The Impact of IFRS Mandatory Adoption on the Performance of Saudi
Banks
,
2
HELA TURKI,
32,
LAMIA S. SHEHAB,
1,2
MONA HASSABELRASOUL MOHAMMAD 2,4
ZAHRA TAJUDDIN ABDELGADER ALI
1Department of Accounting, Faculty of Commerce,
Azhar University,
Dakahlia,
EGYPT
2College of Business,
Jouf University,
KINGDOM OF SAUDI ARABIA
3Department of Accounting,
Giza High Institute for Administrative Sciences,
Tamouh, Giza,
EGYPT
4Department of Accounting,
College of Economics, Commerce and Business Administration,
Shendi University,
SUDAN
Abstract: - The study aims to determine the impact of IFRS mandatory application on financial and market
performance, in the Saudi Arabian banking sector for the period from 2012 to 2021. The results of this study
show that there is no relationship between the IFRS mandatory application and each of the rates, return on
equity, and return on assets, while there is an inverse relationship with earnings per share. In terms of the effect
on the market performance, the study concluded that there is no relationship between the IFRS mandatory
application and each of the volume and value of trading, and there is a positive relationship on the growth rate.
The study attributed these results to several reasons, the most important of which is the gradual application of
the IFRS, which was followed by Saudi Arabia, in accordance with strict executive procedures from the Saudi
Arabian Monetary Authority (SAMA).
Key-Words: - IFRS, mandatory adoption, financial performance, market performance, accounting information
quality, Banks
Received: August 25, 2023. Revised: December 9, 2023. Accepted: January 7, 2024. Published: January 23, 2024.
1 Introduction
The Kingdom of Saudi Arabia's interest has
increased recently in developing the Saudi financial
market, believing in the importance of financial
markets in achieving the goals of economic
development in general and the Kingdom's Vision
2030 in particular. The economic development of
any country must be accompanied by a financial
development of the same strength and ambition.
As a member of the G20, the Kingdom has
taken many decisions and procedures aimed at
enhancing levels of transparency, disclosure, and
governance. These decisions contribute to
improving the investment environment in the market
in addition to preparing the regulatory and
legislative environment in line with international
trends.
Among the prominent steps in this field is the
plan that the Kingdom put in place in 2012 to
convert to international accounting standards. It was
implemented in four stages, taking into account
several factors. After studying the application of
these standards from all aspects (Sharia, legal,
professional ...), the kingdom decided on the
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.48
Mona Hassabelrasoul Mohammad,
Lamia S. Shehab, Hela Turki,
Zahra Tajuddin Abdelgader Ali
E-ISSN: 2224-2899
575
Volume 21, 2024
mandatory application of IFRS in its full version on
all establishments listed in the Saudi financial
market at the beginning of 2017. It should be noted
that the emergence and application of IFRS as a
method for the globalization of accounting came in
response to the needs and requirements of the
globalization of the economy, especially financial
markets. This globalization led to an increase in
interest in the relationship between stock markets
and accounting practices. So, the shift to IFRS on a
large scale is an improvement in the quality of
financial reports and enhancing transparency and
accounting disclosure. Thus, these standards support
the efficiency of the market by increasing
confidence in the financial statements, reducing
risks for new investors, and working in an integrated
international regulatory environment, which
facilitates comparison and analysis.
According to the above, this paper aims to
determine the impact of IFRS mandatory adoption
on the financial and market performance of Banks
listed on the Saudi Stock Exchange through:
-Determining the nature of the Saudi capital market
response to the changes resulting from the
mandatory application of international standards.
-Determine the most important factors affecting
positively and negatively the relationship between
the IFRS mandatory adoption and the performance
of companies in the Saudi market.
The importance of the study stems from the
increasing interest in accounting literature to study
the impact of the application of international
standards in the markets of many countries, which
coincides with the recent mandatory application in
the Kingdom of Saudi Arabia and the emergence of
the need to evaluate this decision. At the same time,
there are few studies that dealt with measuring the
impact of the mandatory application of international
reporting standards on the market performance of
companies in the Arab environment in general and
in the Kingdom of Saudi Arabia in particular. The
study is also considered supportive of the
continuous evaluation process for the IFRS
application which allows for continuous
improvement and development.
Practically, the results of the study can be used to
judge:
- The impact of the application of international
financial reporting standards on improving the
quality of information contained in financial
reports and increasing their transparency.
- The efficiency of the Saudi stock market by
measuring the response to changes in the quality
and quantity of disclosed information,
accompanying the mandatory application of
international financial reporting standards.
- The problems and obstacles that may prevent the
success of the mandatory application in the Saudi
market.
2 Literature Review
The need for international financial reporting
standards (IFRS) has increased in light of the global
economy, the globalization of capital markets, the
successive developments in information technology,
and the publication of financial reports on the
Internet. Since (2001) the International Accounting
Standards Board has begun to develop a unified set
of high-quality and internationally acceptable
standards of financial reporting. The goal of this
decision is to ensure the provision of transparent and
complete information that clearly reflects the real
situation of companies in order to protect
stakeholders on the one hand and inform the
financial markets on the other hand.
