From 2005 onwards, consolidated financial statements of listed European companies of around 7,000 had to comply with IFRS (IAS). This study examines the impact of IFRS adoption on the stock market volatility of 10 European stock markets by fitting Autoregressive Conditional Heteroskedasticity (ARCH) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models. The data was obtained from yahoofinance.com for the period January 1, 2005 to December 31, 2005. The stationarity of the time series was checked through unit root test and then descriptive statistics of different stock indices was obtained. The ARCH model was applied to check the presence of ARCH effect in all return series and GARCH(1, 1) model was used to estimate the return volatility. The results suggested that there was high volatility of returns in the markets during the sample period. The GARCH coefficient of Austria, France, Germany, Hungary, Spain and the United Kingdom was close to 1, which indicates that volatility shocks were quite persistent. The coefficient of the lagged squared returns was also positive for these indices, and it implied that stock market volatility or market operators react more to good news than bad news, or the market is positive about the adoption of IFRS. On the other side, the IFRS adoption news did not affect the volatility of Greece, Italy, the Netherlands and Portugal during the sample period.

The aim of International Financial Reporting Standards (IFRS) is to provide a general direction for the preparation of financial statements and not to set the rules for industry-specific reporting. IFRS adoption increases the process of harmonization of accounting standards worldwide. Substantial works have been done not only by the European Union (EU) but also by the International Accounting Standards Board (IASB) since the 1970s to harmonize accounting rules in different countries. The purpose was only to improve the usefulness of financial information in the international context. According to the American Institute of Certified Public Accountant (AICPA), a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier by adopting IFRS. Besides, companies with subsidiaries in countries that require or permit IFRS may be able to prepare accounts by one method. A subsidiary of a foreign company may also need to convert its accounts by IFRS or if they have a foreign investor that must use IFRS. Companies may also benefit by using IFRS if they wish to raise capital abroad. Hail et al. (2009) described that one of the benefits of moving to IFRS is that it can enhance the liquidity of capital markets and reduce companies’ costs of capital by providing investors with better information on corporate performance. The benefit to investors could also lead to more-informed valuation of equity markets, reducing the risk of adverse selection for the less-informed investors.

Alternatively, there is a big disadvantage about companies in Europe adopting IFRS, like the current and future accountants had to relearn how to do their jobs. Though it does not seem to be a problem, it is something to be considered because the accountants are still learning how to prepare financial statements under IFRS. One more fact is that IFRS necessitates application of fair value principles in certain situations. This would result in significant differences from financial information that are currently presented, especially relating to financial instruments and business combinations. This could have resulted in significant volatility in reported earnings and key performance measures like EPS and P/E ratios. This instability in reported earnings can lead to volatility in the returns of a stock market of a country. On the other side, all the benefits rely on the presumption that mandatory IFRS adoption provides superior information to market participants compared to previous accounting regimes, and this can affect the stock market positively.

Applied Finance Journal, International Financial Reporting Standards (IFRS), European Union (EU), International Accounting Standards Board (IASB), Autoregressive Conditional Heteroskedasticity (ARCH), Generalized Autoregressive Conditional Heteroskedasticity (GARCH), The Impact of IFRS, FRS (IAS), Stock Market Volatility.