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This paper purports to examine the market reaction and the information content while Taiwan government promulgates that the International Financial Reporting Standards (IFRS) will be adopted for listed companies starting from 2013. IFRS are issued by the International Accounting Standards Board (IASB) and have been completely adopted by European public companies since 2005. Nowadays, more than 120 countries in the have exerted or will adopt IFRS in the near future. Since firms adopt IFRS usually result in numerous merits such as better reporting quality and comparability, the Taiwanese government authority intends to stipulate enterprises to adopt IFRS. As a matter of fact, the authority has endeavoured to make Taiwanese generally accepted accounting principles (Taiwan GAAP) converge towards IFRS in the recent decade and enacted accounting standards according to IFRS in terms of financial instruments, assets impairment, employee benefits and inventories. Subsequently, with a view to achieving further consistence with IFRS, the method of convergence has came to a halt with the scheme of adopting IFRS promulgated.
Previous studies have investigated the reaction of stock market to the specific one of foresaid standards implemented or announced in Taiwan; however, it is still vague how the investors will react to the information of full set IFRS adoption, which will be examined in this paper. The merits of adopting IFRS such as improving comparability, better financial information quality, reducing information asymmetry, lower cost of capital and so forth, have been extensively discussed by numerous studies (e.g., Tarca, 2004; Daske and Gebhardt, 2006; Daske et al. 2008; Epstein, 2009; Iatridis, 2010). Hence, this paper assumes that there would be a positive reaction to capital market provided that investors believe the benefits of IFRS adoption would outweigh demerits derived from it. Event study methodology together with market model would mainly be employed to uncover the market reaction. The electronic production sector, the core industry of Taiwan, would be selected as samples to conduct this research because firms belong to it usually have more intention to issue capital overseas and have larger scale of foreign operation, which indicates that these firms would be more keen on adopting IFRS. Also, sensitive test would be implemented to alleviate the effects of cluster, which could be deemed as the indigenous weakness of regulatory event studies. Based on the empirical results, this paper finds that the returns of sampled firms witness positive reaction to the news regarding IFRS adoption, and this reaction usually exists prior to the formal announcements.
Also, this paper would follow Armstrong et al. (2010), which contest that firm with lower pre-adoption quality financial reporting information and higher information asymmetry would experience more positive reactions from IFRS adoption in European countries. They also hypothesise that firms domiciled in more stringent enforcement environment would have more positive reaction to IFRS adoption. By means of cross-sectional analyses, this paper could not find the identical conclusion with Armstrong et al. On the contrary, a positive relationship between abnormal returns and lower pre-adoption information asymmetry would be found, which reveals that investors might perceive convergence cost as a concern in Taiwan capital market.
Through afore-mentioned tests, this paper proposes to provide preliminary findings regarding the market reaction to IFRS adoption of Taiwan. These results could be extended by a series of following events with regard to the IFRS adoption plan, and therefore the future research might render more comprehensive and completed findings.
The paper would be comprised of seven parts. Following the introductory section, which outlines the nature of the study, Section 2 would introduce Taiwan GAAP in the aspects of its origin, previous convergence with IFRS, major differences with IFRS and the adoption scheme of IFRS. Then, Section 3 would demonstrate reviews on related literatures regarding the application of event study to accounting standards adoption and economic consequence of adopting IFRS. Section 4 would present and defend the paper's selected methodology, and subsequently the empirical results would be depicted in Section 5. Section 6 would take the limitations of this paper into account. Finally, Section 7 would conclude the study based on findings and a set of recommendations.
In this section, the original standard-setting processes and the scheme of IFRS adoption would be introduced as background information. Apart from that, the considerable differences between Taiwan GAAP and IFRS prior to the adoption scheme would be explained in order to be the premises of following analyses.
The Original Process of Generating Accounting Standard in Taiwan
Taiwan is an interesting paradigm to exhibit the process of accounting standards transferred from U.S. generally accepted accounting principles (US GAAP) to IFRS. In 1983, the Ministry of Finance in Taiwan convoked a conference with a view to improving the effectiveness of accounting system, and then the Accounting Research and Development Foundation (the Foundation) was established based on the conclusion of this convention. One of significant role of the Foundation is to develop Taiwanese accounting standards with the aims that "promote accounting knowledge and enhance the quality of accounting and auditing practices" (Lai  , 1992, foreword, in Ong, 2005). The Foundation consists of four separate committees. Among these four committees, the Financial Accounting Standards Committee (FASC) takes charge of accounting standard-setting and comprises of 14 members. Apart from two members who are representatives of the government, the FASC still include six accounting academics and six accountants from the professional realm (Ong, 2005).