Proponents of International Financial Reporting
Standards (IFRS) have argued that adopting IFRS as
a global standard will contribute to reducing
differences between these reports in different
countries, strengthening the comparability of
financial information, improving its explanatory
power as an indicator of company performance,
reducing its cost, improving transparency and
limiting information asymmetry and increasing the
quality of financial reporting.
Prior studies have investigated the relationship
between the adoption of financial reporting
standards and corporate performance, quality of
accounting information, and comparability.
However, these studies did not reach similar results,
there was a noticeable divergence.
2.1 IFRS Mandatory Adoption
IFRS is an extension, development, and continuous
improvement of the content of the accounting
standards issued in order to respond to the
successive developments in the international
business environment.
The tendency to apply the IFRS carries a change
in the philosophy of looking at accounting, from
being just a system for collecting and processing
information in a way that helps in settling potential
conflicts between stakeholders, to becoming a
financial reporting system for the professional
investor in an advanced and renewable work
environment, [1]. This later is characterized by the
expansion of the global activities of enterprises with
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Mona Hassabelrasoul Mohammad,
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Zahra Tajuddin Abdelgader Ali
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the growing role of multinational companies and the
need for the transfer of production factors and
capital from different countries, and to deal with a
large base of users of financial statements that are
not homogeneous in terms of culture and language,
[2].
The rapid development and expansion of
international financial markets have allowed
companies and investors to bypass national borders
in search of better funding sources and investment
opportunities while giving investors an opportunity
to diversify their investment portfolios in a way that
reduces potential risks, [2].
In light of these variables, international
accounting compatibility has become necessary in
order to send a unified and reliable message to the
market, through the presence of high-quality
accounting standards that guarantee the quality of
financial statements and reports in terms of
enhancing comparability, relevance, accuracy and
addressing the problems of information asymmetry
and profit management, [3].
From the perspective of advanced economies,
the adoption of IFRS will reduce the expenses and
time of issuing new local standards, and raise the
efficiency and control of professional practice so
that it is ethical and helps to reduce financial
corruption, [4].
IFRS is also characterized as principles-based
standards, they rely on a set of concepts based on
general economic definitions that allow the
practitioner to treat economic events according to
their essence, which gives them a high degree of
simplicity and clarity. They represent an integrated
system of standards, which refer to each other, so
they reduce the possibility of conflict between its
requirements, [5], [6].
Accordingly, IFRS has one direct effect, which
is raising the quality of financial statements
followed by a number of indirect effects, such as
increasing the financial market efficiency, and
liquidity, and reducing the cost of capital, [7].
This prompted the bodies of control and
supervision of the accounting profession in most
countries to take steps towards obligating
companies, banks, and financial institutions to adopt
IFRS, so the Countries have taken three different
strategies when adopting the standards:
convergence, partial adoption, and full adoption, [8].
In terms of commitment, countries’ positions varied
between voluntary and mandatory implementation,
which led to an increase in the number of countries
implementing the standards, approximately 130
countries, [9].
The results showed that the difference in legal,
economic, and environmental factors is one of the
most important reasons behind the different decision
strategies for adoption, [4], [8] [10]. Some studies
indicate that countries that have strong investor
protection systems and high rates of economic
growth are more likely to adopt mandatory IFRS,
[11]. On the other hand, the strength of legal
systems and the degree of accounting obligation
may be an incentive to implement IFRS, despite the
weakness of investor protection systems and the
decline in economic indicators, [8].
The level of accounting knowledge, human
qualification, and the nature of the organizational
environment are among the factors with a positive
significant relationship to the decision to transfer to
adopting IFRS, [12].
One of the most important obstacles to the
implementation of IFRS, especially in developing
countries, is the absence of efficient markets for
most assets, which does not allow the use of fair
value, [13], as well as the failure to satisfy
stakeholders, who sometimes have conflicting
interests, [14].
In addition, mandatory adoption requires
persistent and intense efforts in the field of actual
implementation, which increases the costs of
transformation, [15].
However, the study, [16], found a positive
impact of IFRS mandatory adoption in achieving the
desired goals of accreditation, and the quality of
financial reports in the European context during the
period from 2001 to 2009. The study, [17], also
attributed the success of the application in some
Pacific islands to the laws binding on this
application.
The mandatory adoption of IFRS also allows
comparisons between the financial performance of
companies in the same country, or in different
countries, in a way that supports the globalization of
financial markets, and contributes to saving the
costs of preparing local accounting standards for
each country separately, [3].
However, the mandatory adoption of IFRS in
itself is not sufficient to achieve the desired goals of
the application, as [7], emphasized that the proper
application of these standards and their success in
achieving their goals differ from one country to
another, according to the availability of a set of
elements. We can summarize them as follows:
Standard quality level
The legal and political system in the country
Financial reporting incentives and the associated
capital structure, ownership in the tax system,
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the extent of the development of financial
markets
In the context of comparing the costs and
obstacles and the expected benefits, in light of the
different elements, many Arab countries have taken
the decision of mandatory adoption IFRS, including
the Kingdom of Saudi Arabia.
In 2012, the Kingdom prepared a plan for the
transition to international accounting standards,
which was implemented in four stages, after
studying the application of these standards in all
respects (legal, legal, technical...) provided that the
mandatory application of international financial
reporting standards in its full version will be on all
institutions listed in the Saudi Stock Exchange at the
beginning of 2017. Believing that IFRS is
characterized by comprehensiveness, integration,
and modernity in covering financial transactions
compared to Saudi standards.
