Protection of proprietary information and financial reporting opacity: Evidence from a natural experiment

We utilize the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous shock to the proprietary costs of disclosure and study the impact of the IDD on corporate financial reporting policy. We find compelling evidence that firms headquartered in states that adopt the IDD exhibit a significant increase in financial reporting opacity relative to firms headquartered in states that fail to adopt the IDD. Our finding is robust to a battery of sensitivity tests. Cross-sectional evidence shows that the impact of the IDD on opacity is more pronounced for firms with weak external monitoring. Further, our path analysis shows that financial reporting opacity engendered by the adoption of the IDD had broad negative consequences for capital market investors.     

Debt Financing and Voluntary Adoption of the International Financial Reporting Standards: Evidence from Korean Unlisted Firms

We investigate the effect of debt financing on the voluntary adoption of the International Financial Reporting Standards (IFRS) by unlisted firms and such adoption’s effect on bond credit rating. We find that unlisted firms with public debts are more likely to voluntarily adopt IFRS. Subsequent to the voluntary application of IFRS, the unlisted firms exhibit, on average, enhanced credit ratings. These findings suggest that the public debt market’s demand for high-quality financial reporting may drive those unlisted firms to voluntarily adopt IFRS. Furthermore, rating agencies seem to reward such firms by elevating their bond credit ratings.     

Voluntary Adoption of the IFRS and Industry-Level Comparability: Evidence from Korean Unlisted Firms

This study examines the role of industry-level comparability with regard to voluntary adoption of the international financial reporting standards (IFRS) by unlisted firms in Korea. Mandatory adoption of the IFRS for listed firms in 2011 inhibits financial statement comparability between listed and unlisted firms. Our empirical findings reveal that unlisted firms in industries with higher ratios of listed firms tend to adopt the IFRS voluntarily. After this adoption, such unlisted firms seem to attract greater investment in the public debt market.     

Voluntary IAS 1 accounting disclosures prior to official IAS adoption: An empirical investigation of UK firms

This paper focuses on firms’ voluntary compliance with the reporting requirements of the International Accounting Standard (IAS) 1 before the official adoption of IASs. The paper seeks to identify the motives for the voluntary adoption of IAS 1 and investigates the relation to the provision of voluntary accounting disclosures, the increase in equity capital, managers’ remuneration and firms’ stock returns. The study shows that the decision-making process of firms is significantly influenced by the intention to improve key financial measures, such as leverage, profitability and growth. Firms would tend to adopt an accounting policy or regulation when they feel that adoption would favourably impact on their financial situation. For example, the study indicates that firms voluntarily adopted IAS 1 before the official IAS adoption date in order to provide evidence of superior managerial ability and high quality reported accounting information. It is found that firms that perform well are more motivated to voluntarily abide by IAS 1. The study also reports that firms that provide voluntary accounting disclosures and perform increases in their equity capital appear to voluntarily adopt IAS 1. Similar findings are obtained for firms that display higher management remuneration and stock returns.     

Characteristics of UK firms related to timing of adoption of Statement of Standard Accounting Practice No. 20

This study examines whether the timing of adoption of the UK Statement of Standard Accounting Practice No. 20 ‘Foreign Currency Translation’ depended on firms’ financial characteristics. Consistent with US studies, we find that early adopters tended to be larger firms, and that variables, such as growth options, profitability, leverage and management payout, have strong predictive power. In general, the decision to adopt the Statement of Standard Accounting Practice No. 20 did not appear to adversely affect the profitability measures or dividend payout. Firms tended to adopt when the adverse economic consequences of the adoption were likely to be minimal. They also appeared to defer the adoption of the standard to influence their financial performance and, hence, to achieve certain corporate financial objectives.     

Effects of the Adoption of IFRS on the Credit Market: Evidence from Brazil

Based on a sample of approximately 6500 credit ratings and 137,000 loan contracts, this paper analyzes the effects of mandatory IFRS adoption on the Brazilian credit market. We find that the IFRS adoption effects were limited to firms displaying improved accounting information quality at the time of transition, lending support to the notion that economic benefits do not necessarily flow from the publication of financial reports in IFRS but, rather, depend on how earnestly firms adopt the recommended disclosure practices.     

The Effect of Fair Value Adjustments on Dividend Policy Under Mandatory International Financial Reporting Standards Adoption: Australian Evidence

Using a sample of firms from the financial sector of the Australian Securities Exchange, we examine the effect of the fair value adjustments of financial instruments on firms’ dividend distributions in the context of mandatory International Financial Reporting Standards (IFRS) adoption. We find a positive relationship between the fair value adjustments of financial instruments and firms’ dividend payouts, suggesting that the frequent use of fair value adjustments of financial instruments by financial firms following mandatory IFRS adoption has the potential to increase the proportion of transitory earnings in reported earnings and cause changes in dividend policies. Our results add to the ongoing debate on the unintended economic consequences of fair value accounting (FVA) and provide empirical support for regulators’ concerns that unrealized FVA gains from asset revaluation during booms may encourage the distribution of those unrealized gains.     

