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Adopting a Label: Heterogeneity in the Economic Consequences around IAS/IFRS Adoptions
Abstract
This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these predictions, we classify firms into ‘label’ and ‘serious’ adopters using firm-level changes in reporting incentives, actual reporting behavior, and the external reporting environment around the switch to IAS/IFRS. We analyze whether capital-market effects are different across ‘serious’ and ‘label’ firms. While on average liquidity and costs of capital often do not change around voluntary IAS/IFRS adoptions, we find considerable heterogeneity: ‘Serious’ adoptions are associated with an increase in liquidity and a decline in cost of capital, whereas ‘label’ adoptions are not. We obtain similar results when classifying firms around mandatory IFRS adoption. Our findings imply that we have to exercise caution when interpreting capital-market effects around IAS/IFRS adoption as they also reflect changes in reporting incentives or broader changes in firms’ reporting strategies, and not just the standards.
... The International Financial Reporting Standards (IFRS) is a recent and globally recognized set of accounting standards that have been recommended and adopted by several countries across the globe due to its proposed benefits of increased transparency and comparability (IFRS Foundation 2019). The marginal benefits of IFRS adoption can be summarized in terms of an increase in transparency, comparability, and disclosure of financial information (Daske et al. 2013). These benefits make IFRS standards more capable of being generally acceptable compared with most local GAAP standards in Sub-Saharan Africa. ...
... Some found positive relationship between IFRS adoption and stock market liquidity (Sawan and Alsaqqa 2013;Ben Cheikh and Ben Rejeb 2021;Opare, Houqe, and Van Zijl 2021;Li et al. 2021;Deef and Radi 2022) while some did not find any positive relationship (Okoye, Okoye, and Ezejiofor 2014;Silva and Nardi 2020). A few studies also discovered mixed results (Daske et al. 2013;Gao, Jiang, and Zhang 2019;Khan et al. 2021). ...
... Following this result, we reject the second null hypothesis (H 02 ) for Kenya but do not reject the same for Nigeria and South Africa. The result for Kenya is similar to those of Daske et al. (2013), Sawan and Alsaqqa (2013), and Gao, Jiang, and Zhang (2019). The result for South Africa is similar to that of Sherman and De Klerk (2015) who found IFRS to have an insignificant impact on market liquidity and comparability of financial statements. ...
The International Financial Reporting Standards (IFRS) is a set of global accounting standards that tries to provide truer and fairer accounting figures by recommending more realistic measurement and recognition criteria, increasing the disclosure of relevant information, and increasing the comparability of financial statements across borders. Most of the literature on IFRS adoption addresses its impact on the value relevance of accounting figures but ignores the wider picture in terms of impact on stock market performance. The few studies that address IFRS adoption and stock market performance focus on advanced economies and lack proper theoretical underpinning. This study addresses the impact of IFRS adoption on stock market performance in Sub‐Saharan Africa. The study applied the autoregressive distributed lag model to test the research hypotheses. The Johannesburg, Nigerian, and Nairobi stock exchanges were selected as the sample markets because they constitute the major frontier markets for foreign investors wishing to penetrate the Sub‐Saharan African market. The sample period was from 1990 to 2020. The results of the study showed that IFRS adoption had a positive and significant impact on market efficiency and size for all the selected countries. IFRS adoption had a positive and significant impact on market liquidity in Kenya only. The study recommends that IFRS adopters should implement stock market policies that encourage the participation of foreign investors following the increase in financial statements comparability brought about by IFRS adoption.
... In addition, we follow the same sample selection process in relation to US listed insurance undertakings and use these as a control sample for Difference-in-Differences (DiD) analysis. 13 As in Daske et al. (2013) and Horton et al. (2013), the choice of the sample of US insurers is deemed appropriate because the reporting regime for US listed insurers remained unchanged throughout the period examined. 14 The sample selection process is summarised in Table 1. ...
... This approach is taken to prevent the duplication of firms that have cross listing in multiple stock markets. 14 Similar with Daske et al. (2013) and Tsalavoutas and Tsoligkas (2021), we use the Worldscope item "accounting standards followed" (WC07536) to verify that the treated and control sample firms follow the same accounting standards (IFRS and US GAAP, respectively) and thus ensure comparability of accounting information across the two samples. 15 It is noted that for all, but one firm in the sample, fiscal year end is 31 December. ...
... Finally, in terms of country-specific variables, the EEA sample is characterised by lower levels of insurance penetration (INSUR_PEN, p<0.01) but higher levels of market volatility (MRKVOL, p<0.01) and unobservable risk premium (MRKDY, p<0.01). It is not unusual the characteristics of the control and treated samples to be different (e.g., Daske et al., 2013;Horton et al., 2013). To alleviate any concerns that our results are driven by differences in these two samples, in the robustness tests section, we report results on tests where we use entropy balancing that reduces the potential influence of different sample characteristics. ...
From 1 st January 2016, insurance firms in the European Economic Area (EEA) are required to adhere to the Solvency II regulation. As such, for the first time ever, insurance firms started to provide mandatory market, risk-related, disclosures on an annual basis via the publication of a single report: the Solvency and Financial Condition Report (SFCR). Considering that analysts are perceived as the main recipients of the report, this study tests whether and how analyst forecast properties (i.e., absolute forecast error, dispersion and forecast bias) change following the provision of Solvency II related information. Using a sample of EEA insurers for the period between 2012 and 2021 and a difference-indifferences design, we find an improvement in properties of analysts' forecasts in the post Solvency II period. Specifically, while we find no change in analysts' forecast bias, we show a reduction in analysts' absolute earnings forecast errors, both at the consensus and individual analyst's levels, and forecast dispersion. The findings extend the financial and risk-based reporting literature in the insurance industry and contribute to the wider analyst related literature in relation to changes in the reporting landscape. The study also informs the relevant regulatory authorities regarding the beneficial effects of Solvency II disclosures.
... In this case, IFRS adoption could be part of a broader set of changes (Daske, Hail, Leuz, & Verdi, 2013). Furthermore, even if IFRS were used in a country, the company's reporting process would continue to be greatly influenced by its primarily local contributing institutional factors, including taxation, laws and financing (Ball, 2006). ...
... Thus, the contrasting argument does not show that accounting standards do not matter at all. It also cannot be attributed to the accounting standards alone, but likely also reflects the differences in firms' underlying motivations for IFRS adoption (Daske et al., 2013). ...
Purpose
The purpose of this study is to focus on, namely, the international financial reporting standards (IFRS) or local generally accepted accounting principles (GAAP) effects of financial reporting as a corporate governance mechanism on mergers and acquisitions (M&As) for banking institutions during the global financial crisis.
Design/methodology/approach
I investigate the characteristics of bank financial statements before the start of the global crisis, which helps to explain the relationships between the accounting standards and the global financial crisis. The observations, which are based on 3,178 deals in a sample period, are crucially important for corporate governance and bank performance. The results from our analysis are robust to a wide variety of modifications in our research design and are corroborated by descriptive statistics, one-way ANOVA and a two-sample t -test on a sample of banks that voluntarily adopted IFRS for M&As.
Findings
The find that IFRS-based monitoring of banks M&As in terms of higher quality financial reporting is negatively linked with bank performance, whereas local GAAP-based monitoring of banks’ M&A is positively associated with accounting performance. Finally, our main results for higher quality financial reporting under local GAAP or IFRS generally hold after controlling for various analyses and relationships between account standards and the financial crisis.
Practical implications
Financial reporting standards setting a corporate governance mechanism are considered since it was impacted recently during the global financial crisis and became a great matter of concern.
Originality/value
The value of this paper is determined by an empirical investigation of the relationships between bank performance and accounting and financial reporting standards in the context of the global economy.
... These standards aim to promote consistency and comparability in financial reporting, making it easier for investors, creditors, and other stakeholders to assess a company's financial position and performance. 1. Ensure the quality of financial reporting: The primary purpose of international cash accounting standards is to ensure the accuracy, transparency, and comparability of financial statements. ...
... 5. The impact of international cash accounting standards can vary depending on the industry and firm size. A study by Daske et al. (2013) found that the impact of international cash accounting standards on financial statements varied by industry and firm size, with some industries and larger firms experiencing more significant effects. ...
The adoption of international cash accounting standards by enterprises has become an important topic in the accounting and finance literature. This study assesses the impact of these standards on the financial statements of a sample of enterprises, including their net income, total working capital, and cash flows. The study finds that the adoption of international cash accounting standards leads to improvements in financial reporting quality, including increases in net income, total working capital, and cash flows from operating activities. The study also discusses the advantages and disadvantages of adopting these standards and provides recommendations for improving cash accounting in enterprises based on international standards. Overall, this study contributes to our understanding of the impact of international cash accounting standards on enterprises and provides valuable insights for practitioners, policymakers, and researchers.
... Consistent with the familiarity assumption, Amiram (2012) argues that an increase in foreign investors' confidence resulting from operating in a familiar accounting-based environment, such as IFRS adopting country leads to more foreign investment in the host country. Daske et al. (2013) argue that comparability is fundamental to investor decision-making. Accordingly, Tweedie and Seidenstein (2005) claim that the global adoption of IFRS could facilitate cross-border investments by increasing the comparability of financial statements between countries (see Caban-Garcia et al., 2020). ...