The time plan for the transformation came in
order to give enough time to study the standards in
all aspects related to the local environment and to
involve many relevant parties to ensure that they
achieve their goals. This resulted in the Authority’s
approval of a set of additional disclosures that are an
integral part of the application of standards in the
Kingdom, as they provide information that enables
the decision maker to judge the extent to which the
establishments’ revenues, investment and sources of
financing which comply with the requirements of
Sharia.
The study, [18], confirms the possibility of
adopting IFRS in the Saudi accounting environment,
specifically in financial institutions, taking into
account the fundamental differences in the Saudi
accounting system that adopts Islamic Sharia law.
The business environment in the Kingdom of Saudi
Arabia, which represents the components of the
IFRS application, is characterized by the following,
- The Kingdom enjoys the sovereignty of a free
economic system with the state carrying out
some vital economic activities
- Joining international organizations as the
International Traders Organization of Accounting
Bodies, and as a member of the Economic Group
of Twenty
- The economic environment in the Kingdom has
developed to attract foreign investment, increase
the financial surplus, achieve the highest rates of
economic growth, and enter the global financial
markets.
- The local environment is compatible with the
characteristics of globalization in terms of the
use of modern technologies in the field of
information and communication technology.
- Local laws, and regulations, comply with
international requirements.
In light of the importance of the banking sector
by its special nature, its primary impact on the
economy as a whole through its frequent dealings
with investors, depositors, and other stakeholders,
and its ability to install confidence in the monetary
system through its association with the regulatory
authority and the government, in addition to its
sensitivity and its rapid impact on any global
financial crisis, the Kingdom of Saudi Arabia gave
the banking sector a good opportunity by allowing it
to be implemented since 2012. This decision
contributed to increasing the readiness of banks and
adapting their conditions through training and
gaining experience before deciding to implement the
mandatory application of IFRS in its full version in
2017, which helped in achieving the desired
objectives of the application and which has
repercussions on the market and financial
performance of this vital sector.
2.2 IFRS Adoption and Corporate
Performance
The study, [19], analyzed the impact of the financial
reporting standards adoption on the performance
indicators of previous studies in a number of
European countries, then determined the differences
between the financial ratios prepared according to
IFRS and the ratios prepared according to Czech
accounting standards for a sample of 18 Czech
companies. After performing this comparison, they
found that the Impact varies from one country to
another, and there is no impact of the adoption of
standards on performance indicators in the Czech
Republic. This is consistent with what was, [20],
found when studying the impact of adopting IFRS
on the performance of food processing companies in
Nigeria, this results indicate that the differences in
market performance between the previous and
subsequent periods of IFRS are not significant,
which shows a weak relationship between the
adoption of IFRS Finance and performance of food
and beverage manufacturers listed on the Nigeria
Stock Exchange.
In contrast, [21], indicated that there is a strong
positive relationship between IFRS adoption and
financial performance and that this relationship is
attributed to reducing the cost of the firm. They
showed that the adoption of IFRS improves
organizational efficiency and productivity for
efficacious organizational performance and ensures
better allocation of the organization's resources.
A study to examine the impact of mandatory
adoption of international reporting standards in
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Mona Hassabelrasoul Mohammad,
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Zahra Tajuddin Abdelgader Ali
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manufacturing and mining firms operating in South
Africa, [22], found that there was a significant
impact of IFRS on return on assets, return on equity,
and the ratio of market value to book value of the
company, but revealed a positive impact on
Earnings per share.
The study, [23], studied the direct and indirect
impact of the compulsory imposition of standards
on the financial performance of French companies
listed on the French Stock Exchange. They found
that there was no direct impact of imposing
standards on the financial performance of
companies, but there was an indirect effect resulting
from the cost of capital.
Concerning the studies conducted on the Saudi
environment, [24], identified the impact of the
application of international financial reporting
standards on sample of Saudi companies listed in
the Saudi financial market, the results indicate a
decline in the value of equity and net profit due to
transition to IFRS.
It is clear from the presentation of these studies
that there is no agreement between the results of
previous research regarding the impact of the
mandatory application of IFRS on the financial
performance of companies, and the results of some
studies contradict each other, and this was an
incentive to study the relationship between imposing
IFRS and the financial performance of Saudi banks.
Therefore, the first hypothesis can be formulated as
follows:
H1: The Mandatory application of IFRS has no
effect on the financial performance of Saudi
banks.
Proponents of the IFRS have argued that
mandatory accounting standardization improves
both the quality of accounting and the comparability
of accounting information. Several studies were
conducted to determine the effect of imposing IFRS
on accounting quality and comparability.
The study, [25], study examined the impact of
the mandatory application of IFRS on the quality of
accounting using a large-scale sample of 20
countries. Three reporting quality criteria were used;
income smoothing, reporting aggressiveness, and
earnings management. The study concluded that the
mandatory application of IFRS led to a decrease in
the quality of accounting reports.
Similarly, [26], found that the accounting
quality decreased after switching to IFRS in a study
conducted on a sample of 297 British companies
obligated to apply the IFRS.