Taiwan originally compiles its generally accepted accounting principles based on US GAAP. Since the late 1990s, Taiwan GAAP is gradually shifted towards IFRS by means of the method of convergence. As of to date, the FASC has promulgated several accounting standards in accordance with IFRS with minor differences (See Appendix I).
The Introduce of Adoption Scheme in Taiwan
US GAAP and IFRS Convergence
Accounting harmonisation is regarded as the global propensity and there is no exception in the United States. In March 2008, the United States Securities and Exchange Commission modifies current rules and forms. These amendments would permit foreign private issuers (i.e., non-U.S. domiciled firms with a majority of their shareholders and operations located outside the U.S.) to file their financial statements without filing Form 20-F, the reconciliation to US GAAP, provided that their financial statements that are prepared in accordance with full set of IFRS (Epstein, 2009). This regulation is also one of the most important momentums to foster Taiwan to adopt full-set IFRS.
The Scheme of Adopting IFRS in Taiwan
In order to further foster globalization, diminish the obstacles to international financing and make domestic more attractive to foreign investors, Financial Supervisory Commission (FSC), the governmental agency with the responsibility for managing the financial affairs, announced that Taiwan would alter its strategy of accounting harmonisation from convergence to adoption on 28 October, 2008. Then, FSC promulgated a roadmap with specific progress towards IFRS adoption in Taiwan on 14 May, 2009. In order to alleviate the material effects of adoption plan on domestic firms, Taiwanese public companies would be divided as two categories in this scheme (i.e., category I: listed companies and financial institutions supervised by the FSC, which excludes credit cooperatives, credit card companies and insurance intermediaries; and category II: Unlisted public companies, credit cooperatives and credit card companies). Companies of Category I should apply in IFRS starting from January 1, 2013. Their plan with respect to adoption of IFRS and potential influence should be disclosed in the year-end financial reports in fiscal year 2011 as well as 2012 and interim financial reports in fiscal year 2012. On the other hand, category II companies should postpone adopting IFRS until the fiscal year 2015. The discourse of above-mentioned plan and potential influence is also compulsory from two years prior to the adoption. This paper will only focus on the category I company since these firms are traded in public capital market with fair market value per share. Besides, early optional adoption is applicable for firms which have already issued securities overseas, registered an overseas securities issuance with FSC, or had a market capitalization of greater than ten billion of New Taiwan Dollar. These firms would be permitted to prepare additional consolidated financial statements in accordance with IFRS starting from January 1, 2012; of course, these companies are required to disclose the potential influences of adopting IFRS in their annual reports of fiscal year 2010 and 2011's interim financial statements as well as annual reports.
As noted in the adoption scheme, the significant tasks that need to be accomplished consist of following items:
IFRS need to be translated into Taiwan-IFRS, which would be issued after appropriate review;
Studying on possible implementation issues regarding IFRS and finding out feasible resolutions;
Revising related regulations and supervisory mechanisms in order to be consistent with IFRS; and
Enhancing related publicity and training activities with a view to conducting the plan more efficiently and effectively.
Followings are the predicted benefits which the authorities hope to attain by means of the adoption plan,
Reinforcing the efficiency of enacting domestic accounting standards and enhancing of the competitiveness and rating of local capital markets in the world;
Ameliorating comparability of the financial statements between local and foreign companies;
It is unnecessary for companies to restatement of financial statements while issuing overseas securities, which lessens the cost of raising capital overseas; and
Employing a single set of accounting standards would decrease the cost of account conversions as well as improve management efficiency, especially for companies with numerous foreign branches or subsidiaries.