... Hence the use of international standards is imperative for easy monitoring and comparison of financial performance (Ball, 2006(Ball, , 2016. Empirically, at the firm level, there is plentiful and almost unanimous evidence that IFRS improve the comparability and transparency of financial reporting (Agostino et al., 2011;Alali & Foote, 2012;Armstrong et al., 2010;Barth et al., 2008;Daske et al., 2013;Daske & Gebhardt, 2006;Elbakry et al., 2017;Hail et al., 2010;Houqe et al., 2012;Iatridis & Rouvolis, 2010;Lee et al., 2018;Miah et al., 2021;Tawiah & Gyapong, 2021). In a literature review, Houqe (2018) reports that IFRS adoption positively influences the capital market via a reduction in information asymmetry, improvement in transparency, and comparability of financial statements. ...
Banking is one of the highly regulated industries, where a single set of global standards is likely to play a significant role in eliminating double reporting and reducing information asymmetry. Accordingly, we use data on 98 countries over 9 years to examine whether the use of International Financial Reporting Standard (IFRS) drives bank internationalisation. The results show that the use of IFRS is positively and significantly associated with an increase in foreign investment in the banking sector by easing regulatory compliance. However, in developing countries, the benefit of IFRS increasing foreign investment banks is associated with both easing regulatory compliance and reducing information asymmetry between banks and their clients. Our results are consistent across different sub‐samplings, including EU versus non‐EU, high versus low absence, and divergence between domestic standard and IFRS. These results provide reassurance and clear evidence of how IFRS facilitates the global flow of capital, even in a highly regulated industry such as banks. The results are robust to alternative measurements of variables and endogeneity tests using the Two‐Stage Least Square, Two‐step System Generalised Method of Moments and Propensity Score Matching.
... Previous studies indicated that comprehensive information disclosure can mitigate information asymmetry and enhance market liquidity (Bushee and Leuz, 2005). Additionally, research by Armstrong et al. (2010); Daske et al. (2013); DeFond et al. (2011); Florou and Kosi (2015); Marra and Mazzola (2014) supported the positive capital market outcomes associated with IFRS adoption. ...
Manuscript type: Research paper. Research aims: This study aims to explore the determinants of voluntary IFRS application in listed firms in Vietnam. Design/methodology/approach: Analyzing data from 552 public companies listed on the Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange during 2019–2022, this study employs a logistic model with robust analysis. Research findings: The findings indicate that voluntary IFRS application is positively associated with firm size, leverage, internationalization, corporate efficiency, state ownership, and foreign ownership. Particularly, internationalization has the most significant impact on voluntary IFRS application. Theoretical contribution/originality: These findings of this study align with positive accounting theory, which proposes how factors affect voluntary IFRS application. Practitioner/policy implications: Policymakers should consider these findings when developing or revising policies concerning voluntary IFRS application, particularly for state-owned and foreign-owned companies. Research limitation: This study spans from 2019 to 2022, during which economic and regulatory conditions may have fluctuated, potentially impacting the results. Moreover, the data on voluntary IFRS adoption were collected through surveys, which may be subject to respondent bias and dependent on participants’ understanding and willingness to provide accurate information.
... Nevertheless, the narrative surrounding this subject is multifaceted. Certain studies, such as those by Daske et al. (2013), have unveiled mixed outcomes, with a more noticeable positive influence on FRQ observed in developed nations with robust regulatory frameworks. Critics like Nobes (2008) also contend that the standardised nature of IFRSs may not be universally applicable, particularly in economies with distinct accounting customs or weaker enforcement mechanisms (Amin et al. 2023;Babu and Kushwaha 2024). ...
This research delves into the influence of adopting international financial reporting standards (IFRSs) on the financial reporting quality (FRQ) of Indian multinational corporations (MNCs). It also investigates the moderating impact of the internal control system (ICS) on the relationship between IFRSs and FRQ. The data collection involves a survey using a previously validated and adjusted scale from earlier studies. A sample of 512 participants is selected through purposive sampling methods. The analysis employs partial least square structural equation modelling (PLS-SEM) to validate the data and test the hypotheses. The results indicate a significantly positive influence of perceived benefits, perceived ease of implementation, and government policy on IFRS adoption within Indian MNCs. However, the impact of legal requirements on IFRS adoption in Indian MNCs is insignificantly positive. Furthermore, adopting IFRSs substantially positively affects FRQ within Indian MNCs. Similarly, FRQ significantly positively affects the relevance, accuracy, understandability, comparability, and timeliness of MNCs’ financial reports in India. The moderating role of the ICS in the connections between IFRS adoption and FRQ is positive yet insignificant within Indian MNCs. The insights derived from this study are valuable for investors, shareholders, government authorities, financiers, board members, and top executives of organisations.
... Previous research has provided mixed results on the relationship between sustainability reporting and value relevance. For example, some studies have found a positive relationship between sustainability reporting and value relevance (Botosan and Plumlee, 2013;Cho et al., 2015), while others have found no significant relationship (Cheng et al., 2014;KPMG, 2014) or a negative relationship (Dam and Scholtens, 2013;Daske et al., 2013). ...
Purpose
This study aims to establish whether accounting research articles can be potentially generated by artificial intelligence. If artificial intelligence can produce quality work, the integrity of academic research may be compromised.
Design/methodology/approach
ChatGPT was used to create a paper on a meta-analysis of the relationship between sustainability reporting and value relevance. After the paper was generated, references had to be added by hand based on the citations created by ChatGPT. The paper was then presented as-is for review.
Findings
ChatGPT was able to create a relatively good-quality research paper that received two major revisions from independent specialists in the field of accounting and finance. Even though there is uncertainty regarding the appropriateness of all the references and the results cannot be confirmed, there is a risk that a reviewer may find the paper publishable because reviewers are not compelled to check references and the accuracy of results if proper methods were used that appear to be sufficient at face value.
Originality/value
Artificial intelligence for academic writing is still relatively new, and there is still significant uncertainty as to the impact it may have on scholarly research. This is especially problematic because artificial intelligence applications improve by the second.
... Majority of IFRS-based prior studies have used a cross-country approach(Cao and Patel, 2020;Benson, et al., 2015;Linnenluecke, et al., 2017;Daske, et al., 2013). ...
This paper investigates how private and public firms vary with respect to unconditional conservatism in financial reporting in the pre and post IFRS worlds. I consider unconditional conservatism (UC) which pre-empts the more commonly studied conditional conservatism, private firms that are differently regulated, IFRS convergence instead of the more uniform IFRS adoption and an emerging market. Using a large Indian sample of 63,000 observations across more than 15,500 firms (~41% are private) over 10 years (2011-2020), I show that private firms are less unconditionally conservative than public firms. Also, contrary to literature, IFRS convergence increases conservatism in India and reduces the conservatism gap between private and public firms. These results hold even after controlling for monitoring, governance, and group-affiliation. This adds significantly to our understanding of how the effect of uniform accounting standards on reporting choices of different firm types varies significantly by and within a context and region.
... this entails delivering clear and comprehensible disclosures, adhering to accounting standards, and furnishing timely and precise financial reports. By adhering to these practices, cross-listed companies can bolster investor confidence, augment access to capital, consequently fostering improved financial performance and growth (chen et al., 2019;Daske et al., 2013;lang et al., 2006;leuz, 2006). ...
... this entails delivering clear and comprehensible disclosures, adhering to accounting standards, and furnishing timely and precise financial reports. By adhering to these practices, cross-listed companies can bolster investor confidence, augment access to capital, consequently fostering improved financial performance and growth (chen et al., 2019;Daske et al., 2013;lang et al., 2006;leuz, 2006). ...
In today’s globalized competitive landscape several dimensions such as labour, markets and capital are integrated. As a result, companies attempt to gain inbound foreign capital. To achieve that they investigate away countries to host their operations and to trade their shares. While the concept of cross-listing strategy provides several benefits to companies, it has also critical challenges that companies are called to tackle. Different legal systems set different boundaries to investors power. With the application of criterion sampling, we utilize a multiple regression analysis in the European stock exchanges, for a period of eight years, and we investigated the impact of legal origins on financial statements’ value relevance. The findings indicate that common law countries offer a more beneficial environment for cross-listing strategies, as they demonstrate greater value relevance in financial statements compared to civil law countries. Specifically, our results show that both Profit or Loss and Balance Sheet items are more relevant in common law countries compared to civil law countries.