Contrarily, [27], examined the impact of the
mandatory application and investor protection on
the quality of earnings in a sample of 46 countries.
They found that imposing IFRS increases the
earning quality when the country provides great
protection for investors. In the constant, [28], found
that earnings management after mandatory IFRS
application increased in France but did not change
in Australia and the United Kingdom.
The study, [29], aimed to evaluate the benefits
and costs resulting from the transition to IFRS in
Saudi Arabia, and found that the transition will lead
to greater transparency, accountability, and
efficiency, in addition to opportunities to enhance
foreign investments.
The study, [30], investigated the degree of profit
smoothing in banks during the mandatory
application of IFRS in Nigeria. They found that
imposing IFRS reduced profit smoothing and thus
improved the quality of accounting information.
In a study [31] aimed to identify to the
opportunities and challenges facing the Saudi
banking sector related to the implementation of
IFRS, it was concluded that it leads to improving the
quality of financial statements and increasing
transparency.
The widespread transition to IFRS has led to
numerous studies to examine its effects. One area of
research interest has been the impact on
comparability. The study, [32], tested whether
imposing IFRS improves comparability in EU
countries using three criteria: similarity of
accounting function, degree of information
transmission, similarity of information content of
income, and book value of equity. They conclude
That IFRS adoption improves cross-country
accounting information comparability.
The study, [33], tested whether the obligated
application of IFRS increases the benefits of capital
markets by enhancing comparability. The results
confirmed that the IFRS mandatory application
improves compatibility, which in turn increases the
benefits of capital markets.
The study, [34], examined whether cross-
country comparability and reporting quality have an
impact on the economic benefits of mandatory
implementation of IFRS identified by previous
research, which include: increases in Tobin’s Q,
stock liquidity, accuracy of analyst forecast, and
agreement of analyst forecast. The results indicated
that increasing cross-country comparability has an
important role in the economic benefits of the
mandatory application of IFRS in 2005.
The Financial Accounting Standards Board
aimed to issue international reporting standards to
improve the quality and transparency of accounting
information so that it reflects the economic
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Mona Hassabelrasoul Mohammad,
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Zahra Tajuddin Abdelgader Ali
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performance and the true financial position of
companies, the study, [35], and the financial
statements available to investors be more
comparable which enabling them to make rational
economic decisions when allocating resources, [33].
Here the following question arises if the
mandatory application of international financial
reporting standards affects both comparability and
the quality of accounting information, which in turn
provides better information to the investor, enabling
him to rationalize his investment decisions. How do
these benefits affect the market performance of bank
shares? Therefore, the following hypothesis can be
formulated:
H2: The mandatory application of international
financial reporting standards has a positive impact
on the market performance of banks.
By extrapolating these studies, a number of
indicators were used to measure the impact of
IFRS adoption on financial performance, including
return on assets, return on equity, cost of capital,
and operating cash flows after and before
application, and the market book value was used to
measure the impact on market performance.
This study differs from its predecessors in
measuring the impact on financial performance
using EPS, ROA, and ROE. It also represents the
first study to measure the impact of IFRS adoption
on Stock trading using both trading volume and
value to examine the impact on the bank’s market
performance and the growth rate, in addition to
using the Covid-19 pandemic as one of the control
variables.
Regarding the studies conducted in the
Kingdom of Saudi Arabia, the studies did not
address the impact of the mandatory application on
banks but rather dealt with companies listed on the
Saudi Stock Exchange after excluding banks.
This study represents a continuation of previous
efforts to explore the impact of the shift to the
mandatory application of IFRS on performance in
one of the emerging markets.
3 Research Methodology
The applied study aims to test the hypotheses of the
study to measure and test the impact of the
mandatory adoption of financial reporting standards
IFRS on the performance of banks listed on the
Saudi Stock Exchange, Tadawul. It is concerned
with both financial performance, expressed in
profitability ratios(Earnings Per Share, Return On
Assets, Return On Equity), and market performance,
which means the performance of the shares in the
stock market in terms of trading volume and value,
and share price growth. So the paper examines the
Impact of IFRS mandatory adoption on the financial
performance of Saudi banks (H1), and the impact of
this adoption on market performance (H2).
3.1 Sample and Dataset Selection
The study population consists of all the banks listed
on the Saudi Stock Exchange, A sample
representing all the banks listed on the Saudi Stock
Exchange was chosen after excluding the banks for
which the required data were not available during
the study period.
So the sample consists of (11) banks after
excluding one bank.
With the knowledge that Examining the effect
of IFRS mandatory adoption by taking a sample
from one country only, aims to prevent statistical
bias that may result from the different institutional
environments of the companies under study.
This study covers the period from 2012 to 2020,
with the transition year (2016) being excluded - as
there is a dispute between researchers, as some see
the year of transition as the year that precedes
adoption, [36], while others see it as the year in
which adoption takes place, [13], [37].
The study, [5], predicts managers are more
likely to manage their earnings during the year
preceding the year of the IFRS mandatory adoption
year so as to avoid any noticeable fluctuations that
might occur in the relevant earnings thus ranking
them within a certain range at the time of mandatory
adoption.
In agreement with the [36], study, the year
)2016(which precedes the compulsory application,
was excluded which is considered the year of
transition.