Material Differences between Taiwan GAAP and IFRS prior to Adoption
Even though the FASC has endeavoured to make Taiwan GAAP align with IFRS in the recent decade, there is still significant inconsistence between these two standards owing to the fact that FASC possess of limited resource to revise full-set standards and come up with the latest modifications IASB makes. According to Taiwan Stock Exchange (2009a), these differences could be primarily divided into three categories: (1) Taiwan GAAP does not develop specific accounting standards which IFRS has generated; (2) Taiwan GAAP could not revise in time as some of previous converged accounting standards are modified by IASB; and (3) The differences derived from non-converged accounting standards. Followings are the details of these three categories.
Taiwan GAAP does not develop specific accounting standards which IFRS has generated
Taiwan GAAP does not stipulate accounting treatments in terms of investment properties, agriculture and mineral assets, whilst ISAB has developed IAS 40: Investment Property, IAS 41: Agriculture and IFRS 6: Exploration for and the Evaluation of Mineral Assets in order to regulate these transactions.
Taiwan GAAP could not revise in time as some of previous converged accounting standards are modified by IASB
The accounting treatments with respect to financial instruments are examples of this kind of differences. IFRS7: Financial Instruments: Disclosures is effective for fiscal year starting from 1 January, 2007 and supersedes IAS 30 together with the disclosure requirements regulated in IAS 32. However, as can be seen in Appendix I, the FASC compiles Statement of Financial Accounting Standards (SFAS) No.36 based on IAS 32. The disclosures required by IFRS 7 have not been incorporated.
The differences derived from non-converged accounting standards
This kind of differences are summarised as the comparisons between IFRS and Taiwan GAAP clause by clause. Su (2002) and Deloitte & Touche (2009) have documented detailed differences. Due to the fact that the number of these differences is too tremendous, this paper would list several material and notable ones as below:
Retrospective application of IFRS is required as a general principle while first time adoption, and furthermore, some optional exemptions and mandatory exceptions are described in IFRS 1. However, there are no specific standard with regard to first-time adoption mentioned in Taiwan GAAP. First time adoption is usually regarded as an accounting principle change unless the special transitional provisions permitted.
According to IFRS, special purpose entities should be combined in the consolidated financial statement, while, there is no similar regulation in Taiwan GAAP.
Given the nature of transaction is infrequent and unusual, Taiwan GAAP permits enterprise to recognise extraordinary income or losses in the income statement; however, extraordinary items are prohibited in IFRS regardless of their nature.
Based on IFRS, Properties, plants and equipments might be measured at revalued amount, which equals to fair value at the date of revaluation less subsequent accumulated depreciation and impairment losses. In addition, revaluation should be implemented regularly so that the carrying amount of assets does not deviate significantly from its fair value. Nevertheless, turning to Taiwan GAAP, properties, plant and equipments might be recorded at cost or at cost plus appreciation if assets are revalued in accordance with Taiwan government's regulations. Revaluation value of land is based on the assessed present value  ; on the other hand, properties other than land revalued according to the amount approved by the tax authorities.
Taiwan GAAP stipulates that deferred income tax assets or liabilities should be divided into current or non-current items based on their expected settle dates, whereas all deferred income tax items should be recognised as non-currents items in accordance IFRS.
Vacation is regarded as a short-term compensation. Based on IFRS, the expected cost of short-term accumulated compensated absences should be recognised when employees render service. However, there is no related regulation in Taiwan GAAP.
This section would consist of five major parts which start from the previous articles in terms of the applications of event studies in the newly issued specific accounting standards as well as full-set accounting standards. Subsequently, the advantages and drawbacks with respect to the adopting IFRS would be extensively discussed. Last but not least, this paper would introduce previous research regarding the relationship between IFRS adoption and market reaction as the premise of following tests.
Previous Research regarding Adopting Specific Accounting Standards
Applying event study in the adoption of accounting standards has been extensively discussed. For instance, Leftwich (1981) tests if there is abnormal return while the two compulsory accounting standards, Accounting Principles Board Opinion No.16: Accounting for Business Combination and Opinion No.17: Accounting for Intangible Assets, are issued. It is found by Leftwich that there is negative impact on stock price provided these new standards cause adverse effect on firms. However, Dechow et al. (1996) indicate that there is no systematic evidence to support that investors reacted to news concerning mandatory expensing of stock options while FASB announcing Exposure Draft regarding stock compensation project. So far as the studies regarding newly accounting standards issued during the period of convergence stage in Taiwan are concerned, numerous domestic academic articles dedicate to uncovering the market reaction via the methodology of event study. For example, Lin (2005) argues that there is negative effect on the equity market while the SFAS No.35: Impairment of Assets is announced. In addition, the higher ratio of fixed assets over total assets, the greater cumulative negative abnormal returns have been found (ibid). Moreover, a negative effect on the equity market is found by Huang (2009) while she tests the market reaction to revised SFAC No.10: Inventory. The effect is more severe on the companies with higher amount of inventories or with lower margin rate.
