Auditor Quality,IFRS Adoption,and Stock Price Crash Risk: Korean Evidence

This paper investigates the relationship among auditor quality, International Financial Reporting Standard (IFRS) adoption and stock price crash risk. Using 657 unique listed companies spanning 2002–2014 in Korea, this study finds that stock price crash risk decreases, especially for firms using Big 4 auditors, after IFRS adoption in Korea. Stock price crash risk decreases for a firm included in Big 4 auditors, while it does not increase for a firm excluded from Big 4 auditors after IFRS adoption. Finally, this study finds that Big 4 auditor decreases stock price crash risk only when the firm size is above-median.     

IFRS reporting, firm-specific information flows, and institutional environments: international evidence

This study investigates whether and how a firm??s voluntary adoption of International Financial Reporting Standards (IFRS) influences the extent to which firm-specific information is capitalized into stock prices measured by stock price synchronicity. We also study the role of analyst following and institutional environments in determining the relation between IFRS reporting and synchronicity. Using firm-level data from 34 countries, we find that synchronicity is significantly lower for IFRS adopters than for non-adopters across all regression specifications and that for IFRS adopters it decreases from the pre-adoption period to the post-adoption period. This finding supports the view that voluntary IFRS adoption facilitates the incorporation of firm-specific information into stock prices, thereby reducing synchronicity. We also find that the synchronicity-reducing effect of IFRS adoption is attenuated (accentuated) for firms with high (low) analyst following and is stronger (weaker) for firms in countries with poor (good) institutional environments.     

The impact of IFRS adoption on the value relevance of book value and earnings

In this study, we investigate the impact of IFRS adoption in Europe and Australia on the relevance of book value and earnings for equity valuation. Using a sample of 3488 firms that initially adopted International Financial Reporting Standards (IFRS) in 2005, we are able to compare the figures originally reported for the 2004 fiscal years to the IFRS figures that were provided in 2005 as the 2004 IFRS comparative figures. As part of the inquiry, we introduce a cross-product term, equal to the product of EPS and BVPS, into the traditional linear pricing models. The estimated coefficient on the cross-product term is statistically significant and negative, as theory suggests in the presence of important nonlinearities. Further, there is increased non-linearity in the data subsequent to IFRS adoption, with the increase being most pronounced for firms in Common Law countries. With non-linear effects controlled for, there is no observed change in price relevance for firms in either Code Law or Common Law countries, contradicting the results from the linear pricing models. The results also suggest that the distribution of measurement errors becomes more similar across Code Law and Common Law countries after the adoption of IFRS, removing one difference between these groups. Thus, IFRS enhances comparability, an inference that would not be possible had we confined the analysis only to linear pricing models.     

IFRS Adoption and the Choice Between Public and Private Debt: Evidence from South Korea

This article examines the association between mandatory International Financial Reporting Standards (IFRS) adoption and corporate choice between public debt and private debt. If IFRS adoption increases the quality of lenders’ information environment provided on financial statements, firms are more likely to access the public debt market. Using a sample of public and private debts financing firms from 2000 to 2014 in Korea, we find that firms that file financial reports under the IFRS are less likely to finance from public debt markets, implying that the mandatory IFRS adoption has exacerbated the information environment of the public debt market in Korea.     

Do Improvements in the Information Environment Enhance Insiders’ Ability to Learn from Outsiders?

We examine whether and how an exogenous shock to the information environment changes insiders’ ability to learn from outsiders. We document three main findings. First, we find an increase in investment‐to‐price sensitivity following the adoption of International Financial Reporting Standards (IFRS). Second, we show that the relation between the market reaction to M&A deal announcements and the likelihood of deal completion becomes stronger after IFRS adoption. Third, we find significant improvements in post‐acquisition operating and stock return performance post‐IFRS adoption. These results are more pronounced for firms that experienced significant increases in foreign institutional ownership around IFRS adoption, especially when these foreign investors are from countries that matter for the firm’s growth opportunities. Taken together, our findings suggest that insiders’ ability to learn from outsiders improves post‐IFRS, and this improved ability to learn from outsiders leads to real economic gains.     