Besides, opting for a long-term study period is
intended to provide a couple of advantages. In the
first place, a nine-year observation analysis would
enable us to account for changes likely to take place
in standards. In a second place, such choice is
targeted to help limit the bias likely to occur during
the standards shift period (2016) as well as the bias
relating to IFRS associated learning and
understanding period, which can differentiate from
one company to another as is related to leaders’ and
financial analysts’ familiarity degree to IFRS.
The required data was obtained from the Saudi
Stock Exchange website, Tadawul,[38], Saudi
Arabian Monetary Authority (SAMA), [39], in
addition to the Argaam website, [40] and the
websites of banks on the Internet.
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Zahra Tajuddin Abdelgader Ali
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3.2 Variables Measurement and Research
Model
To complete the study and in light of the research
hypotheses, three variables were identified as
following the mandatory adoption of international
financial reporting standards as independent
variables, while the dependent variables were
represented in the financial performance and market
performance of Saudi banks.
3.2.1 Measuring Variables
In order to measure banks' financial performance,
three indicators were chosen to evaluate the
financial performance of banks: earnings per share
(EPS), return on assets (ROA), and return on equity
(ROE).
To measure the market performance of banks,
by which we mean the performance of stocks in the
stock exchange, three indicators were chosen to
express the stock's performance on the stock
exchange, which are trading volume, trading value,
and the growth rate of the stock's market price.
The mandatory adoption of IFRS is expressed as
a binary variable that indicates the effect of the
mandatory adoption of IFRS. It gives a value of 1
for the years after the adoption of 2017 and beyond
and zero for the years before 2017.
3.2.2 Research Model
To determine the extent of the impact of the
mandatory adoption of reporting standards on both
the financial performance and the market
performance of Saudi banks, the research
hypotheses were expressed through two regression
models.
H1: the IFRS mandatory adoption has a positive
effect on financial performance.
𝐹𝑝𝑒𝑟 = 𝛽0+ 𝛽1 𝐼𝐹𝑅𝑆 + 𝛽2𝑠𝑖𝑧𝑒 + 𝛽3𝑀𝐵 +
𝛽4𝑙𝑒𝑣 + 𝛽5𝑐𝑜𝑣 + 𝜀
Where
𝐹𝑝𝑒𝑟: Refers to financial performance: independent
variable.
IFRS: mandatory adoption of IFRS, dependent
variable, takes 1 to years after 2016, and 0 for years
before 2016.
Size: The control variable represents the logarithm
of total assets.
MB: The control variable refers to the ratio between
the market value of equity and to book value of
equity.
Lev: control variable refers to leverage which is
computed by dividing total debt by total assets.
Cov: control variable refers to the presence of the
COVID-19 pandemic, its value 0 to years before
2020 and 1 to the year 2020.
As we mentioned earlier, the financial
performance is expressed in three indicators, and
accordingly, it is divided into three sub-equations as
follows:
𝐸𝑃𝑆 = 𝛽0+ 𝛽1 𝐼𝐹𝑅𝑆 + 𝛽2𝑠𝑖𝑧𝑒 + 𝛽3𝑀𝐵 + 𝛽4𝑙𝑒𝑣 +
𝛽5𝑐𝑜𝑣 + 𝜀 (1)
𝑅𝑂𝐴 = 𝛽0+ 𝛽1 𝐼𝐹𝑅𝑆 + 𝛽2𝑠𝑖𝑧𝑒 + 𝛽3𝑀𝐵 +
𝛽4𝑙𝑒𝑣 + 𝛽5𝑐𝑜𝑣 + 𝜀 (2)
𝑅𝑂𝐸 = 𝛽0+ 𝛽1 𝐼𝐹𝑅𝑆 + 𝛽2𝑠𝑖𝑧𝑒 + 𝛽3𝑀𝐵 +
𝛽4𝑙𝑒𝑣 + 𝛽5𝑐𝑜𝑣 + 𝜀 (3)
Where:
- EPS represents Earnings Per Share
- ROA represents Return on Assets calculated
by dividing its net income by its total assets.
- ROE represents Return on Equity calculated
by dividing net income by shareholders'
equity.
H2: the IFRS mandatory adoption has a negative
effect on market performance.
𝑀𝑃𝑒𝑟 = 𝛽0+ 𝛽1 𝐼𝐹𝑅𝑆 + 𝛽2𝑠𝑖𝑧𝑒 + 𝛽3𝑀𝐵 +
𝛽4𝑙𝑒𝑣 + 𝛽5𝑐𝑜𝑣 + 𝜀
Where:
MPer: refers to Market performance: independent
variable.
IFRS: mandatory adoption of IFRS, dependent
variable, takes 1 to years after 2016, and 0 for years
before 2016.
Size: The control variable represents the logarithm
of total assets.
MB: The control variable refers to the ratio between
the market value of equity to the book value of
equity.
Lev: control variable refers to leverage which is
computed by dividing total debt by total assets.
Cov: control variable refers to the presence of the
COVID-19 pandemic, its value 0 to years before
2020 and 1 to the year 2020.