... في يار دراستي أكدت فقد المحاسبية المعلومات لجودة المعززة النوعية الخصائص أحد للمقارنة القابلية وتعد أن وأوضحت للمقارنة، المالية التقارير قابلية زادت كلما تنخفض األسهم أسعار انهيار خطر أن علي أسعار خطرإانهيار حول المستثمرين تصورات من يقلل مما السيئة األخبار اكتناز عن المديرين تعرقل المالية التقارير مقارنة قابلية للمقارن للقابلية ويمكن المستقبل، في األسهم مقابل السيئة المعلومات عن اإلفصاح علي المتماثل غير السوق فعل رد من تخفف أن ة الجيدة. المعلومات المالية التقارير إلعداد الدولية المعايير تطبيق أن علي الدراسات من العديد أكدت الشأن بهذا ا ً وارتباط IFRS العوامل أهم من القابلية وتحسين المالية، التقارير إعداد عملية شفافية تعزيز خالل من المالية التقارير إعداد بيئة تحسين في كبير بشكل تساهم التي المعلومات تماثل عدم وتخفيض للمقارنة، (Gassen&Sellhorn,2006;Daske et al.,2013;Chatham, 2008;Chen et al., 2010; Lateridis, 2010;Cohen et al., 2013) . توصلت حيث األسهم، أسعار انهيار خطر حدوث محددات من تعتبر المالية التقارير إعداد بيئة أن على دراسات عدة أكدت فقد المالية التقارير إلعداد الدولية المعايير تطبيق أن إلى الدراسات تلك IFRS انهيار خطر من تحد التي الرئيسية المحددات من تعتبر من والحد المالية، التقارير غموض مستوي وتخفيض الشفافية، وتعزيز المالية التقارير بيئة تحسين خالل من وذلك األسهم، أسعار السيئة األخبار حجب علي التنفيذيين المديرين قدرة (Bleck&Liu, 2007; DeFond et al.,2015; Hutton et al., 2009; المالية التقارير إلعداد الدولية المعايير تطبيق يؤثر أن المرجح ومن IFRS آليات خالل من األسهم أسعار انهيار خطر علي يؤدي مما المعايير تلك تتطلبها التي اإلضافية اإلفصاحات في الليات هذه إحدى وتتمثل الصافي. ...
... The authors, however, warn that the adoption event may be conflated with other institutional changes made to promote globalization around the same time. In addition, the voluntary adoption of IFRS has an inherent self-selection bias regarding firms' incentives to adopt IFRS, either legitimately or merely as a label (Daske et al., 2013). Christensen et al. (2015) explore Barth's model in the German setting where firms were initially voluntary and later mandated adopters. ...
... become legitimate and taken-forgranted practices (Meyer & Rowan, 1977;DiMaggio & Powell, 1983). Indeed, accounting scholars, such as Carmona and Trombetta (2008) and Daske et al. (2013), differentiate between 'adopters': ...
IMPACT This study shows that consolidated financial accounts (CFAs) do not only appear to be useful from a municipal financial accounting perspective. For serious adopters, who change their behaviour and adapt their strategy in line with the information provided, CFAs seem to be a powerful tool for monitoring and governance purposes. ABSTRACT The authors analyse the effect of deregulation in the case of the removed requirement for Swedish municipalities to prepare consolidated financial accounts (CFAs) in their interim reports. The findings show that deregulation led to a statistically significant, but not substantial, reduction in CFAs. Municipalities with many municipal corporations tended to continue preparing CFAs. CFAs therefore appear to be more than a compliance exercise, as they are being used for monitoring and coordination purposes.
... Overall, the model's likelihood ratio (F-statistics) indicates a significant fit for characterising the relationship between the explanatory variables (CMAS, FS, and LEV) and the mediating variable (ROA), with a p-value of less than 0.001. In summary, based on the results in Table 2, firm size (FS) and financial leverage (LEV) have significant direct effects on profitability (ROA), while compliance assessment (CMAS) does not show a significant direct effect This is consistent with the findings of research by authors like Daske et al, (2013) organization's internal adoption of IFRS and its financial performance. However, Akinlo and Oladipupo,(2017), Olowe et al. (2019),Okorie and Adegbite, (2019), Epstein and Jermakowicz,(2010) contend that IFRS have a the duties to supervise and checkmate the management activities, which will minimise the agency problem because they are also powerful and they can bear the expense of successful oversight and be involved in board decision-making, resulting in better firm performance. ...
his study examined the impact of International Financial Reporting Standards (IFRS) on the firm performance of listed manufacturing companies in Nigeria. With the adoption of IFRS, companies have experienced significant changes in their accounting and reporting practices. However, the specific effects of IFRS adoption on the manufacturing sector in Nigeria remain understudied. Using a quantitative research approach, data was collected from a sample of listed manufacturing companies in Nigeria. The sample was selected through purposive sampling, considering criteria such as company size, financial performance, and level of IFRS adoption. Statistical techniques, including regression analysis, was employed to analyze the data and investigate the relationship between IFRS adoption and firm performance. The study focused on exploring the impact of IFRS adoption on various dimensions of firm performance, including profitability, liquidity, and solvency measures. Control variables such as company size, age, leverage, and industry-specific characteristics will be considered to isolate the effects of IFRS adoption. The findings of this study contributed to the existing literature by providing insights into the specific impact of IFRS adoption on the firm performance of listed manufacturing companies in Nigeria. The research outcomes will inform policymakers, regulators, and industry practitioners about the challenges and opportunities associated with implementing IFRS in the manufacturing sector. Additionally, the study will identify areas where further improvements can be made in the application and implications of IFRS in the Nigerian context.
... Overall, the model's likelihood ratio (F-statistics) indicates a significant fit for characterising the relationship between the explanatory variables (CMAS, FS, and LEV) and the mediating variable (ROA), with a p-value of less than 0.001. In summary, based on the results in Table 2, firm size (FS) and financial leverage (LEV) have significant direct effects on profitability (ROA), while compliance assessment (CMAS) does not show a significant direct effect This is consistent with the findings of research by authors like Daske et al, (2013) organization's internal adoption of IFRS and its financial performance. However, Akinlo and Oladipupo,(2017), Olowe et al. (2019),Okorie and Adegbite, (2019), Epstein and Jermakowicz,(2010) contend that IFRS have a the duties to supervise and checkmate the management activities, which will minimise the agency problem because they are also powerful and they can bear the expense of successful oversight and be involved in board decision-making, resulting in better firm performance. ...
his study examined the impact of International Financial Reporting Standards (IFRS) on the firm performance of listed manufacturing companies in Nigeria. With the adoption of IFRS, companies have experienced significant changes in their accounting and reporting practices. However, the specific effects of IFRS adoption on the manufacturing sector in Nigeria remain understudied. Using a quantitative research approach, data was collected from a sample of listed manufacturing companies in Nigeria. The sample was selected through purposive sampling, considering criteria such as company size, financial performance, and level of IFRS adoption. Statistical techniques, including regression analysis, was employed to analyze the data and investigate the relationship between IFRS adoption and firm performance. The study focused on exploring the impact of IFRS adoption on various dimensions of firm performance, including profitability, liquidity, and solvency measures. Control variables such as company size, age, leverage, and industry-specific characteristics will be considered to isolate the effects of IFRS adoption. The findings of this study contributed to the existing literature by providing insights into the specific impact of IFRS adoption on the firm performance of listed manufacturing companies in Nigeria. The research outcomes will inform policymakers, regulators, and industry practitioners about the challenges and opportunities associated with implementing IFRS in the manufacturing sector. Additionally, the study will identify areas where further improvements can be made in the application and implications of IFRS in the Nigerian context.
... Furthermore, Dobler (2008) argues that risk disclosures are highly subjective and hard to verify externally, and therefore, such disclosures inherently allow for management discretions. As a result, rather than the IFRS standards, firms' discretion to report risk information is likely to be dependent upon their reporting incentives that are shaped by a variety of factors, including proprietary costs, institutional enforcement levels and entities' operating characteristics (Daske et al., 2013). Against this background, it is unclear whether and to what extent IFRS standards have been successful in improving the disclosure of risk information in corporate reports. ...
Purpose
This study aims to empirically investigate the effect of International Financial Reporting Standards (IFRS) convergence on corporate risk disclosure, with a particular emphasis on the quantity and coverage of risk information. The research also conducts economic benefit and cost analysis to investigate the economic implications that may arise from the transition to IFRS reporting.
Design/methodology/approach
A content analysis approach is used to measure two broader dimensions of risk disclosure, namely, risk disclosure quantity and risk topic coverage. Furthermore, using firm-fixed effect regression on a sample of 143 Indian-listed companies, this study investigates the variations in these risk disclosure dimensions before (2012–2016) and subsequent to (2017–2021) the convergence with IFRS.
Findings
The empirical results of this research demonstrate that IFRS convergence has led to a significant improvement in firms’ risk disclosure across several dimensions. Particularly, during the post-IFRS period, firms’ usage of risk-related words and sentences has considerably surged in MD&A, Notes and whole annual reports. In addition, upon IFRS convergence, firms’ risk descriptions have become more extensive and evenly distributed across risk topic categories. Moreover, the in-depth benefit and cost analysis revealed that firms reporting under IFRS benefit from decreased cost of equity capital, but they also incur a higher cost of audit fees.
Originality/value
This study contributes to the literature in two ways. First, this is the only study, to the best of the authors’ knowledge, to conduct a broader examination of the impact of mandatory IFRS convergence on corporate risk disclosure, with a major focus on quantity and coverage of risk information. Second, by conducting economic benefit and cost analysis, this study provides novel insights into the critical role of IFRS risk disclosures toward multiple economic outcomes.
