Value relevance of IFRS and the effect of the financial crisis: evidence from European financial firms

This thesis investigates the value relevance of International Financial Reporting Standards (IFRS) and the effect of the financial crisis on European financial firms. The empirical work is divided into two parts. The first part examines the impact of mandatory IFRS adoption and of the financial crisis on the value relevance of accounting information. For a sample of financial firms listed in the European Economic Area (EEA) and Switzerland over 1998-2012, the results indicate that the combined value relevance of book value of equity and earnings has increased following mandatory IFRS adoption in 2005, thereby supporting the view that IFRS adoption improves the quality of accounting information. In addition, the findings suggest that the value relevance of book value of equity increases while that of earnings decreases as the financial crisis evolves. Moreover, during the crisis period the value relevance of equity book value appears greater for firms operating in countries with weak institutional environment as well as for firms with weak corporate governance mechanisms. The results are consistent for the whole sample of financial firms and a sub-sample of banks. The second empirical part of this thesis evaluates the value relevance of fair value hierarchy under IFRS 7 that requires firms to classify fair value measurements into three levels based on the valuation inputs. Using a sample of listed financial firms in the EEA and Switzerland over 2009-2012, the results show that the value relevance of level 1 and level 2 fair values is greater than the value relevance of fair values at level 3, although the difference is significant only for level 1. Furthermore, the evidence suggests that the value relevance of level 3 fair values is lower for firms domiciled in countries characterised by a weak institutional environment and for firms with weak corporate governance mechanisms.