This equation is divided as follows:
𝑇𝑉𝑂𝐿 = 𝛽0+ 𝛽1 𝐼𝐹𝑅𝑆 + 𝛽2𝑠𝑖𝑧𝑒 + 𝛽3𝑀𝐵 +
𝛽4𝑙𝑒𝑣 + 𝛽5𝑐𝑜𝑣 + 𝜀 (4)
𝑇𝑉𝐴𝐿 = 𝛽0+ 𝛽1 𝐼𝐹𝑅𝑆 + 𝛽2𝑠𝑖𝑧𝑒 + 𝛽3𝑀𝐵 +
𝛽4𝑙𝑒𝑣 + 𝛽5𝑐𝑜𝑣 + 𝜀 (5)
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𝑀𝑃𝐺 = 𝛽0+ 𝛽1 𝐼𝐹𝑅𝑆 + 𝛽2𝑠𝑖𝑧𝑒 + 𝛽3𝑀𝐵 +
𝛽4𝑙𝑒𝑣 + 𝛽5𝑐𝑜𝑣 + 𝜀 (6)
Where:
TVOL represents Trading Volume
TVAL represents Trading Value
MPG represents Market share price growth.
The last control variable is the Covid-19
pandemic. This pandemic started in 2019 and
quickly became a global epidemic. It has led to
difficulties in investment and to heightened
uncertainty in financial markets. So, it creates
severe problems in the market and financial
performance. That’s why, it is expected that this
pandemic is negatively associated with dependent
variables. The effects of this pandemic persist until
now that`s why from 2020, it takes 1.
The impact of IFRS on Market performance and
financial performance is tested using a panel data
model and the regression is performed using SPSS.
4 Results
4.1 Descriptive Statistics
Descriptive Statistics of numeric and dichotomous
variables are presented respectively in the table.
Table 1. Descriptive Statistics of dichotomies
variables
Variable
Frequenc
y
Percent
Max
Min
IFRS
43
51.2
1
0
Cov
10
88.1
1
0
The results of Table 1 show that the percent of
observations post IFRS mandatory adoption is
51.2%. This percentage is about half of the total
observations. So this sample is able to present the
impact of the IFRS adoption.
Table 2, Table 3 and Table 4 represent the
descriptive statistics of variables of sub-equations
that studied the relationship between IFRS
mandatory adoption and financial performance.
Table 2. Descriptive Statistics(H1-1)
N
Minimum
Maximum
Mean
Std. Deviation
Earnings
Per Share
83
-2,010
5,616
2,236
1,301
Size
83
6,550
8,781
8,164
,341
MB
83
782,730
3903,551
1702,514
736,193
LEV
83
1,100
1,472
1,185
,061
83
Table 3. Descriptive Statistics(H1-2)
N
Minimum
Maximu
m
Mean
Std.
Deviation
Return On
Assets
85
-,0157
,032
,0179
,007
Size
85
6,552
8,782
8,167
,337
MB
85
782,733
3903,554
1692,560
730,232
LEV
85
1,105
1,473
1,185
,060
Valid N
(listwise)
85
Table 4. Descriptive Statistics(H1-3)
N
Minimum
Maximum
Mean
Std. Deviation
Return On
Equity
85
-,074
,216
,121
,046
Size
85
6,554
8,778
8,167
,337
MB
85
782,726
3903,550
1692,560
730,232
LEV
85
1,102
1,472
1,185
,060
Valid N
(listwise)
85
Table 5. Descriptive Statistics (H2-1)
N
Minimum
Maximum
Mean
Std. Deviation
Trading
volume
84
43291474,
000
1264448945
4,000
1110914774,
785
2409485275,0
41
Size
84
7,474
8,778
8,186
,289
MB
84
782,726
3903,550
1692,142
734,608
LEV
84
1,102
1,446
1,182
,052
Valid N
(listwise)
84
Table 6. Descriptive Statistics(H2-2)
N
Minimum
Maximum
Mean
Std. Deviation
trading
value
86
62457326
7,08
1821159359
83,15
21149303709
,141
34500713046,8
29
Size
86
,000
8,778
8,092
,928
MB
86
,000
3903,550
1652,789
769,907
LEV
86
,000
1,446
1,168
,137
Valid N
(listwise)
86
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Table 5, Table 6 and Table 7 represent the
descriptive statistics of variables of sub-equations
that studied the relationship between IFRS
mandatory adoption and Market performance.
The results of Table 2, Table 3, Table 4, Table
5, Table 6 and Table 7 show that there is a
significant deviation in all the dependent variables.
Table 7. Descriptive Statistics(H2-3)
N
Minimum
Maximum
Mean
Std. Deviation
Growth rate
88
-5,122
3,125
-,241
1,380
SIZE
88
,000
8,778
8,079
,933
Market to
book
88
,000
80214981,
000
28048355,00
0
17575099,552
LEV
88
,000
1,472
1,172
,139
Valid N
(listwise)
88
a. Predictors: (Constant), COV, Size, MB, LEV, IFRS
4.2 Regression Results
4.2.1 IFRS and Financial Performance
Table 8. Results Model 1
Model
Unstandardized
Coefficients
Standardized
Coefficients
T
Sig.
B
Std.