We examine whether and how variations in country‐level institutional factors explain the intensity, diversity and informativeness of corporate disclosures around the world. Using a comprehensive corporate disclosure dataset containing more than 100 types of disclosures from firms domiciled in 35 countries, we examine the effect of four core country‐level institutional factors—legal system, creditor/investor rights, political process and societal characteristics—on corporate disclosures. Our results suggest that the country‐level institutional factor, which is likely to capture the legal system of a country, is negatively associated with the intensity, diversity and informativeness of disclosure. Moreover, our results suggest that the level of creditor/investor rights protection, political process and societal characteristics can also consistently affect the production, diversity and informativeness of disclosures. Overall, our evidence broadens our collective understanding of how core institutional factors at the society and country levels systematically explain corporate disclosures and their associated informativeness.
Entities that are members corporate groups prepare their individual financial statements independently of each other, according to their own national laws, but also according to one of the international accounting standards. It is the obligation of parent companies to prepare the consolidated financial statements, which represent the corporate group as one single company. For market operators, it is essential to compare the performance of different business entities, irrespective of different applicable national accounting rules. Users of financial statements need a uniform accounting system that makes the understanding of the content more transparent and clearer thus helping decision-making. In this study, the importance and legal background of consolidation are described, as well as the compassion of Hungarian and international rules on consolidation. Comparison by sectors includes data on sales revenues, data on employment and it also includes whether the choices made on accounting standards and the sectoral differences have an impact on the scores of the ESG-index.
Research on the impact of the International Financial Reporting Standard (IFRS) mandate on the quality of financial reporting produced mixed findings. Several researchers showed that the IFRS mandate depresses earnings management since it improves comparability, and the principle-based approach offers limited alternatives for managers in reporting. Others have shown that it provides flexibility for managers in institutionally and legally weak countries. We examine whether the IFRS mandate depresses earnings management practices in South Africa. Using a sample of 206 firms listed on the Johannesburg Securities Exchange (JSE) from 2000 to 2010, our findings show that the IFRS mandate significantly reduces earnings management. Our findings contribute to the ongoing discussion about whether high-quality standards effectively mitigate earnings management practices and protect stakeholder rights in developing countries.
Despite the growing importance of science-based targets (SBTs), our knowledge of their impact on corporate decarbonisation commitment is extremely limited due to inadequate research. To address this gap, we investigate the relationship between SBTs and corporate carbon reduction. Our empirical results reveal the following insights: First, the adoption of an SBT leads to significant subsequent carbon reduction in our sample companies. Second, decarbonisation does not occur until SBTs have been adopted for several years. Third, our findings show that the adoption of SBTs does not harm these companies’ profitability. Overall, our results suggest that SBTs are long-term investments that do not generate immediate but long-term and more sustainable outcomes. In sum, SBTs seem to be a strategy that can help management achieve a win-win situation: achieving a carbon reduction target without reducing economic growth. This justifies the need to study SBTs in future research in the field of carbon-accounting.
We study environmental and social (E&S) disclosures in annual reports. Using the word embedding model to examine over 210,000 annual reports from 24,271 public firms in 30 international countries/regions between 2001 and 2020, we create an E&S dictionary that allows us to document trends in annual report E&S disclosure. Specifically, we find: (1) increases in length and boilerplate language and (2) decreases in specificity. Our results also suggest that E&S disclosure quality improves after the adoption of voluntary ESG reporting frameworks but deteriorates after disclosure mandates. Our findings provide systematic evidence on the evolution of E&S disclosure in annual reports over the past two decades and shed light on how voluntary and mandatory standards have shaped global E&S reporting practices.
We analyze a unique set of Chinese firms to isolate the impact of accounting standards on financial reporting comparability and capital markets. From 2001 to 2006, these companies simultaneously maintained two sets of financial statements because of their dual‐class share structure: statements for A‐shares followed Chinese Generally Accepted Accounting Principles (GAAP), whereas those for B‐shares followed International Financial Reporting Standards (IFRS). We find a disparity in financial reporting comparability between these two accounting standards: IFRS produce less comparable information than Chinese GAAP. We also find that the disparity in comparability is related to fair value accounting, especially when corporate governance is weak.
Fair value accounting may induce earnings manipulation in a weak institutional environment. Our article investigates whether managers bias fair value estimates for investment property when meeting/beating analysts’ earnings forecasts. The empirical results indicate that firms reporting investment property at fair value are more likely to meet/beat analyst forecasts in the weak institutional environment of China. Moreover, managers trade off accrual-based earnings management with fair value estimates for investment property when meeting/beating analysts’ earnings forecasts. In addition, further analysis also reveals that managerial incentives to bias fair value estimates are constrained by high-quality audit. The findings shed new light on the unintended consequences on fair value accounting under International Financial Reporting Standards (IFRS) and have important policy implications for regulators and accounting standard setters.
This study explores the pivotal factors influencing the adoption of International Financial Reporting Standards (IFRS) in the banking sector of Vietnam, focusing on the perceptions of its benefits, the competence of accountants, the involvement of managers, and the guidance from the accounting and auditing community. Employing Exploratory Factor Analysis (EFA) on data collected from 236 professionals across accounting, auditing, banking, and finance, the research reveals that the perceived benefits of IFRS, active managerial participation, and advice from the accounting-auditing community significantly encourage the adoption of IFRS within Vietnamese commercial banks. Interestingly, the competence of accountants was not identified as a significant determinant. These findings suggest a nuanced landscape of IFRS adoption, emphasizing the importance of managerial support and community guidance over individual accountant competence. The study contributes to the broader discourse on IFRS adoption, offering actionable insights for banks, policymakers, and potentially applicable strategies for firms in Vietnam or similarly positioned economies on the path to IFRS compliance.
Purpose
We investigate how existing investment in strong external corporate governance mechanism—use of Big 4 audit firms—affect compliance with corporate governance audit (CGA) regulation in Nigeria and Kenya. While both countries are characterized by weak enforcement, they differ in their corporate governance audit regulatory strategies.
Design/methodology/approach
The study adopts neo-institutional theory as a theoretical framework and uses logit and probit models and generalized estimating equations as empirical models to test the hypotheses developed.
Findings
The study finds that persuasive coercive isomorphism provides reputational benefits to clients of multinational audit firms in Kenya and encourages them to conduct and report their CGA. In Nigeria, clients of multinational audit firms are less likely to conduct CGA as there is no persuasive coercive isomorphism in place. We also find many internal corporate governance variables to positively influence CGA.
Practical implications
The success of any regulation is dependent on the level of compliance by regulated entities. As clients of multinational audit firms usually have the motivation and resources to employ such high quality audit firms, it is expected that if they are well motivated, they will commit similar level of resources to conducting CGA. In Nigeria, the Financial Reporting Council should develop some persuasive measures to encourage clients of multinational audit firms to conduct CGA. In both Nigeria and Kenya, enforcement of internal corporate governance frameworks should be strengthened.
Originality/value
This is the first study to explore how regulatory strategies affect strategic responses of regulated entities to CGA regulation, introducing a new dimension to the ESG literature.
Fixed effects (FE) have emerged as a ubiquitous and powerful tool for eliminating unwanted variation in observational accounting studies. Unwanted variation is plentiful in accounting research because we often use rich data to test precise hypotheses derived from abstract theories. By eliminating unwanted variation, FE reduce concerns that omitted variables bias our estimates or weaken test power. FE are not costless, though, so their use should be carefully justified by theoretical and institutional considerations. FE also transform samples and variables in ways that are not immediately apparent, and in doing so affect how we should interpret regression results. This primer explains the mechanics of FE and provides practical guidance for the informed use, transparent reporting, and careful interpretation of FE models.
We analyze the textual management discussion and analysis (MD&A) information of Japanese firms that voluntarily adopted International Financial Reporting Standards (IFRS) and disclosed information in the Japanese language. We conduct a difference-in-differences analysis of firms that voluntarily adopted IFRS and those that continue to use Japanese generally accepted accounting principles. We find that the voluntary adoption of IFRS decreases the textual length but does not change the difficulty of MD&A information. The results indicate that IFRS adoption decreases the level of MD&A disclosure. However, the decrease in textual length is not observed after the 2018 MD&A regulation changes. This suggests that the negative effect of IFRS adoption is offset by the positive effect of the regulation change. This study is unlike previous research as it contributes to international accounting literature by analyzing financial reporting in a non-English language, viz. Japanese, which is, technically, a very difficult language.
Data Availability: All financial data and some textual data used in this study are available from commercial providers (NEEDS–FinancialQUEST2.0, NEEDS–MT Executive (Yakuin), and eol), and the other textual data are available from a governmental public source (EDINET).
JEL Classifications: M41; M48; G14.
This study examines the effect of R&D disclosure on the informativeness of share prices about future earnings. Considering its importance to companies, and mindful the uncertain nature of R&D and the limited information provided in the financial statements, R&D disclosure is an important source of information for investors to assess the future prospect of the firm. Using a sample of 6,487 firm-year observations reporting under IFRS from 15 countries over a 10-year period, we show that R&D disclosure conveys information about future earnings, which is incorporated in current returns. Thus, R&D disclosure allows investors to better anticipate future earnings. We find that this result is driven by disclosures in the front end of the annual report, which includes the management commentary section. In additional tests, we find that R&D disclosures are an important source of information to anticipate future earnings in countries with lower corruption levels and in countries with strong enforcement. Finally, we show that higher levels of R&D disclosure relating to the Development phase of R&D, Conditions for capitalisation and Patents and innovation better assist investors to anticipate future earnings. This is the first study to consider whether R&D disclosure assists investors in better anticipating future earnings alongside identifying those topics of R&D disclosure as being most relevant in this process.
