European Financial and Accounting Journal 2010, 5(3):84-112 | DOI: 10.18267/j.efaj.57

ROE and Value Creation under IAS/IFRS: Evidence of Discordance from French Firms

Mohamed El Hedi Arouri1, Aldo Lévy2, Duc Khuong Nguyen3
1 Prof. Mohamed El Hedi Arouri - Associate Professor of Finance, University of Orleans & EDHEC Business School, Rue de Blois - BP 6739, 45067 Orléans cedex 2, France; .
2 Prof. Aldo Lévy - Professor of Management Accounting, GREG-CRC, CNAM, 292 Rue Saint-Martin, 75003 Paris, France; .
3 Prof. Duc Khuong Nguyen - Associate Professor of Finance, ISC Paris School of Management, 22 Boulevard du Fort de Vaux, 75017 Paris, France; .

This paper re-examines the effects that adoption of the International Financial Reporting Standards (IFRS) has had on financial reporting of French listed firms. By analysing the 2004 financial statements of CAC 40 companies, we show that the transition to the IAS/IFRS has a significant impact on the return on equity (ROE) of considered firms by increasing it by 25 basis points on average, compared to the French GAAP. This finding thus suggests an amplified degree of discordance between the ROE, as a crucial measure of firm performance, and the value creation process following the IFRS adoption. From a theoretical viewpoint, Merton (1987)'s capital asset pricing model (CAPM) with incomplete information, which claims its convergence to its traditional version through the reduction of information costs, cannot in fact be valid, owing to divergences in the assessment of a firm's performance.

Keywords: Financial leverage, IAS, IFRS, Return on equity
JEL classification: L25, M41

Published: October 1, 2010  Show citation

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Arouri, M.E.H., Lévy, A., & Nguyen, D.K. (2010). ROE and Value Creation under IAS/IFRS: Evidence of Discordance from French Firms. European Financial and Accounting Journal, 5(3), 84-112. doi: 10.18267/j.efaj.57
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