Previous Research regarding Adopting Full-set Accounting Standards
There are numerous studies discussing the relationship between stock prices and the adoption of single accounting standard; nevertheless, research on the implementing the full set of accounting standard is relatively rare.
Daske et al. (2008) discuss research by Comprix et al. (2003)  which investigate abnormal returns of firms domiciled in European Union on four key event dates of public announcements that could raise the possibility of mandatory IFRS reporting. A weakly significant, albeit negative, market reaction to these four event dates has been found by them. Nonetheless, significantly positive returns would exist on certain preceding event dates provided that firms are audited by one of Big 5 auditors, domiciled in countries that are perceived to experience the greatest increase in quality of financial information as a consequence of IFRS adoption, or subject to stricter legal enforcement.
Armstrong et al. (2010) examine the market reaction to 16 events occurred from 2002 to 2005 in relation to the likelihood of mandatory adoption of IFRS in the EU. In comparison with Comprix et al. (2003), which studies the events from 2000 to 2002, Armstrong et al. (2010) analyse later events between 2003 and 2004 that are associated with the endorsement of the IFRS standards in general together with IAS 32/39 particularly. A positive (negative) reaction to events which increase (decrease) the possibility of IFRS adoption has been discovered by them. They also explain that this phenomenon results from evidence that investors anticipate benefits of harmonized accounting standards under IFRS.
Compared with Armstrong et al. (2010), which emphasises on whether mandatory IFRS is good or bad as perceived by investors, Christensen et al., (2007) focus on the differences in the economic consequences of mandatory IFRS among firms that are likely to incur relative benefits and costs due to the decision. Exploiting the extent of similarity with German voluntary IFRS and U.S. GAAP adopters as a proxy for U.K. firms' intention to adopt IFRS, they argue that this proxy is positively (negatively) associated with the stock price reaction to events increasing (decreasing) the probability of mandatory IFRS reporting. In addition, they find a similar relation for changes in the cost of equity capital as well. In other words, UK firms with similar features to German voluntary adopter would experience greater benefits from accounting harmonisation.
Advantages of IFRS Adoption
The advantages of adopting IFRS would mainly be discussed in this section. In general, uniform accounting standards with better quality would result in financial reports with higher quality, and furthermore, it could foster higher liquidity of financial market and reduce information asymmetry. Ultimately, it could be predicted that the cost of capital also would decrease; namely, investor would accept lower return from their investment given that they have the belief that perceived riskiness would be reduced. So far as riskiness is concerned, Epstein (2009) mentions that there are numerous dimensions of riskiness and accounting risk is one of relevant concerns. He regards accounting risk as "the risk in investing derived from difficulties in understanding the accounting principles applied by reporting entity, and the possibility that financial reporting standards might not be uniformly adhered to."
Followings are the details of significant merits regarding IFRS adoption which have been suggested in pervious literatures.
Enhance quality of Financial Information
Historically opposition to permitting IFRS based financial statement was attributed to the concern that the quality of IFRS is not as good as it of US GAAP. With the evolvement of IASB from former IASC in 2001 and substantially identical adopting due process to that of the FASB, IFRS has been gradually recognised as a label of better quality and IFRS-based financial reporting would make sure reasonable purposes of accomplishment of financial statements (Epstein, 2009). Similarly, regulators expect that as long as enterprise adopts IFRS, the comparability of financial statements, corporate transparency and the quality of financial reporting would be reinforced, and therefore IFRS adoption could benefit investors (e.g., EC Regulation No. 1606/2002).
Tarca (2004) finds that competitive market pressure could facilitate firms to exert international standards because numerous enterprises believe employing international standards would enable comparable information and better communication with users.