The crucial role and fragility of global supply chains highlight the need for deeper insights into the factors that can promote the establishment of global supply chain relations. We examine the impact of financial statement comparability on firms’ establishment of global supply chain relations. Using a large sample of supply chain relations from 49 non-U.S. economies over the period 2003–2020, we find that non-U.S. firms are more likely to establish and maintain more supply chain relations with U.S. firms when their financial statements are more comparable to industry peers in the U.S. To address endogeneity concerns, we show that our findings are robust to identification strategies exploring the exogenous changes in financial statement comparability associated with IFRS adoption or PCAOB international inspections. Moreover, we find that the effect of financial statement comparability on cross-border supply chain relations is more pronounced when the information barrier is higher between non-U.S. economies and the U.S. Overall, our study provides new insights into the impact of financial statement comparability on firms’ establishment of cross-border supply chain relations and sheds lights on the role of financial statement comparability in promoting international trade.
Intangible assets in the activities of business entities can constitute a significant part of assets. Their valuation can be done in several ways, which are fundamentally different. Literature offers several methods for valuing intangible assets, which are based on three basic approaches. Each of them captures the value of the property based on different specific characteristics. The issue of intangible assets is also addressed by international accounting standards, the task of which is to guide the accounting and reporting of this type of assets so that the financial statements provide correct and complete information that is comparable on a global basis.
Using misstatement data, we find that the distribution of detected fraud features a heavy tail. We propose a theoretical mechanism that explains such a relatively high frequency of extreme frauds. In our dynamic model, a manager manipulates earnings for personal gain. A monitor of uncertain quality can detect fraud and punish the manager. As the monitor fails to detect fraud, the manager's posterior belief about the monitor's effectiveness decreases. Over time, the manager's learning leads to a slippery slope, in which the size of frauds grows steeply, and to a power law for detected fraud. Empirical analyses corroborate the slippery slope and the learning channel. As a policy implication, we establish that a higher detection intensity can increase fraud by enabling the manager to identify an ineffective monitor more quickly. Further, non‐detection of frauds below a materiality threshold, paired with a sufficiently steep punishment scheme, can prevent large frauds.
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We examine whether the information about capitalised exploration and evaluation (E&E) expenditures in extractive industry (mining and oil and gas) firms is incorporated into lending decisions through the cost of debt financing. Additionally, we examine whether the accounting method applied for the capitalisation of these assets on the balance sheet (i.e., degree of the aggressiveness) affects the cost of debt financing. Consistent with our predictions, we find that firms with higher amounts of capitalised E&E expenditures exhibit lower cost of debt financing, suggesting that the intensity of E&E capitalisation provides relevant information that is priced by the debt market. In other words, capitalised E&E expenditure signals a reduced risk with regards to the future economic benefits associated with such expenditure and decreases debtholder downside risk. We further show that this effect is contingent upon the accounting method that firms apply. Specifically, we find that the positive effect of capitalised E&E expenditures is less pronounced for firms that use a more aggressive accounting method. This finding highlights the significant role that the diversity of accounting methods used to capitalise E&E expenditure holds for debt market participants. The study contributes to the financial accounting strand of the literature and has important practice and policy implications.
Using a sample of Japanese firms, we investigate the impact of the voluntary adoption of International Financial Reporting Standards (IFRS) on accounting figures. To control institutional factors, we manually collected two sets of accounting figures prepared by the same firm and for the same fiscal year from reconciliation statements required by IFRS 1. We find that net income is significantly higher under IFRS than under Japanese generally accepted accounting principles (J-GAAP), while equity is not significantly affected by the adoption of IFRS. We also find that the implementations of some accounting standards (e.g., accounting standards for goodwill, intangible assets, and employee benefits) significantly impact both equity and net income. We further find that voluntary IFRS adopters show a higher goodwill ratio (goodwill/total assets) than J-GAAP adopters and that this goodwill ratio positively correlates with the impact of IFRS 3 (business combinations) on equity. These results indicate that, despite the global demand for convergence of local GAAP with IFRS, the differences in fundamental concepts between IFRS and local GAAP still remain.
We present a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, governing a specific self-dealing transaction. This theoretically-grounded index predicts a variety of stock market outcomes, and generally works better than the previously introduced index of anti-director rights.
Managers, investors and researchers have a compelling interest in identifying a reliable empirical proxy for firm-specific cost of equity capital (r). In theory, deducing r is possible if the market's future cash flow forecast and current stock price are observable. Practically, deducing r is dependent on the ability to estimate the market's forecasted terminal value. We evaluate five methods of deducing firm-specific r (labeled rDIVPREM, rGLSPREM, rGORPREM, rOJNPREM, and rPEGPREM) that deal with this conundrum differently. The extent to which the estimates are associated with firm risk in a stable and meaningful manner is the basis for our assessment. We find that the rDIVPREM and rPEGPREM estimates are consistently and predictably related to risk, while the alternatives are not. Based on these results, we conclude that rDIVPREM and rPEGPREM dominate the alternatives.
We present a new measure of legal protection of minority shareholders against expropriation by corporate insiders: the anti-self-dealing index. Assembled with the help of Lex Mundi law firms, the index is calculated for 72 countries based on legal rules prevailing in 2003, and focuses on private enforcement mechanisms, such as disclosure, approval, and litigation, governing a specific self-dealing transaction. This theoretically-grounded index predicts a variety of stock market outcomes, and generally works better than the commonly used index of anti-director rights.
This paper examines the economic consequences of mandatory International Financial Reporting Standards (IFRS) reporting around the world. We analyze the effects on market liquidity, cost of capital, and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects occur prior to the official adoption date. Partitioning our sample, we find that the capital-market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self-selection, the latter result cautions us to attribute the capital-market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries make concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects.
Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, and an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing. Our tests provide support for the market segmentation hypothesis and Merton's (1987) investor recognition hypothesis.
I describe a model of earnings and earnings growth and I demonstrate how this model may be used to obtain estimates of the expected rate of return on equity capital. These estimates are compared with estimates of the expected rate of return implied by commonly used heuristics - viz., the PEG ratio and the PE ratio. Proponents of the PEG ratio (which is the price-earnings [PE] ratio divided by the short-term earnings growth rate) argue that this ratio takes account of differences in short-run earnings growth, providing a ranking that is superior to the ranking based on PE ratios. But even though the PEG ratio may provide an improvement over the PE ratio, it is arguably still too simplistic because it implicitly assumes that the short-run growth forecast also captures the long-run future. I provide a means of simultaneously estimating the expected rate of return and the rate of change in abnormal growth in earnings beyond the (short) forecast horizon - thereby refining the PEG ratio ranking. The method may also be used by researchers interested in determining the effects of various factors (such as disclosure quality, cross-listing, etc.) on the cost of equity capital. Although the correlation between the refined estimates and estimates of the expected rate of return implied by the PEG ratio is high, supporting the use of the PEG ratio as a parsimonious way to rank stocks, the estimates of the expected rate of return based on the PEG ratio are biased downward. This correlation is much lower and the downward bias is much larger for estimates of the expected rate of return based on the PE ratio. I provide evidence that stocks for which the downward bias is higher can be identified a priori.
This paper uses a sample of more than 2,500 firms from 27 countries to investigate the relation among ownership structure, analyst following, investor protection, and valuation. We find that analysts are less likely to follow firms with potential incentives to withhold or manipulate information, such as when the family/management group is the largest control rights blockholder. Furthermore, this relation is stronger for firms from low-shareholder-protection countries. Using valuation regressions that take into account potential endogeneity between analyst following and firm value, we find a positive valuation effect when analysts cover firms that have both potentially poor internal governance and weak country-level external governance. Overall, our findings suggest that corporate governance plays an important role in analysts' willingness to follow firms and that increased analyst following is associated with higher valuations, particularly for firms likely to face governance problems.
International harmonization of accounting standards appears to be inevitable. However, little evidence exists regarding whether harmonizing accounting standards will result in actual harmonization of accounting practices. Using a sample of non-U.S. firms that adopt U.S. Generally Accepted Accounting Principles (GAAP) to provide evidence on this issue, we find that most firms that adopt U.S. GAAP adjust their accounting methods to those required by U.S. GAAP. Properties of the firms' accounting numbers also change significantly after adopting U.S. GAAP, but they do not fully converge toward that of U.S. firms. In the cross-section, regulatory oversight is associated with more successful implementation of U.S. GAAP; firm-specific capital market incentives are not. These results suggest that harmonizing accounting standards may result in more comparable accounting methods and numbers, but that effective regulatory oversight will be important in reaching this outcome.