Error
Beta
1
(Consta
nt)
-9,134
4,101
-2,227
,029
IFRS
-,711
,243
-,274
-2,923
,005
Size
1,704
,348
,447
4,891
,000
MB
,000
,000
,235
2,582
,012
LEV
-2,389
1,965
-,112
-1,216
,228
COV
-,319
,354
-,084
-,900
,371
a. Dependent Variable: Earning Per Share
Table 8 shows the analysis of the IFRS
mandatory adoption on Earning per share shows that
IFRS adoption is negatively associated with EPS.
Indeed, an examination of causal relations shows
that the coefficient associated with the link between
the adoption of IFRS and EPS is negative (-2.923)
and statistically significant (0.005). In addition, the
results show that the coefficient associated with the
link between the adoption of IFRS and Size, MB is
significant. So, IFRS adoption decreases the EPS.
Table 9. Results of Model 2
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std.
Error
Beta
1
(Consta
nt)
-,041
,024
-1,725
,088
IFRS
-,001
,001
-,070
-,669
,505
Size
,003
,002
,133
1,318
,191
MB
3,485E-6
,000
,379
3,757
,000
LEV
,027
,011
,247
2,403
,019
COV
-,006
,002
-,289
-2,790
,007
a. Dependent Variable: Return On Assets
The results of Table 9 show that MB, LEV, and
COV have a significant effect on ROA
Table 10. Results of Model 3
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std.
Error
Beta
1
(Consta
nt)
,114
,138
,824
,412
IFRS
-,013
,008
-,140
-1,586
,117
Size
,019
,012
,142
1,669
,099
MB
2,778E-5
,000
,439
5,154
,000
LEV
-,159
,066
-,208
-2,397
,019
COV
-,029
,012
-,209
-2,389
,019
a. Dependent Variable: Return On Equity
Table 10 presents a significant and negative
relationship between ROE and LEV and between
COV and ROE. While it represents a positive and
significant relationship between Size and ROE and
between MB and ROE.
4.2.2 IFRS and Market Performance
Table 11. Results Model 4
Model
Unstandardized
Coefficients
Standardized
Coefficients
T
Sig.
B
Std. Error
Beta
1
Consta
nt)
-
187707595
58,688
7574536464,
739
-2,478
,015
IFRS
-
232865958,
783
444961930,7
52
-,049
-,523
,602
Size
-
223678459
3,563
759172067,9
97
-,268
-2,946
,004
MB
704802,748
315235,052
,215
2,236
,028
LEV
313497249
74,853
4216627072,
352
,675
7,435
,000
COV
570178695,
399
686710561,2
66
,077
,830
,409
a. Dependent Variable: Trading volume
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Table 11 shows the non-significant effect of
IFRS mandatory adoption on Trading Volume. It
also shows a significant effect of Size, MB, and Lev
on Trading Volume.
Table 12. Results Model 5
Model
Unstandardized Coefficients
Standar
dized
Coeffic
ients
T
Sig.
B
Std. Error
Beta
1
(Con
stant
8807994388,792
31647546063,724
,278
,781
IFRS
2490083682,130
7655134229,047
,036
,325
,746
Size
-
33482791679,88
0
9204632599,232
-,900
-
3,638
,000
MB
11707536,837
5254387,028
,261
2,228
,029
LEV
223925570216,8
07
59016050795,270
,892
3,794
,000
COV
10039082591,49
2
12046194347,156
,094
,833
,407
a. Dependent Variable: trading value
Table 12 shows the non-significant effect of
IFRS mandatory adoption on Trading Value. It
shows also a significant effect of Size, MB, and Lev
on Trading Value.
Table 13. Results Model 6
Model
Unstandardized
Coefficients
Standardized
Coefficients
T
Sig.
B
Std. Error
Beta
1
(Constant)
,038
1,355
,028
,978
IFRS
,777
,327
,283
2,376
,020
SIZE
,013
,322
,009
,041
,967
Market to
book
-2,784E-9
,000
-,035
-,261
,794
LEV
-,499
1,940
-,050
-,257
,798
Corona
Virus
-,890
,466
-,223
-1,911
,060
a. Dependent Variable: Growth rate
The analysis of the IFRS mandatory adoption on
the growth rate as shows in Table 13 indicates that
IFRS adoption is positively associated with growth
rate. Indeed, an examination of causal relations
shows that the coefficient associated with the link
between the adoption of IFRS and GR is positive
(2.376) and statistically significant (0.020). In
addition, the results show that the coefficient
associated with the link between the adoption of
IFRS and the Coronavirus variable is negative (-
1.911) and statistically significant (0.60). According
to these results, IFRS adoption increases the growth
rate
Table 14 summaries the results found conclude
that models are statistically significant and explain
the phenomenon.
5 Discussion
The study aims to determine the impact of IFRS
mandatory application on financial and market
performance using six criteria: Earning per share
(EPS) - return on equity (ROQ), return on assets
(ROA), trading volume (TVOL), trading value
(TVAL), and Market share price growth (MPG).
Since the variables were divided into variables
related to financial performance and others related
to market performance, the results of each group
will be discussed separately
With regard to the impact of the IFRS
mandatory transition on financial performance, the
results of the statistical analysis indicate that there is
no relationship between the mandatory application
and the rate of return on equity, which is the same as
what was reached by [35].