Through the aid of 'quality score' extracted from the yearly 'Best Annual Report,' Daske and Gebhardt (2006) suggest that disclosure quality experiences significant increase while adopting IFRS in the some European countries. Their result is applicable not only to firms which voluntarily adopt IFRS or U.S. GAAP, but also to firms which suffer from mandatory adoption of such standards. Their findings render extensive evidence on the 'missing link' in the line of argument that 'higher quality' international accounting standards result in higher quality accounting reports which should eventually contribute to higher liquidity in the capital markets (Leuz and Verrecchia, 2000)  and lower the cost of capital to the enterprises (Daske, 2006)  .
Curb Earning Management
In comparison with many local GAAP, IFRS are usually regard as a set of accounting standards with better quality and could reduce reporting discretion. Ewert and Wagenhofer (2005) contest that tightening the accounting standards could curb the degree of earnings management as well as improve reporting quality. Similar argument has been contended by following research that firms which adopt IFRS exhibit less evidence of earnings smoothing together with managing earnings; additionally, these firms usually recognise losses more timely and have more value relevance of accounting figures (Barth et al., 2008; Iatridis, 2010). Above-mentioned papers also sustain that quality of financial statements would be reinforced after adoption IFRS.
Foster International Capital Market and Cross-border Capital Flows
Nowadays, many major stock exchanges around the world (e.g., London, Frankfurt, Bangkok, Hong Kong, and Kuala Lumpur stock exchange) accept that foreign-listed firms prepare their financial reports in accordance with IFRS without any reconciliation (Hope et al., 2006). They also find that IFRS could be deemed as a vehicle for countries to reinforce investor protection and enhance the accessibility of capital markets to foreign investors. According to Hope et al. (2006), it is held by Carnachan (2003)  that adopting IFRS could not only lessen costs of reconciling financial reports from original GAAP to foreign GAAP for companies which seek to finance overseas but save investors efforts to comprehend multiple sets of standards.
In addition, Covrig et al. (2007) demonstrate evidence that the global convergence towards IFRS reporting may foster cross-border investment as well as the integration of capital markets. They also find that IAS adopters could provide more information and/or more familiar form of information with foreign investors. Hence, adopting IFRS could alleviate the cost of information about foreign investment and facilitate investors to put their money in cross-border investment. That is to say, a common set of accounting standards would assist investors in differentiating between lower and higher quality firms; simultaneously, it would lower estimation risk and ameliorate information asymmetries among investors (Daske et al, 2008). Besides, Merton (1987) contends that making foreign investors easily invest a country's firms easier would result in certain merits such as reinforcing the liquidity of the capital markets and expanding firms' investor base, which enhances risk sharing and reduces the cost of capital.
Improve Liquidity and Information Asymmetry
Epstein (2009) contests that if investors become more assured that reporting entities' financial statement precisely represent their economic positions and results of operation, the market for those firms' securities would be more liquid. He further defines liquidity as "the ease of selling assets, as evidenced by lower transaction costs and narrower bid-ask spreads." Daske et al. (2008) perform the empirical tests and find that the market liquidity of mandatory adopters witness statistically significant increases after IFRS reporting changes into mandatory. Similar result has been asserted by Leuz and Verrecchia (2000), which examine German firms which alter from national to international standards. They assert that the information asymmetry and liquidity, which is estimated by the proxy variables, bid-ask spread and trading volume, is reduced.
Lower the Cost of Capital
It has been suggested by several seminal papers (Botosan, 1997; Hail, 2002; Botosan and Plumlee, 2002; and Francis et al., 2008) that companies are equipped with high levels of disclosure would enjoy low information risk; simultaneously, it is more likely for them to have a lower cost of capital, compared with those firms with low disclosure levels and high information risk. In addition, as noted by Ding et al. (2007), IFRS usually requires more comprehensive disclosures than do most counties' accounting standards. Hence, it is extensively asserted that adopting IFRS would lessen the cost of capital by many seminal papers. For example, Daske et al. (2008) figures out a decrease in firms' cost of capital with a corresponding increase in Tobin's q, but only if they account for the likelihood which these effects occur before the official IFRS adoption date; therefore, this situation indicate that the market could predict the economic consequences of the mandate.