This paper examines the relations between the disclosure practices of firms, the number of analysts following each firm and properties of the analysts' earnings forecasts. Using data from the Report of the Financial Analysts Federation Corporate Information Committee (FAF Report 1985-89), we provide evidence that firms with more informative disclosure policies have a larger analyst following, more accurate analyst earnings forecasts, less dispersion among individual analyst forecasts and less volatility in forecast revisions. The results enhance our understanding of the role of analysts in capital markets. Further, they suggest that potential benefits to disclosure include increased investor following, reduced estimation risk and reduced information asymmetry, each of which have been shown to reduce a firm's cost of capital in theoretical research.
This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to reflect fully information contained in the accrual and cash flow components of current earnings until that information impacts future earnings.
This paper investigates the relation between cross listing in the United States and the information environment of non-U.S. firms. We find that firms that cross list on U.S. exchanges have greater analyst coverage and increased forecast accuracy than firms that are not cross listed. A time-series analysis shows that a change in analyst coverage and forecast accuracy occurs around cross listing. We also document that firms that have more analyst coverage and higher forecast accuracy have higher valuations. Furthermore, the change in firm value around cross listing is correlated with changes in analyst following and forecast accuracy, suggesting that cross listing enhances firm value through its effect on the firm's information environment. Our findings support the hypothesis that cross-listed firms have better information environments, which are associated with higher market valuations.
Transaction costs are important for a host of empirical analyses from market efficiency to international market research. But transaction costs estimates are not always available, or where available, are cumbersome to use and expensive to purchase. We present a model that requires only the time series of daily security returns to endogenously estimate the effective transaction costs for any firm, exchange, or time period. The feature of the data that allows for the estimation of transaction costs is the incidence of zero returns. Incorporating zero returns in the return-generating process, the model provides continuous estimates of average round-trip transaction costs from 1963 to 1990 that are 1.2% and 10.3% for large and small decile firms, respectively. These estimates are highly correlated (85%), with the most commonly used transaction cost estimators. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
We develop an empirical method that allows us to evaluate the reliability of an expected return proxy via its association with realized returns even if realized returns are biased and noisy measures of expected returns. We use our approach to examine seven accounting-based proxies that are imputed from prices and contemporaneous analysts' earnings forecasts. Our results suggest that, for the entire cross-section of firms, these proxies are unreliable. None of them has a positive association with realized returns, even after controlling for the bias and noise in realized returns attributable to contemporaneous information surprises. Moreover, the simplest proxy, which is based on the least reasonable assumptions, contains no more measurement error than the remaining proxies. These results remain even after we attempt to purge the proxies of their measurement error via the use of instrumental variables and grouping. We provide additional evidence, however, that demonstrates that some proxies are reliable when the consensus long-term growth forecasts are low and/or when analysts' forecast accuracy is high.
UK private and public companies face substantially equivalent regulation on auditing, accounting standards and taxes. We hypothesize that private-company financial reporting nevertheless is lower quality due to different market demand, regulation notwithstanding. A large UK sample supports this hypothesis. Quality is operationalized using Basu's (1997) time-series measure of timely loss recognition and a new accruals-based method. The result is not affected by controls for size, leverage, industry membership and auditor size, or by allowing endogenous listing choice. The result enhances understanding of private companies, which are predominant in the economy. It also provides insight into the economics of accounting standards.
International harmonization of accounting standards appears to be inevitable. However, little evidence exists regarding whether harmonizing accounting standards will result in actual harmonization of accounting practices. Using a sample of non-U.S. firms that adopt U.S. Generally Accepted Accounting Principles (GAAP) to provide evidence on this issue, we find that most firms that adopt U.S. GAAP adjust their accounting methods to those required by U.S. GAAP. Properties of the firms' accounting numbers also change significantly after adopting U.S. GAAP, but they do not fully converge toward that of U.S. firms. In the cross-section, regulatory oversight is associated with more successful implementation of U.S. GAAP; firm-specific capital market incentives are not. These results suggest that harmonizing accounting standards may result in more comparable accounting methods and numbers, but that effective regulatory oversight will be important in reaching this outcome.
This book reviews the theory and methodology underlying the economics-based empirical literature in accounting. An accounting theory theory is an explanation for observed accounting and auditing practices. Such an explanation is necessary for interpretation of empirical associations between variables. The book discusses the role of theory in empirical work. It then reviews accounting theories involved in empirical studies of the use of accounting in capital markets, contracting and the political process and the extent to which the theories are consistent with those studies' evidence. Empirical studies in auditing are also reviewed. The book finishes with a discussion of the role of accounting research and a summary and evaluation of the research up until the mid-1980s.
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are concentrated in the European Union (EU) and limited to five EU countries that concurrently made substantive changes in reporting enforcement. There is little evidence of liquidity benefits in IFRS countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Thus, changes in reporting enforcement or (unobserved) factors associated with these changes play a critical role for the observed liquidity benefits after mandatory IFRS adoption. In contrast, the change in accounting standards seems to have had little effect on market liquidity.
ABSTRACT The returns,earned,by U.S. equities,since 1926 exceed,estimates,derived,from theory, from other periods and markets, and from surveys of institutional inves- tors. Rather than examine historic experience, we estimate the equity premium from,the discount,rate that,equates,market,valuations,with,prevailing,expecta- tions of future,f lows. The accounting,f lows,we project are isomorphic,to projected dividends,but use more,available,information,and,narrow,the range,of reasonable growth rates. For each year between 1985 and 1998, we find that the equity pre- mium,is around,three percent,~or less! in the United States and five other markets. THE EQUITY RISK PREMIUM LIES at the core of financial,economics.,Representing
Quoted spreads, quoted depth, and effective spreads move together with market- and industrywide liquidity. After controlling for well-known individual liquidity determinants, such as volatility, volume, and price, we found that common influences remain significant and material. For well-diversified size-based portfolios, more than half the variation in quoted spreads is explained by variations in market average trading costs. Daily movements in the average depth of the market explain more than 80 percent of depth variations in size-based portfolios.
This paper identifies challenges and opportunities created by global financial reporting for the education and research activities of U.S. academics. Relating to education, after overviewing the relation between global financial reporting and U.S. GAAP, it offers suggestions for topics to be covered in global financial reporting curricula and clarifies common misunderstandings about the concepts underlying financial reporting. Relating to research, it explains how and why research can provide meaningful input into standard-setting, and identifies questions that can motivate research related to topics on the International Accounting Standards Board's technical agenda and to the globalization of financial reporting.
This paper provides evidence that managers strategically select the prior-period earnings amount that is used as a benchmark to evaluate current-period earnings in quarterly earnings announcements. Managers are more likely to separately announce a prior-period gain from the sale of property, plant, and equipment (PPE) than a loss. This strategy provides the lowest possible benchmark for evaluating current earnings, thereby allowing the manager to highlight the most favorable change in earnings. This strategic disclosure behavior is more likely to occur when it prevents a negative earnings surprise. The observed strategic disclosure decisions are consistent with a conjecture by managers that the nonrecurring nature of the prior-period gain/ loss will be forgotten unless it is separately announced. Consistent with this conjecture, there is some evidence that equity investors, one potential target of strategic reporting, use the benchmark that managers provide in earnings announcements to evaluate current earnings, even when the components of this benchmark have different persistence. However, cross-sectional analyses provide no evidence that managers ex post exploit the equity mispricing that occurs between the earnings announcement date and the release of the financial statements.
This paper investigates whether firms benefit from expanded voluntary disclosure by examining changes in capital market factors associated with increases in analyst disclosure ratings for 97 firms. The disclosure rating increases are accompanied by increases in sample firms' stock returns, institutional ownership, analyst following, and stock liquidity. These findings persist after controlling for contemporaneous earnings performance and other potentially influential variables, such as risk, growth, and firm size. While it is difficult to draw unambiguous causal conclusions, these results are consistent with disclosure model predictions that expanded disclosure leads investors to revise upward valuations of the sample firms' stocks, increases stock liquidity, and creates additional institutional and analyst interest in the stocks.
Non-U.S. firms cross-listing shares on U.S. exchanges as American Depositary Receipts earn cumulative abnormal returns of 19 percent during the year before listing, an additional 1.20 percent during the listing week, but incur a loss of 14 percent during the year following listing. We show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time oflisting. Our tests provide support for the market segmentation hypothesis and Merton?s (1987) investor recognition hypothesis.
This study investigates the relation between disclosure policy and liquidity in equity markets. Disclosure policy influences market liquidity because uninformed investors “price protect” against adverse selection, and this price protection is manifested in market liquidity. Bid-ask spreads, the empirical measure of market liquidity used in this study, are predicted to be inversely related to disclosure policy. In addition, increased trading by informed traders and higher probability of information event occurrence are predicted to both increase spreads and intensify the relation between spreads and disclosure policy. These predictions apply during periods in which no news about the firm is disclosed or pending. The results show that relative bid-ask spreads for firms with disclosure rankings in the bottom third of the empirical distribution are approximately 50 percent higher than spreads for firms with disclosure rankings in the top third of the empirical distribution. Tests that assume endogenous disclosure policy reveal a significant negative relation between disclosure policy and spreads, even after controlling for the effects of return volatility, trading volume, and share price. Tests for cross-sectional variation in spreads and for the sensitivity of spreads to disclosure policy based on informed trade activity and probability of information event occurrence are generally consistent with the predictions, though these results are not statistically significant. The findings of this study are consistent with the notion that a well-regarded disclosure policy reduces information asymmetry and hence increases liquidity in equity markets.