The results also indicate that there is no
relationship between IFRS obligatory adoption and
the return on assets, which is similar to what was
reached, [1].
The statistical analysis revealed that there is an
inverse relationship between IFRS mandatory
application and EPS, which means IFRS mandatory
adoption led to a reduction in profit, which may
mean the possibility of the existence of profit
management before applying the standards.
To investigate, the relationship between the
mandatory application and the profitability of the
banks was analysed, and the results came to indicate
that there is no relationship between the mandatory
application of IFRS and the profitability of the
banks as shown in Table (A-1, Appendix) and (A-2,
Appendix).
Table 14. Models Summaries
Model
R
R Square
Adjusted R
Square
Std. Error of the
Estimate
EPS
,666a
,444
,408
1,00089
ROA
,541a
,293
,248
,0058167763
ROE
,704a
,496
,464
,0338049365
Trading
volume
,667a
,445
,409
1852165084,80704
86000
Trading
Value
,401a
,161
,108
32580423707,9222
2
Growth rate
,282a
,080
,024
1,3638482140
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Zahra Tajuddin Abdelgader Ali
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This can be attributed to the fact that the
accounting work in Saudi banks is carried out in
accordance with the instructions of the Saudi
Monetary Agency, which represents a strong
enforcement agency, It agrees with the findings of a
study that the lack of a relationship between the
financial performance of companies and the
mandatory application of IFRS that operate in a
strong enforcement environment, In addition, Saudi
banks have started to gradually and voluntarily
implement IFRS since 2012.
The results of the statistical analysis also
showed that there is a positive effect of each of the
size and the market value to book value of equity
ratio on the financial performance of Saudi banks, in
addition, there is a negative impact of the Covid- 19
pandemic on the financial performance of banks, as
for financial leverage, its impact varied as it
negatively affected the return on equity and
positively on the return on assets.
As for the market performance, the results of the
regression analysis indicate that there is no
relationship between the mandatory application and
both the trading value and the trading volume. Also,
the results show IFRS mandatory adoption has a
positive impact on the growth rate. This means
IFRS mandatory adoption has relatively improved
market performance.
This can be attributed to that the Saudi market
has gone through many changes during the study
period, most notably
1- The launch of the Kingdom’s Vision 2030 and
the subsequent reform procedures,
2- Inclusion Saudi Stock Exchange in the MSCI
Emerging Market Index, - which has shown that the
market’s reaction reflects positive signals in both
the long and short terms, which would improve the
quality of the market.
3- Covid-19 pandemic, which led to a global
economic downturn.
6 Limitations of the Study
The study sample is limited to Saudi banks that have
the necessary data during the period from 2012 to
2020.
These results are correct with regard to the
indicators that were relied upon, and accordingly,
the results may differ if other indicators are used.
The results are also correct regarding data for
the period from 2012 to 2020, and perhaps if the
period expands, we may reach other results.
7 Conclusion
The research aimed to study the impact of the
mandatory application of international financial
reporting standards on the financial and market
performance of Saudi banks. Data was collected on
financial performance indicators, which were
earnings per share, return on assets, return on
equity, trading volume, trading value, and market
price growth rate during the period from 2012 to
2020, excluding the year 2016 as the year of the
transition. The study concluded:
1- There is no relationship between the IFRS
mandatory application and return on assets, return
on equity, trading volume, and trading value.
2- There is a statistically significant negative
relationship between IFRS mandatory adoption and
earnings per share.
3 - There is a positive relationship between
mandatory adoption and the growth rate of the
market price, which means IFRS mandatory
implementation led to an increase in the growth rate.
4- The statistical results also indicated that the
Corona pandemic has negatively affected the
performance of Saudi banks.
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Zahra Tajuddin Abdelgader Ali
E-ISSN: 2224-2899
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Volume 21, 2024
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APPENDIX
Table A-1 Descriptive Statistics to Earnings
N
Minimum
Maximum
Mean
Std.
Deviation
Earnings
Per Share
83
-2,010
5,616
2,236
1,301
Size
83
6,550
8,781
8,164
,341
MB
83
782,730
3903,551
1702,51
736,193
LEV
83
1,100
1,472
1,185
,061
Valid N
(list wise)
83
Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
The authors equally contributed in the present
research, at all stages from the formulation of the
problem to the final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
No funding was received for conducting this study.
Conflict of Interest
The authors have no conflicts of interest to declare.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
_US
Table A-2 Results about earnings regression
Model
Unstandardized
Coefficients
Standardi
zed
Coefficien
ts
t
Sig.
B
Std. Error
Beta
1
(Const
ant)
-
59792577,
089
6826596,
567
-
8,759
,000
IFRS
109080,72
2
400708,1
13
,018
,272
,786
SIZE
6539865,3
86
580203,4
25
,716
11,27
2
,000
MB
1609,600
258,639
,392
6,223
,000
LEV
6090401,5
17
3269837,
487
,120
1,863
,066
COV
-
320074,78
5
596900,4
14
-,035
-,536
,593
a. Dependent Variable: Earnings
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.48
Mona Hassabelrasoul Mohammad,
Lamia S. Shehab, Hela Turki,
Zahra Tajuddin Abdelgader Ali
E-ISSN: 2224-2899
587
Volume 21, 2024