Apart from above-mentioned advantages, there are also some positive effects of adopting IFRS are asserted by numerous studies. Take El-Gazzar et al. (1999) for example, they state that exposing to new market, obtaining overseas debt and equity capital, enhancing customer recognition and lessening political costs could be the reasons why enterprises voluntarily comply with IFRS.
Although the merits of adopting IFRS have been comprehensively discussed above, there are numerous studies indicating that enforcement is a crucial factor which would impede the anticipated effects derived from IFRS adoption. Daske et al. (2008) find that the capital-market effects on the mandatory implication of IFRS reporting are not identical across countries and firms. These effects around mandatory IFRS adoption exist only in countries equipped with stricter enforcement regimes and in countries which the institutional environment renders strong incentives to firms so as to render transparent financial information. Furthermore, Daske et al. (2009) divide firms into 'serious' and 'label'  in according to their attitudes towards adopting IFRS. They notice that serious firms would enjoy significantly stronger effects than label ones in terms of the cost of capital and market liquidity. Namely, market participants could distinguish these two categories of firms.
Ball (2006) argues that uneven implementation, which derived from the inevitable political and economic factors around the world, would curtail the ability of common set of standards to lessen information costs as well as information risk. In addition, information processing costs might increase by immersing accounting inconsistencies at a less transparent and deeper level than more-readily observable differences in standards (ibid.). Ball believes that the foresaid situation would considerably influence the potential benefits of IFRS adoption. Similar result has been asserted by KPMG (2006) who surveys 187 firms across 10 countries in order to realise the different accounting principles or practices selected although these firms have prepared their accounting reports in accordance with IFRS. This survey indicates that despite substantial convergence, a strong national identity is still included in IFRS financial statements, which complies with the views regarding reporting incentives.
Drawbacks of adoption of IFRS
In the foresaid section, the merits of adopting IFRS have been comprehensively discussed. On the contrary, it is possible that investors would react negatively to the IFRS adoption when they anticipate that the costs come from adoption outweigh the benefits of it. Followings are the details of potential disadvantages regarding the implementation of IFRS.
Epstein (2009) argues that accounting risk consists of several underlying phenomena. One is risk that accounting principles exerted could not fully and accurately reflect the real economic constructs. (e.g., historical cost could not measure the economic value of long-lived assets). On the other hands, Epstein believes that the inability of users to process information is also a reason for producing accounting risk. As long as investors could not fully comprehend the measures and disclosures of some complicated accounting information, they call for higher returns to compensate higher risk they bear. Hence, it is still possible that adopting IFRS would deteriorate the cost of capital due to the fact that users of financial statements are not capable of understanding information presented in accordance with IFRS, relatively strange to them.
Direct and Indirect Cost
According to Carnachan (2003), it is held by Hope et al. (2006), that converging to IFRS will generate "both one-time transitional costs and the on-going costs of maintaining a standard-setting system." The one-time transitional costs manifests a huge amount of money and time spending because successful convergence calls for involvement of negotiations among the IASB, government authorities, national standard-setters, regulators, and professionals in participating in the convergence process. Simultaneously, direct compliance costs derived from retraining preparers, investors, auditors, and regulators to apply and interpret IFRS are inevitable. Apart from that, there will be on-going costs (e.g., mechanisms need to come up with the latest IFRS and interpretations and future standards) after the convergence. Jermakowicz et al. (2007) discuss the survey conducted by Ernst and Young (2002), which argue certain obstacles in the process of adopting IFRS. For example, adopting IFRS usually require paralleled accounting system in the periods of transition. Furthermore, it is mandatory to prepare comparative financial reports for past years. Apart from that, the necessary training for accountants, managements and auditors is also noteworthy. On the other hand, although adopting IFRS would increase disclosed information and, in turn, enhance the information quality, Dumontier and Raffournier (1998) contest that application IAS to Swiss firms would cost more. It results from the fact that firms apply IAS entail to prepare additional disclosure and give up vital discretion in accounting choices.