The impact of national GAAP and accounting traditions on IFRS policy selection: Evidence from Germany and the UK

The adoption of IFRS in the European Union in 2005 aimed to increase the comparability of publicly traded companies’ consolidated accounts. However, previous literature questions whether IFRS are applied consistently across countries with differing institutional environments, and therefore, whether de facto harmony has been achieved. We further examine this question by investigating IFRS accounting policy choices of listed companies in Germany and the UK between 2005 and 2009. We find that most firms, when choosing IFRS options, tend to retain accounting policies required by national rules. We also investigate national accounting traditions in the case of options under national GAAP and find that most companies continue these after adopting IFRS. Moreover, there appears to be little significant change in accounting choices over time from 2005 to 2009. Given the differences in accounting rules and practices that exist across countries, our results suggest that international differences in financial reporting are likely to continue under IFRS.     

IFRS adoption in China and foreign institutional investments

We examine the effectiveness of China’s IFRS adoption from the perspective of an important set of financial report users, foreign institutional investors. We find that foreign institutional investment does not increase after China’s IFRS adoption, and some evidence that it actually declines, particularly among firms with weaker incentives to credibly implement IFRS, or with greater ability to manipulate IFRS’s fair value provisions. We also find that the association between earnings and returns generally declines after IFRS adoption, consistent with reduced earnings quality. In addition, we find that foreign institutional investors’ returns decrease after China’s IFRS adoption. Finally, the decline in foreign institutional investment is greater among investors from countries with weak institutions that have also adopted IFRS. Taken together, our evidence suggests that the weak institutional infrastructure in China’s transitional economy impairs IFRS’s intended goal of attracting institutional investment through improved financial reporting quality. Further, financial information users’ home country institutions and IFRS adoption experience affect the effectiveness of IFRS adoption.     

Product market effects of IFRS adoption

Prior literature finds that International Financial Reporting Standards (IFRS) adopters enjoy lower financing costs subsequent to IFRS adoption. We predict and find that mandatory IFRS adopters exploit lower financing costs to increase market share vis-à-vis non-adopters. This effect is robust across several different model specifications in a sample capturing the universe of public and private firms in the EU, in a matched sample of public and private firms, and in a public firm sample comparing mandatory and voluntary IFRS adopters. We further find that IFRS is associated with an increase (decrease) in industry sales concentration (competition), consistent with large public firms increasing market share. In supplemental analyses, we find that mandatory adopters issue more equity and debt after IFRS adoption and that larger market share gains accrue to those mandatory IFRS adopters that issue more equity and debt after IFRS adoption. Overall, we provide evidence of unintended product market consequences of IFRS adoption.     

Have ‘European’ and US GAAP measures of income and equity converged under IFRS? Evidence from European companies listed in the US

The EU's adoption of IFRS, combined with the SEC's removal of the US GAAP reconciliation requirement for non‐US registrants reporting under IFRS, signifies a major shift towards the acceptance of global standards. Based on 20‐F reconciliations provided by the population of US listed European companies filing IFRS‐based statements with the SEC in 2005, we examine whether ‘European’ and US GAAP measures of income and equity converged under IFRS. We find that during the period immediately preceding IFRS, for our sample companies, European and US GAAP measures are generally comparable in respect of income and equity. However, as an exception to the latter, we find that UK GAAP yielded significantly lower measures of equity than US GAAP For companies adopting IFRS for the first time in 2005, we find a significant gap between IFRS and US GAAP measures of income, thereby, signifying de facto divergence from US GAAP in regard to income determination. Furthermore, we find that, following IFRS adoption, significant differences with US GAAP equity persisted for companies that previously reported using UK GAAP. Our findings, thus, support critics’ claims that standard‐setters, most notably the IASB and FASB, have more work to do to achieve a sufficient degree of convergence between IFRS and US GAAP that will convince the SEC to require US companies to use IFRS.     