We investigate the market valuation of earnings and book value amounts prepared under International Accounting Standards (IAS) and U.S.-GAAP to provide evidence on the debate between the U.S. SEC and the NYSE on whether foreign firms should be allowed to list in the U.S. using IAS. Our sample consists of foreign firms that adopted IAS in their primary accounts with a reconciliation to U.S.-GAAP in their Form 20-F filing. Using both price and return valuation models, we find evidence that the U.S.-GAAP earnings reconciliation adjustment is associated with market value and stock returns after controlling for IAS amounts. In addition, we find evidence that U.S.-GAAP amounts are valued differently than IAS amounts and are more highly associated with market values and security returns than IAS amounts.
This study examines reporting practices of a sample of foreign listed and domestic-only listed companies from the United Kingdom, France, Germany, Japan and Australia to determine the extent to which companies voluntarily use “international” standards. Two types of use of non-national standards in the consolidated accounts presented to the public are considered: adoption of “international” standards instead of national standards, and supplementary use where “international” standards are used in conjunction with national standards. “International” standards are defined as US GAAP or IAS (now IFRS). The study tests for a preference for either set of standards and considers the relationship of choice of regime with firm attributes.
The results show significant voluntary use of “international” standards in all five countries and among foreign listed and domestic-only listed companies. Companies using “international” standards are likely to be larger, have more foreign revenue and to be listed on one or more foreign stock exchanges. US GAAP is the predominant choice, but IAS are used by many firms in Germany and some in Japan. Firms listed in the United States' regulated markets (NYSE and NASDAQ) are more likely to choose US GAAP, but companies traded in the OTC market often select IAS.
The study demonstrates for managers and regulators that there is considerable support for “international” standards, and that choice of IAS or US GAAP relates to specific firm characteristics which differ according to a firm's country of origin. Most use of “international” standards reflects individual countries' institutional frameworks, confirming the key role of national regulators and standard setters in assisting companies to achieve more comparable international reporting.
Despite the increasing integration of global capital markets, there is little evidence on the valuation properties of cross-listed, non-U.S. firms' accounting variables. We use the relative performance of the earnings capitalization, the book value, and the residual income valuation models to explore the valuation properties of International Accounting Standards and U.S. Generally Accepted Accounting Principles earnings and book values reported by non-U.S., cross-listed firms trading in a common equity market. Using non-U.S./non-U.K. firms whose shares trade on the International Stock Exchange Automated Quotation system in London, we find that the earnings capitalization model is the dominant accounting-based valuation model when cross-listed firms report under International Accounting Standards. In contrast, we find that when cross-listed firms report under U.S. Generally Accepted Accounting Principles, the residual income model is the dominant accounting-based valuation model. Our exploratory study provides insights into the valuation implications of allowing a dual reporting system for foreign registrants trading in a common equity market.
I describe a model of earnings and earnings growth and I demonstrate how this model may be used to obtain estimates of the expected rate of return on equity capital. These estimates are compared with estimates of the expected rate of return implied by commonly used heuristics - viz., the PEG ratio and the PE ratio. Proponents of the PEG ratio (which is the price-earnings (PE) ratio divided by the short-term earnings growth rate) argue that this ratio takes account of differences in short-run earnings growth providing a ranking that is superior to the ranking based on PE ratios. But even though the PEG ratio may provide an improvement over the PE ratio, it is arguably still too simplistic because it implicitly assumes that the short-run growth forecast also captures the long-run future. I provide a means of simultaneously estimating the expected rate of return and the rate of change in abnormal growth in earnings beyond the (short) forecast horizon - thereby refining the PEG ratio ranking. The method may also be used by researchers interested in determining the effects of various factors (such as disclosure quality, cross-listing, etc.,) on the cost of equity capital. Although the correlation between the refined estimates and estimates of the expected rate of return implied by the PEG ratio is high supporting the use of the PEG ratio as a parsimonious way to rank stocks, the estimates of the expected rate of return based on the PEG ratio are biased downwards. This correlation is much lower and the downward bias is much larger for estimates of the expected rate of return based on the PE ratio. I provide evidence that stocks for which the downward bias is higher can be identified a priori.
We examine the relation between firm-level transparency, stock market liquidity, and valuation across a variety of international settings. We document lower transaction costs and greater liquidity (as measured by lower bid-ask spreads and fewer zero-return days) for firms with greater transparency (as measured by less evidence of earnings management, better accounting standards, higher quality auditors, more analyst following and more accurate analyst forecasts). The relation between transparency and liquidity is more pronounced in periods of high volatility, when investor protection, disclosure requirements, and media penetration are poor, and when ownership is more concentrated, suggesting that firm-level transparency matters more when overall investor uncertainty is greater. Increased liquidity is associated with lower implied cost of capital and with higher valuation as measured by Tobin’s Q. Finally, a mediation analysis suggests that liquidity is a significant channel through which transparency affects firm valuation and equity cost of capital.
This paper examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) by the European Union on financial analysts' information environment. To control for the effect of confounding concurrent events, we use a control sample of firms that had already voluntarily adopted IFRS at least two years prior to the mandatory adoption date. We find that analysts' absolute forecast errors and forecast dispersion decrease relative to this control sample only for those mandatory IFRS adopters domiciled in countries with both strong enforcement regimes and domestic accounting standards that differ significantly from IFRS. Further, for mandatory adopters domiciled in countries with both weak enforcement regimes and domestic accounting standards that differ significantly from IFRS, we find that forecast errors and dispersion decrease more for firms with stronger incentives for transparent financial reporting. These results highlight the important roles of enforcement regimes and firm-level reporting incentives in determining the impact of mandatory IFRS adoption.
This study examines whether the information content of earnings announcements--abnormal return volatility and abnormal trading volume -- increases in countries following mandatory IFRS adoption, and conditions and mechanisms through which increases occur. Findings suggest information content increased in 16 countries that mandated adoption of IFRS relative to 11 that maintained domestic accounting standards, although the effect of mandatory IFRS adoption depends on the strength of legal enforcement in the adopting country. Utilizing a path analysis methodology, we find evidence of three mechanisms through which IFRS adoption increases information content: reducing reporting lag, increasing analyst following, and increasing foreign investment.
We address three research questions motivated by the recent ascent of International Financial Reporting Standards (IFRS) in Europe. First, analyzing the determinants of voluntary IFRS adoption by publicly traded German firms during the period 1998-2004, we find that size, international exposure, dispersion of ownership, and recent IPOs are important drivers. Second, using the results from this determinant model to construct propensity score-matched samples of IFRS and German-GAAP (HGB) firms, we document significant differences in terms of earnings quality: IFRS firms have more persistent, less predictable and more conditionally conservative earnings. Third, analyzing information asymmetry differences between IFRS and HGB firms, we show that IFRS adopters experience a decline in bid-ask spread of 70 base points and an average of 17 more days with price changes per year. On the other hand, IFRS adopter's stock prices seem to be more volatile. In the light of some important limitations of our study, we discuss IFRS-related research opportunities in post-2005 Europe.
This paper surveys the theoretical and empirical literature on the economic consequences of financial reporting and disclosure regulation. We integrate theoretical and empirical studies from accounting, economics, finance and law in order to contribute to the cross-fertilization of these fields. We provide an organizing framework that identifies firm-specific (micro-level) and market-wide (macro-level) costs and benefits of firms' reporting and disclosure activities and then use this framework to discuss potential costs and benefits of regulating these activities and to organize the key insights from the literature. Our survey highlights important unanswered questions and concludes with numerous suggestions for future research.
Accounting in shaped by economic and political forces. It follows that increased worldwide integration of both markets and politics (driven by reductions in communications and information processing costs) makes increased integration of financial reporting standards and practice almost inevitable. But most market and political forces will remain local for the foreseeable future, so it is unclear how much convergence in actual financial reporting practice will (or should) occur. Furthermore, there is little settled theory or evidence on which to build an assessment of the advantages and disadvantages of uniform accounting rules within a country, let alone internationally. The pros and cons of IFRS therefore are somewhat conjectural, the unbridled enthusiasm of allegedly altruistic proponents notwithstanding. On the "pro" side of the ledger, I conclude that extraordinary success has been achieved in developing a comprehensive set of "high quality" IFRS standards, in persuading almost 100 countries to adopt them, and in obtaining convergence in standards with important non-adopters (notably, the U.S.). On the "con" side, I envisage problems with the current fascination of the IASB (and the FASB) with "fair value accounting." A deeper concern is that there inevitably will be substantial differences among countries in implementation of IFRS, which now risk being concealed by a veneer of uniformity. The notion that uniform standards alone will produce uniform financial reporting seems naive. In addition, I express several longer run concerns. Time will tell.
