Unraveling the impact of IFRS 9 expected credit loss model in the banking sector: an event study analysis

Purpose This study aims to draw upon the efficient market hypothesis (EMH) to illuminate the role of the International Financial Reporting Standard (IFRS) in shaping investor perceptions and financial outcomes. Particularly, it delves into investigating the effect of IFRS 9 on the variation in stock returns. Design/methodology/approach This study uses an event study methodology to investigate whether the adoption of IFRS 9 has a significant impact on the performance of banks listed on the Amman Stock Exchange (ASE). The analysis is divided into two distinct approaches: the first examines the immediate effects of IFRS 9 during the first quarter of 2018, coinciding with its initial adoption. The second approach assesses the implications of IFRS 9 in the subsequent quarters. This dual approach clarifies the significance of IFRS 9 in the banking sector. Findings The results of the event analyses reveal an adverse market reaction to the IFRS 9 post-adoption effect in the retained earnings, accounting for all financial instruments held prior to 2018. Likewise, there was further evidence of a negative market response to the Expected Credit Loss (ECL) post-adoption provisions. The results suggest that investors in Jordan’s banking sector viewed retained earnings and earnings surprises under IFRS 9 less favorably than those under International Accounting Standard (IAS) 39, indicating that the reported deterioration in retained earnings and overall earnings was more severe than the market had anticipated. This suggests that the mandatory transition to IFRS 9 may not have provided advantages for investors in emerging markets, as it exposed them to significant wealth declines and potential losses in future cash dividends. Practical implications This study provides essential recommendations to the regulatory agencies in Jordan and other developing markets. Strengthening the regulatory framework is crucial to mitigate the impact of new accounting standards, such as IFRS 9, on banks’ financial results. By enhancing regulatory oversight, authorities can help reduce the adverse effects of these standards on bank performance and minimize investor shock during their implementation. These improve investor confidence when adapting to significant regulatory changes. Originality/value This study is among the first attempts to provide empirical evidence and insight into the impact of IFRS 9, particularly the implementation of the ECL model, on banks’ earnings, the adoption effect on retained earnings, and, in turn, on stock returns in a developing country.