Changes in the value relevance of research and development expenses after IFRS adoption

We investigate whether the nature of differences between national GAAP and IFRS is associated with differential changes in the value relevance of R&D expenses after the adoption of IFRS across countries. Using a difference-in-differences study on a sample of public companies in nine countries that covers pre-IFRS and post-IFRS periods during 1997–2012, we find that the value relevance of R&D expenses declines after IFRS adoption in countries that previously mandated immediate expensing or allowed optional capitalization of R&D costs. On the contrary, there is no change in the value relevance of R&D expenses for countries that switched from the mandatory capitalization rule to IFRS. We also investigate the moderating effects of national institutions on the changes in the value relevance of R&D expenses after IFRS adoption. We find that in countries with stronger investor protection, the changes in the value relevance of R&D expenses are larger. In addition, changes in the value relevance of R&D expenses are smaller for countries whose national culture is characterized by higher uncertainty avoidance. Our findings highlight the importance of both accounting standards and national institutions in explaining the changes in the value relevance of accounting information after IFRS adoption.     

Does IFRS Adoption Increase the Accuracy of Chinese Analysts’ Forecasts?

This article investigates the impact of International Financial Reporting Standards (IFRS) adoption on the accuracy of Chinese analysts’ earnings forecasts. We find that after IFRS adoption, the accuracy of Chinese analysts’ forecasts decreases rather than increasing as they do in developed countries documented by the extant literature. Further investigation finds that this decrease is associated with a fair value measurement of financial assets held for trading. Our finding provides empirical evidence supporting the argument that the effectiveness of IFRS adoption could be negative in a developing country depending on its setting and fair value measurement brought about by IFRS could contribute to the negative effect in this setting.     

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.     

Intangible assets and value relevance: Evidence from the Portuguese stock exchange

We assess the value relevance of the amounts for identifiable intangible assets and goodwill reported in the financial statements of all non-finance companies listed on the main market of the Portuguese Stock Exchange from 1998 to 2008. Additionally, we use panel data to explore the impact on value relevance of Portugal’s formal adoption of International Accounting Standards [IAS] and International Financial Reporting Standards [IFRS] in 2005. A distinctive feature of the accounting by our sample companies is that when they adopted IAS 38 and IFRS 3 in 2005, they were no longer required to recognise some intangible assets (such as start-up costs and research expenditures) and were no longer required to amortise goodwill.We find that net earnings, reported goodwill and other intangible assets are highly significantly associated with stock price. However, whereas earnings are related positively to stock prices when Portuguese Generally Accepted Accounting Principles (GAAP) were applied prior to 2005, the value relevance of earnings appears to have declined after the adoption of IAS/IFRS in 2005. Although the change to IAS/IFRS had no impact on the value relevance of identifiable intangibles as a whole, the evidence suggests that there was a positive effect on the value relevance of goodwill. When the subclasses of identifiable intangible assets are considered, we found evidence of an increase in value relevance of goodwill, other intangible assets, and research and development expenditures.     

The Differential Impact of IFRS Adoption on Aspects of Seasoned Equity Offerings in the UK and France

We examine the potential for IFRS to influence the market for SEOs in the UK and France. The divergence between the UK domestic accounting standards and IFRS is minor (low-divergence firms) whereas domestic accounting standards in France differ materially from IFRS (high-divergence firms); however, both countries have similar legal enforcement and institutional settings that might confound the effect of IFRS adoption. We argue that IFRS adoption serves to mitigate information asymmetry and improve accounting quality. Accordingly, we find that, following IFRS adoption, earnings management activities decrease among high-divergence firms prior to issuing SEOs. As a result of the lower levels of earnings management and information asymmetry, we predict and find that the market reaction to issuing SEOs improves significantly for high-divergence firms following IFRS. Given that equity financing becomes less costly, we find that the propensity to issue new SEOs increases among high-divergence firms after IFRS adoption. We find no similar changes among low-divergence firms. The results persist after running a matched-sample analysis and controlling for potential self-selection bias.     

