, respectively.

CONCLUSIONS
IFRS is deemed one of the most important standards to improve the financial statement quality for the adopters and enhance the quality of bank sectors. Those improvements are predictable to be capable to give substantial assistances to banking market in Jordan, which in turn, allows more banks that are still not listed on the Amman Stock Market to be possessed into stock returns. Existing studies with similar goal have supported the empirical evidence that the adoption of IFRS increases the opportunities of investors to invest in banks and firms in order to increase the countries' markets, which makes the stock return base always solid. Therefore, the research hypothesis that relates to the differences in the firms level is supported particularly for firms that their managers expose news (related to IFRS compliance) about firm assessment, which favourably affects stock return and withholds news unfavourably impacting stock return.
The study concludes that IFRS compliance negatively affects stock return and the ROA has a positive relationship with stock return in Jordanian banks. This has positive impact on decision makers, especially investors and senior managers in Jordanian banks as well as legislators and regulators in Jordan. Therefore, it also helps to determine the nature of the relationship between IFRS compliance and stock return.
This study used and applied a new empirical evidence in the context of Jordanian banks, which added new contribution to the relevant literature. Furthermore, this study is a one of the few focusing on the relationship between IFRS compliance and stock returns in the Middle Eastern countries after the financial crisis of 2008 and the recent political issues. The second hypothesis in this study was supported with a positive relationship, while the first hypothesis revealed results quite opposite to research expectations, which may be attributed to the several factors mentioned in the discussion section. The impacts of IFRS compliance on stock return do differ between firms with higher IFRS compliance and firms with lower compliance, but stock return is actually lower for firms with higher levels of IFRS compliance.
This study presented several contributions, where this research is one of the first studies that examined the relationship between IFRS compliance and stock return in Middle East, particularly in Jordanian banks, in order to provide in-depth information to understand the nature of the dynamics of the association between these two issues. This in turn allows a richer study to carry out underlying the processes and mechanism by which IFRS compliance and stock return in Jordanian banks are assessed. To the authors' knowledge, this study is the first to have used a categorical technique for association between IFRS compliance and stock return in banking sector, since most prior studies have been conducted on the industrial sector as a result of competitive and technical pressures in this sector.
Several issues could make the relationship between IFRS adoption and stock returns different from one country to the next, such as cultural factors, financial crisis, religion and language. Cultural factors are categorised under different perceptions, which makes it difficult to determine these factors. Nevertheless, ignoring cultural factors could lead businesses to further problems that could affect their performance (Sivakumar & Sathyanarayanan, 2007). Finally, the study has significant implications for those activities in which change dynamics in IFRS compliance can appear, diffuse and be applied on stock return influences. This provides a new contextual framework for studying these issues based on a concentrated and holistic view of an explanatory quantitative research.