The foresaid paragraph primarily describes the direct costs of IFRS adoption; however, the indirect costs of it are also worth noticing. Hail and Leuz (2007) mention that proprietary costs could be a concern while consider indirect costs. Propriety costs are the costs come from the disclosure of propriety information to other parties (e.g., competitors, regulator and tax authorities) in the market. Firms which adopt IFRS would disclose more information than they used to doing under domestic GAAP. The additional disclosure might include significant competitive information (e.g., segment information), which not only would produce propriety costs but discourage companies' disclosure incentives (Verrecchia, 1983).
There are numerous papers discussing that firms' reporting incentives (e.g., nations' legal institutions, a variety of market forces, and firms' characteristics of operating) truly cause significant effects on the reporting quality; conversely, the accounting standards only play a limited role (e.g., Ball et al., 2000; Leuz, 2003; and Burgstahler et al., 2006). With regard to this phenomenon, Daske et al. (2008) contents the reason for that is the application of accounting standards involves material judgments and exerting private information. As a result, it is likely that IFRS provide firms with substantial discretion which is related to their reporting incentives. Leuz (2006) further indicates that reporting behaviour is still expected to differ across firms provided that accounting standards offer some discretion and enterprises have inconsistent reporting incentives even under the assumption of perfect enforcement. Moreover, material discretion could be detrimental to the comparability of financial reports.
Daske et al. (2008) assert that capital-market effects would be different across voluntary and mandatory adopters. They believe that voluntary adopters regards adoption IFRS as a boarder strategy that enhances transparency of financial reporting and its quality; therefore, these firms could have more intention to make considerable changes in their reporting practices, such as engaging auditors with higher quality, reinforcing corporate governance, seeking cross-listing and etc. On the contrary, mandatory adopters are essentially compelled to adopt IFRS, and thereby they would experience less response to the treatment (Daske et al., 2008). In sum, the capital-market effects regarding voluntary adoptions are more likely to be prominent, but they cannot be ascribed to IFRS alone. As mentioned in the Section 2.1, Taiwan has converged towards IAS/IFRS since the late 1990s; therefore, it would worth noticing that if the full-set IFRS mandatory adoption would arouse significant influence in its capital market.
Economic Consequence of IFRS Adoption and Market Reaction
In this section, this paper would study the relationship between above-mentioned economic consequence of IFRS adoption and stock reaction. Firstly, it is noted by Nobes and Parker (2008:76) that there is a negative relationship between quality of financial reporting and the cost of capital. Besides, Diamond and Verrecchia (1991) suggests that increased disclosure by firms could reduce transaction costs for investors, contributing to greater liquidity of the market and greater demand for the firms' stocks. Baiman and Verrecchia (1996) also demonstrate that "as investors' potential liquidity needs increase, the optimal level of disclosure rises, the liquidity of the market increases and the cost of capital decreases."
The foresaid papers indicate the relationship between financial statement quality or economic consequence of adopting international accounting standards and the cost of capital or even stock price. Apart from that, Easley and O'hara (2004) find a seminal role for accuracy of accounting information. They indicate that an individual firm could influence its cost of capital by means of selecting features such as its accounting treatments, market microstructure and financial analyst coverage. They also contend that affecting the accurancy and quantity of information available to financial statement users could impede the cost of capital; namely, precise accounting information would decrease an enterprise's cost of capital due to lower riskiness of the assets to be acquired. In addition, Aboody et al. (2004) examines the voluntary recognition of stock-based compensation expense according to Statement of Financial Accounting Standards No. 123. They emphasis on the market reaction to firms' expense recognition announcements and find that firms experience significant and positive announcement abnormal returns when they voluntarily adopt expense recognition. This effect is more obvious for firms that explicitly manifest that their decision is motivated by increased financial reporting transparency. Both Easley and O'hara (2004) and Aboody et al. (2004) explain that information risk is priced and therefore, it could be predicted that the decrease of information risk resulted from IFRS adoption could contribute to a detectable market reaction.
With the announcement of IFRS adoption scheme, the authorities, professional accounting firms and educational institutions in Taiwan make their efforts to deal with the potential problems in the process of adoption. However, the reaction of the capital market of IFRS adoption scheme is still obscure although there are a wide variety of previous articles concentrating on the event study of individual standards which are promulgated or implemented in the convergence stage. Hence, this paper would examine the market reaction while the authority announces the full-set IFRS adoption. Next section would subsequently depict how the research would be designed and developed.