IFRS adoption,reporting incentives and financial reporting quality in private firms

This study examines financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Our findings indicate that failure to identify earnings quality changes around IFRS adoption cannot be automatically interpreted as IFRS adoption having no effect on the FRQ of (private) firms. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ.     

Analyst Following and Forecast Accuracy After Mandated IFRS Adoptions

This study investigates how accounting harmonization affects one particular group of financial statement users—financial analysts. We find that mandatory International Financial Reporting Standards (IFRS) adoption attracts foreign analysts, particularly those from countries that are simultaneously adopting IFRS along with the covered firm's country and those with prior IFRS experience. We also find that mandatory IFRS adoption improves foreign analysts’ forecast accuracy. The change in analyst following increases with the distance between prior local Generally Accepted Accounting Principles (GAAP) and IFRS and with the extent to which IFRS adoption eliminates GAAP differences between the firm's country and the analyst's country. IFRS adoption also attracts more local analysts, particularly those with prior IFRS experience and with an international portfolio prior to mandated IFRS adoption in their home country. Local analysts’ forecast accuracy is not affected by IFRS adoption. Overall, our results suggest that accounting harmonization brings comparability benefits that enhance the usefulness of accounting data.     

The Value Relevance of International Financial Reporting Standards: Empirical Evidence in an Emerging Market

This study examines the value relevance of accounting information under International Financial Reporting Standards (IFRS) in the Abu Dhabi Stock Exchange (ADX, henceforth). Based on models developed by Easton and Harris (1991), and Ohlson (1995) and using monthly market data from 2000 to 2006, this paper investigates the value relevance of accounting information of firms traded on the ADX. Our overall results show that earnings scaled by beginning of period price are positively and significantly related to cumulative returns and that earnings per share and book value per share are positively and significantly related to price per share. We also find that value relevance of accounting information has changed since the market inception in 2000. The results documented herein extend the literature on value relevance accounting information in an emerging market that requires the use of IFRS. The study therefore contributes to the debate over the mandatory adoption of IFRS and the value relevance of accounting information reported under IFRS.     

The mediating effect of REM on the relationship between CEO overconfidence and subsequent firm performance moderated by IFRS adoption: A moderated-mediation analysis

The present paper is pursuing a new direction in the analysis of behavioral finance based on examining whether future performance of the firm is related to overconfidence displayed by the Chief Executive Officer (CEO). We suggest two channels for this relationship, real earnings management (REM) and the mandatory IFRS adoption. First, examining the impact of IFRS adoption on firms’ future performance, we find that overconfident CEOs who do not adopt IFRS exhibit poorer future performance. Other interactions related to overconfidence and IFRS are not significant. Second, examining the relationship between overconfidence and IFRS adoption on REM, we find that overconfident CEOs indulge in higher REM than non-overconfident CEOs. Further, overconfident CEOs who adopt IFRS display greater REM than do those who not adopt IFRS. Therefore, we prove that the indirect effect of CEO overconfidence on the subsequent firm performance through REM is contingent on the mandatory IFRS adoption.     

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.     

Asset Liquidity and Stock Liquidity: International Evidence

This study examines the relationship between asset liquidity and stock liquidity across 47 countries. In support of the valuation uncertainty hypothesis, we find that firms with greater asset liquidity on average have higher stock liquidity. More importantly, our study shows that asset liquidity plays a more significant role in resolving valuation uncertainty in countries with poor information environment. For example, we find that the asset–stock liquidity relationship is stronger in countries with poor accounting standards. We further find evidence that after the adoption of IFRS, the improved accounting information environment results in a weaker asset–stock liquidity relation, but only in countries with a strong legal regime. Finally, our study shows that the positive asset–stock liquidity relationship may be attributed to transparency and/or liquidity reasons.