This paper examines the European stock market reaction to key events predicted to affect the adoption of International Financial Reporting Standards (IFRS) in Europe, including adoption of the controversial standard on financial instruments, IAS 39. This enables us to assess perceptions of equity investors regarding the relative costs and benefits of increased harmonization under IFRS, as well as the move towards greater use of fair value accounting under IAS 39. Overall, our analyses provide evidence that the European equity markets responded positively (negatively) to events that increased (decreased) the likelihood of adoption of IFRS. This is consistent with European equity investors perceiving that the benefits of harmonized accounting standards under IFRS would outweigh the costs of implementation and any reduced local accounting diversity. As predicted, additional analyses provide evidence that these responses were accentuated for firms not cross-listed in the U.S., suggesting investors perceived greater net benefits would accrue to this type of firm. Overall, our findings are consistent with European equity investors favoring harmonization under IFRS.