European stock markets could be heading for a patch of rough water with the introduction of new accounting standards, analysts are warning, saying that stock prices could be bounced around and initial public offerings held back.
New accounting standards will apply to the 7,000 companies quoted on European stock markets from January 2005.
The new rules are intended to improve the quality of financial information produced by quoted companies in order to facilitate comparison of companies in the same sector, thereby improving judgements that determine a company's valuation.
At the International Financial Reporting Standards (IFRS) within Morgan Stanley, the director of research for the new standards, Jeannot Blanchet, explained: "This will be anything but a smooth transition for investors.
"There are likely to be 18-24 months of transition and volatility on stock markets."
The Paris region accountancy body said the companies most affected are likely to be those of medium capitalisation (less than a billion euros) that have not prepared sufficiently far ahead.
They might have to delay publication of their results, which would trigger panic selling of their shares owing to fears the delay might be caused by financial problems.
Blanchet commented: "This will be an excellent market for hedge funds that will identify the problems beforehand and seek out companies that have been overtaken by events. These funds will make very big profits in a very short time."
Another problem could arise from unexpected adjustments of accounts that might surprise some unprepared investors. Few investors are of the implications of the new standards and the effects they will have on balance sheets.
The introduction of the new standards might also slow down initial public offerings because a company wanting a stock flotation in 2005 will have to produce for stock market authorities a calculation of the effects of the new standards in addition to a balance sheet for 2004 under the "normal" rules.
At Euroland Finance, which specialises in IPOs, the head of the IPO division Cyril Temin said: "Small and medium independent companies and family businesses that do not have enough money to present the figures in time, will be tempted to delay plans for a stock market listing.
"This slowdown will be particularly noticeably with regard to small and medium companies. On the other hand, big groups or companies in the hands of investment funds - accustomed to adapting to this kind of accounting requirement - will not be slowed down in their march towards an IPO."
The head of PriceWaterHouse Coopers London Capital Markets Group, Tom Troubridge, said: "There will be a clear pause in European IPOs in 2005 and at least until 2006."
In the third quarter of this year several small and medium companies obtained a place on European stock markets, notably in London and Paris.
PriceWaterhouseCoopers have identified 269 such IPOs in Europe in the first nine months of this year from 71 in 2003.
Blanchet commented: "It will take four or five years for the switch to the new standards to show benefits on the stock market."
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