Understanding accounting discretion in China: An analysis of fair value reporting for investment property

This study sheds light on the discretionary accounting practices in China, the largest emerging market in the world. In particular, we focus on whether Chinese firms use discretion in investment property fair values to manage reported performance. We examine whether firms’ ex ante needs for accounting discretion affect their decisions to adopt fair value reporting for investment property and the ex post performance management by these fair value adopters. Our findings show that the voluntary adoption of fair value reporting for investment property in China remains low. However, the fair value option for investment property is significantly more likely to be chosen by firms with greater needs for accounting discretion. Consistent with the conjecture that firms choose the fair value model to manipulate reported earnings, we show that fair value adopters use the unrealized gains and losses associated with investment properties to smooth earnings and that these firms are also more likely to meet or beat earnings benchmarks after adoption. Overall, our findings indicate that the use of fair value reporting for investment property in the emerging Chinese market is driven by managerial opportunism.     

Shareholder litigation rights and capital structure decisions

We exploit the staggered adoption of the universal demand (UD) laws across U.S. states, which impedes shareholder rights to initiate derivative lawsuits, as a quasi-natural experiment to examine the relation between shareholder litigation rights and firm capital structures. We find that weaker shareholder litigation rights due to the UD laws adoption lead to higher financial leverage, which enhances firm value. Furthermore, the positive relation between the UD laws adoption and financial leverage is more pronounced for firms exposed to higher shareholder litigation risk ex ante or financially constrained firms. Our evidence is consistent with lower shareholder litigation threats motivating firms to increase financial leverage.     

Does financial reporting regulation influence the value of cash holdings?

We investigate how the value of cash holdings changes following the mandatory adoption of International Financial Reporting Standards (IFRS), which is viewed as an exogenous shock to information asymmetry between firms and outside investors. Using firm-level data from 47 countries, we find that mandatory IFRS adoption has a negative and significant impact on the value of cash holdings. This result suggests that investors reduce their valuation of cash holdings when firms can have access to external financing at a lower cost under IFRS. The negative effect of IFRS is concentrated among financially constrained firms. Furthermore, we show that the effect is more pronounced in countries with strong legal enforcement. Overall, our evidence highlights that financial reporting regulation can have a significant effect on how outside investors value corporate cash holdings across countries.     

Diffusion of off-balance-sheet financial innovations: Information complementarity and market competition

By studying the Hong Kong banking industry, the objective of this study is to examine the role of information complementarity and market competition in governing the diffusion of off-balance-sheet (OBS) financial innovations. Specifically, two OBS financial innovations are information complementary if the adoption of one lowers the uncertainty of adopting another. In addition, market competition may speed up the diffusion of OBS financial innovations because competitive firms are able to capture the full profit potential from successful innovations. A simultaneous equation model is devised to estimate the impacts of information complementarity, market competition, and a number of other factors on the diffusion of OBS financial innovations. Results of estimation suggest that information complementarity and market competition are the primary driving forces behind the diffusion process.     

ISO certification,financial constraints,and firm performance in Latin American and Caribbean countries

We employ World Bank Enterprise Survey data collected in 2006–2010 for 21,852 firms from 31 Latin American and Caribbean countries to investigate determinants of the adoption of International Organization for Standardization (ISO) certification, the relation between ISO certification and firm financial constraints, and the effect of ISO certification on firm performance. We find that ISO accreditation is positively related to firm size and firm age. Exporters and foreign firms are more likely to adopt ISO certification. We document that ISO-certified firms exhibit significantly lower level of financial constraints and higher labor productivity and lower cost of sales than non-certified firms.     

The effects of adopting the Balanced Scorecard on shareholder returns

Many firms have adopted the Balanced Scorecard (BSC) as a way to implement strategy and measure firm performance. This paper uses a long-horizon event study methodology to examine the relationship between BSC adoption and shareholder returns. Using a matched pair design, we show that firms who adopt the BSC significantly outperform firms that do not adopt the BSC over a three year period beginning with the year of adoption. Our results are robust for different matching criteria. There is also evidence that firms earn greater excess returns after adoption of the BSC than before. These results provide strong evidence that the BSC is an effective strategic management tool that leads to improved shareholder returns.     

The Impact of Mandatory International Financial Reporting Standards Adoption on Investment Efficiency: Standards,Enforcement, and Reporting Incentives

This paper investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) is followed by a decline in firms’ suboptimal investments. On average, we find that the probability of under‐investment in capital expenditure declines for firms from 23 countries requiring mandatory adoption of IFRS relative to firms from countries that do not have such requirements; meanwhile the probability of over‐investment remains unchanged. However, this real effect becomes smaller when we control for concurrent changes to the enforcement of financial reporting along with the introduction of IFRS in some countries, suggesting that the switch in standards is only one of the drivers for the observed benefits. Moreover, we find that the reduction in suboptimal investments is driven by firms with high reporting incentives to provide transparent financial reports from countries where the existing legal and enforcement systems are strong. We further show that the real effect increases with the predicted changes in accounting comparability. Finally, we find that after mandatory IFRS adoption, capital investment becomes more value‐relevant, less sensitive to the availability of free cash flows, and more responsive to growth opportunities. Our findings provide new insights into the real effects of mandatory IFRS adoption.     