International Financial Reporting Standards (IFRS) have recently been adopted in a number of jurisdictions, including the European Union. Despite the importance of IFRS in the context of global accounting standards harmonization, little is known regarding what institutional factors influence countries' decisions to voluntarily adopt IFRS. This issue is relevant to standard setters because a better understanding of the motivations for adoption will enable them to promote IFRS more effectively to countries that currently do not employ IFRS. Consistent with bonding theory, we find that countries with weaker investor protection mechanisms are more likely to adopt IFRS. Our evidence also shows that jurisdictions that are perceived to provide better access to their domestic capital markets are more likely to adopt IFRS. Taken together, our results are consistent with the view that IFRS represent a vehicle through which countries can improve investor protection and make their capital markets more accessible to foreign investors.
This article is Part I of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In this part, we develop the conceptual framework for our analysis of potential costs and benefits from IFRS adoption in the United States. Drawing on the academic literature in accounting, finance and economics, we assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We also discuss the compatibility of IFRS with the current U.S. regulatory and legal environment as well as the possible macroeconomic effects of IFRS adoption. Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit tradeoff between (1) recurring, albeit modest, comparability benefits for investors, (2) recurring future cost savings that will largely accrue to multinational companies, and (3) one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. In Part II of the series (see Hail et al. 2010), we provide an analysis of the policy factors related to the decision and present several scenarios for the future evolution of U.S. accounting standards in light of the current global movement toward IFRS.
Previous studies (Dumontier and Raffournier, 1998, El-Gazzar et al, 1999; Cuijpers and Buijink, 2004) typically explain the early adoption of IFRS by firm-specific benefits. However, the adoption of IFRS also leads to costs for company insiders, namely less managerial discretion and as a consequence smaller private benefits due to increased disclosure requirements and less accounting method choices. This paper argues that the cost of adopting IFRS depends on characteristics of the institutional environment, more specifically the level of investor protection. Using a sample of European companies, we find that IFRS is more likely adopted in countries with strong laws protecting investors and/or extensive corporate governance recommendations where the loss of private benefits following IFRS-adoption is lower. Furthermore, the results show that corporate governance recommendations are as effective as hard laws in stimulating IFRS-adoption and that their impact increases as laws become weaker. This suggests that by improving corporate governance codes, countries can easily reduce the extraction of private benefits by managers and enhance the quality of the financial information. However, when looking at specific recommendations and laws, we find that shareholder rights with regard to voting rights and the general meeting need to be regulated by law in order to effectively reduce the level of private benefits.
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is particularly responsive to firms' reporting incentives. We document that private firms exhibit higher levels of earnings management and that strong legal systems are associated with less earnings management in private and public firms. We also provide evidence that private and public firms respond differentially to institutional factors, such as book-tax alignment, outside investor protection and capital market structure. Moreover, legal institutions and capital market forces often appear to reinforce each other.
This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors "fixate" on earnings, failing to fully reflect information in the accrual and cash flow components of current earnings until it impacts future earnings.
This paper examines the relation between the disclosure practices of firms, the number of analysts following each firm, and properties of the analysts' earnings forecasts. Using data from the Financial Analysts Federation Corporate Information Committee Report (FAF Report), we provide evidence that firms with more informative disclosure policies have a larger analyst following, more accurate analyst earnings forecasts, less dispersion among individual analyst forecasts and less volatility in forecast revisions. The results enhance our understanding of the role of analysts in capital markets. Further, they suggest that potential benefits to disclosure include increased investor following, reduced estimation risk and reduced information asymmetry, each of which have been shown to reduce a firm's cost of capital in theoretical research.
This paper evaluates alternative models for detecting earnings management. The paper restricts itself to models that assume the construct being managed is discretionary accruals, since such models are commonly used in the extant accounting literature. Existing models range from simple models in which discretionary accruals are measured as total accruals, to more sophisticated models that separate total accruals into a discretionary and a non-discretionary component. Prior to this paper, there had been no systematic evidence bearing on the relative performance of these alternative models at detecting earnings management. This paper evaluates the relative performance of the competing models by comparing the specification and power of commonly used test statistics across the measures of discretionary accruals generated by each model. The specification of the test statistics is evaluated by examining the frequency with which they generate type I errors for a random sample of firm-years and for samples of firm-years with extreme financial performance. We focus on samples with extreme financial performance because the stimuli investigated in previous research are frequently correlated with financial performance. The first sample of firms are targeted by the Securities and Exchange Commission for allegedly overstating annual earnings and the second sample is created by artificially introducing earnings management into a random sample of firms.
n recent years, German companies report consolidated financial statements under German GAAP, U.S. GAAP, or International Accounting Standards (IAS). Market observers, researchers, and regulators have argued that financial statements prepared under the shareholder (or investor) model, such as U.S. GAAP or IAS, provide better information than financial statements prepared under the stakeholder model (German GAAP). They further have argued that U.S. GAAP is more rigorously defined and, therefore, provides superior information to IAS. We investigate comparative value relevance, measured as the slope coefficient of the returns/earnings regression. Our results are consistent with expectations. Within our sample of German companies traded on German stock exchanges, value relevance of U.S. GAAP based earnings is higher than that of IAS based earnings, which in turn is more value relevant than earnings produced under German GAAP. A major contribution of this research is that, unlike prior research, we measure stock returns for all sample firms in the German stock market only, and therefore are not reliant on the perhaps strong assumption underlying prior studies of similarity of pricing across markets domiciled in different countries.
This research examines compliance with both International Accounting Standards (IAS) and United States Generally Accepted Accounting Principles (US GAAP) for companies listed on Germany's New Market. Based on a sample of 100 firms that apply IAS and 100 that apply US GAAP, we investigate the extent to which companies comply with IAS and US GAAP disclosure requirements in their year–2000 financial statements. Compliance levels range from 100% to 41.6%, with an average of 83.7%. The average compliance level is significantly lower for companies that apply IAS as compared to companies applying US GAAP. This study provides the first systematic evidence regarding the enforcement of US GAAP outside the US, and accordingly not subject to Securities Exchange Commission (SEC) review. The results unveil a considerable extent of non–compliance. The overall level of compliance with IAS and US GAAP disclosures is positively related to firms being audited by Big 5 auditing firms and to cross–listings on US exchanges. Compliance is also associated with references to the use of International Standards of Auditing (ISA) or US GAAS in the audit opinion. The findings add to the growing concerns regarding the lack of effective supervision in the German capital market.
Existing research indicates that firms with high accruals are more likely to experience future earnings problems, but that investors' expectations, as reflected in stock prices, do not appear to anticipate these problems. In this paper, we directly examine the published opinions of two types of professional investor intermediaries to see if they provide investors with information concerning the future earnings problems experienced by firms with high accruals. First, we examine the earnings forecasts of sell-side analysts. We show that analysts' earnings forecasts do not incorporate the predictable future earnings declines associated with high accruals. Second, we examine the behavior of independent auditors. We find no evidence that auditors signal the future earnings problems associated with high accruals through either their audit opinions or through auditor changes. Overall, our evidence indicates that analysts and auditors do not alert investors to the future earnings problems associated with high accruals, thus corroborating previous findings that investors do not appear to anticipate these problems.
We examine whether application of International Accounting Standards (IAS) is associated with higher accounting quality. The application of IAS reflects combined effects of features of the financial reporting system, including standards, their interpretation, enforcement, and litigation. We find that firms applying IAS from 21 countries generally evidence less earnings management, more timely loss recognition, and more value relevance of accounting amounts than do matched sample firms applying non-U.S. domestic standards. Differences in accounting quality between the two groups of firms in the period before the IAS firms adopt IAS do not account for the postadoption differences. Firms applying IAS generally evidence an improvement in accounting quality between the pre- and postadoption periods. Although we cannot be sure our findings are attributable to the change in the financial reporting system rather than to changes in firms' incentives and the economic environment, we include research design features to mitigate effects of both.
In this study, we propose an alternative technique for estimating the cost of equity capital. Specifically, we use a discounted residual income model to generate a market implied cost-of-capital. We then examine firm characteristics that are systematically related to this estimate of cost-of-capital. We show that a firm's implied cost-of-capital is a function of its industry membership, B/M ratio, forecasted long-term growth rate, and the dispersion in analyst earnings forecasts. Together, these variables explain around 60% of the cross-sectional variation in future (two-year-ahead) implied costs-of-capital. The stability of these long-term relations suggests they can be exploited to estimate future costs-of-capital. We discuss the implications of these findings for capital budgeting, investment decisions, and valuation research.
We investigate (1) whether the variation in accounting standards across national boundaries relative to International Accounting Standards (IAS) has an impact on the ability of financial analysts to forecast non-U.S. firms’ earnings accurately, and (2) whether analyst forecast accuracy changes after firms adopt IAS. IAS are a set of financial reporting policies that typically require increased disclosure and restrict management’s choices of measurement methods relative to the accounting standards of our sample firms’ countries of domicile. We develop indexes of differences in countries’ accounting disclosure and measurement policies relative to IAS, and document that greater differences in accounting standards relative to IAS are significantly and positively associated with the absolute value of analyst earnings forecast errors. Further, we show that analyst forecast accuracy improves after firms adopt IAS. More specifically, after controlling for changes in the market value of equity, changes in analyst following, and changes in the number of news reports, we find that the convergence in firms’ accounting policies brought about by adopting IAS is positively associated with the reduction in analyst forecast errors.