Investor sentiment, IFRS and market mispricing in emerging economies
Lineker Costa Passos, Marcio MachadoPurpose
This study investigates whether the adoption of International Financial Reporting Standards (IFRS) moderates the relationship between investor sentiment, both local and global, and subsequent asset returns in emerging markets. We explore whether IFRS adoption mitigates the effects of local sentiment while amplifying the transmission of global sentiment due to increased market integration.
Design/methodology/approach
Using firm and country-level data from nine emerging markets between 2004 and 2019, we employ portfolio-based tests and panel regressions with fixed effects. We construct value-weighted market portfolios and six long–short portfolios for each country to capture hard-to-value firm characteristics. Robustness checks include alternative sample compositions and time windows as well as additional analyses addressing treatment timing heterogeneity and the plausibility of the Difference-in-Differences identification strategy.
Findings
Results indicate that IFRS adoption attenuates the association between local investor sentiment (LIS) on subsequent returns while amplifying the influence of global sentiment. These findings suggest that improved information quality reduces the influence of local sentiment on asset prices, whereas increased financial integration strengthens cross-market sentiment spillovers. The evidence is particularly robust in the aggregate-level tests, while firm-level results are more heterogeneous across sentiment-sensitive portfolios.
Research limitations/implications
The analysis focuses on MSCI emerging markets with available data, and future research could extend the framework to firm-level sentiment measures and other institutional settings.
Originality/value
This study extends the investor sentiment literature by linking IFRS adoption to changes in sentiment propagation mechanisms across emerging markets, providing novel evidence on the informational and contagion effects of accounting harmonization. In particular, it highlights a trade-off whereby IFRS adoption may simultaneously mitigate local sentiment effects and increase exposure to global sentiment transmission.