An investigation of Customer Accounting systems as a source of sustainable competitive advantage

This study examines whether using customer accounting systems for resource allocation purposes is a source of sustainable competitive advantage. Based on a longitudinal data set comparing the performance of firms that adopt customer accounting and their industry benchmarks, we find that financial performance increases post adoption, leading to significant abnormal positive performance vis-à-vis average industry benchmarks (4–5%-points ROA difference) in the first two years following the adoption. However, we also show that this effect deteriorates over time, suggesting that the adoption of management accounting systems is a source of temporary rather than sustainable competitive advantage. The results are robust to other strategic events around the time of adoption, different matching of peers, and the influence of other factors that could be expected to influence firm performance. We discuss the implications of these findings for management accounting research and practice.     

Domestic Accounting Standards, International Accounting Standards, and the Predictability of Earnings

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.     

Modeling RBRT adoption and its effects on cost of capital

In the capital market, firms compete to obtain capital at a lower cost than their rivals. In order to do so, firms may try to increase their information disclosure by adopting new information technologies, such as a real-time business reporting technology (RBRT). The financial accounting literature has empirically provided positive evidence of increased transparency (e.g., resulting from RBRT adoption). We attempt to link the transparency and cost of capital literatures and extend organizational innovation adoption theory.We adapt some constructs from existing innovation adoption theory, as well as contribute some that apply to a RBRT context, to develop a mathematical model on the relationship between RBRT adoption and the cost of capital. The model considers both micro-(firm) level factors and macro-level factors that affect the adoption decision. We argue that cost of capital savings, uncertainty, risk aversion, transaction and transformation costs, and governmental policy affect a firm's decision of whether and when to adopt a RBRT. A number of propositions are derived, based on our model, which may help firms formulate their adoption strategy. Our model also provides a basis for further empirical study on this new issue.     

The impact of XBRL adoption on local bias: Evidence from mandated U.S. filers

This paper investigates how eXtensible Business Reporting Language (XBRL) adoption affects the information advantage of local investors relative to their non-local counterparts. By employing the recent staggered SEC mandates of XBRL as a natural shock, we show that institutional investors’ local bias decreases after firms adopt XBRL when preparing their financial statements. These results hold in a difference-in-difference research design with firm and year fixed effects or using matched nonadopting firms as controls, as well as a regression discontinuity design. The impact of XBRL adoption on reducing local bias can be explained by three economic channels: decreased information processing costs, increased corporate disclosures, and improved analyst coverage. We further find that institutions’ superior stock returns in geographic proximate equity investments significantly reduces after the XBRL mandate. The observed reduction in institutional investors’ local bias within U.S. companies following the XBRL mandate also applies to the international setting. Overall, our findings support regulators’ claim that XBRL adoption levels the playing field between local and non-local investors.     

The effect of information shocks on dividend payout and dividend value relevance

We exploit the mandatory adoption of International Financial Reporting Standards (IFRS) as a source of exogenous shock to the corporate financial information environment to study the potential effect that this information shock might have on the dividend payout policy and dividend value relevance in the UK and France. We employ a difference-in-differences research design, in which our choice of the control and treatment groups is mainly based on the divergence between domestic accounting standards and IFRS, while holding institutional factors constant. The UK domestic accounting standards slightly diverge from IFRS (low-divergence firms), whereas French domestic accounting standards substantially diverge from IFRS (high-divergence firms). Nevertheless, both countries have similar institutional factors that might confound the effect of IFRS adoption. Our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason for the free cash flow problem (Jensen, 1986) and cash over-retention (Myers & Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among high-divergence firms via reduction of asymmetric information. Moreover, improving the information environment helps investors become more confident about using accounting numbers to assess firm financial performance, which causes a significant reduction in dividend value relevance among high-divergence firms.     

The adoption of international accounting standards by small and closely held companies: evidence from Bahrain

This study examines the accounting practices and the degree of adoption of international accounting standards (IASs) by small and closely held companies in Bahrain. It finds that 86% (31) of the 36 companies responding to the questionnaire applied IASs and they considered IASs to be very relevant for them. All firms prepare balance sheets, and the majority prepares income statements and cash flow statements. They also duly audit these statements. The data collected also revealed that the quotient influence on whether or not a firm adopted IAS was exerted by their external auditors. External auditors exerted the greatest influence on getting firms to adopt IASs. Banks and company partners were the primary users of company financial statements; inventories, depreciation, disclosure on financial statements, and the presentation of current assets and liabilities. The main IASs followed by a majority of firms are those pertaining so. Some of the standards were considered totally irrelevant, contrary to the prevailing idea that adoption of IASs creates an information overload for small and closely held companies. The results of this study indicate that a majority of our respondents did not find that it was costly to adopt or interpret IASs. Those few firms that experienced some difficulties sought clarification from their external auditors. About 84% of those who adopted IASs strongly agreed that using IASs improves their organization's ability to financial assistance from the banking sector. Also, about 90% of the respondents fully agreed that IASs help to achieve the objectives and improve the effectiveness of financial reporting.