The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Belgium

Abstract

We study the incorporation of EU Directive 2013/34/EU on financial reporting into Belgian legislation. By analyzing the forces that shape the transposition of this Directive, we examine opportunities and obstacles in the Belgian institutional environment that hinder or stimulate the possibilities for the International Financial Reporting Standards (IFRS) to influence financial reporting by private firms in Belgium. As a result of several national forces, the Belgian legislature did not use all opportunities available to modernize financial reporting for private entities when transposing this Directive. We further discuss existing differences between Belgian National Accounting Rules for private enterprises and the IFRS and observe that the influence of the latter on financial reporting regulation for private enterprises in Belgium remains rather limited.     

Are capital buffers pro-cyclical?: Evidence from Spanish panel data

We estimate the relationship between the Spanish business cycle and the capital buffers held by Spanish commercial and savings banks in an incomplete panel of institutions covering the period 1986–2000, which comprises a complete cycle. After controlling for other potential determinants of the surplus capital we find a robustly significant negative relationship between the position in the cycle and capital buffers. From a quantitative standpoint, an increase of 1 percentage point in GDP growth might reduce capital buffers by 17%. This relationship is, moreover, asymmetric, being closer during upturns.     

Does the law of one price hold in international financial markets? Evidence from tick data

This paper investigates the validity of the law of one price (LOP) in international financial markets by examining the frequency, size and duration of inter-market price differentials for borrowing and lending services (‘one-way arbitrage’). Using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, we find that the LOP holds on average, but numerous economically significant violations of the LOP arise. The duration of these violations is high enough to make it worthwhile searching for one-way arbitrage opportunities in order to minimize borrowing costs and/or maximize earnings on given funds. We also document that such opportunities decline with the pace of the market and increase with market volatility.     

Microenterprise Dynamics in Developing Countries: How Similar are They to Those in the Industrialized World? Evidence from Mexico

A rich panel data set from Mexico is used to study the patternsof entry, exit, and growth of microenterprises and to comparethese with the findings of the mainstream theoretical and empiricalwork on firm dynamics. The Mexican self-employment sector ismuch larger than its counterpart in the United States, whichis reflected in higher unconditional rates of entry into thesector. The evidence for Mexico points to the significant presenceof well-performing salaried workers among the likely entrantsinto self-employment, as opposed to the higher incidence ofpoorer wageworkers among the entrants into the U.S. self-employmentsector. Despite these differences, however, the patterns ofentry, survival, and growth with respect to age, education,and many other covariates are very similar in Mexico and theUnited States. These strong similarities suggest that mainstreammodels of worker decisions and firm behavior are useful guidesfor policymaking for the developing-country microenterprisesector. Furthermore, they suggest that, as a first approximation,the developing-country microenterprise should probably be viewedas they are in the advanced countries as offering potentiallydesirable job opportunities to low-productivity workers.     

The effects of rural–urban migration on corporate innovation: Evidence from a natural experiment in China

We show that the migration of low-skilled, rural workers to urban centers has a negative causal effect on innovation of firms in such urban centers. Our tests exploit the staggered relaxation of city-level household registration system in China, which facilitates rural residents to migrate to cities. We find a significant decrease in innovation for firms headquartered in cities that have adopted such policies relative to firms headquartered in cities that have not. Overall, our results support the view that an abundant supply of low-skilled workers increases the benefit of using existing low-skilled technology and thus reduces firms’ incentive to innovate.     

Performance of closely held firms in Russia: evidence from firm-level data∗

This paper evaluates the impact of ownership concentration on firm performance in a weak institutional environment. Specifically, using new survey evidence, we seek to appraise quantitatively the performance of block-holder-controlled firms in Russia and to identify, within the domain of corporate governance theory, factors that may explain such performance. We find evidence of negative association between the size of the dominant owners’ shareholding and performance parameters such as investment, capacity utilization, and profitability. At the same time, we establish that control structures with multiple, large shareholders increase efficiency. The ambiguity of the effects of ownership concentration suggests that country-specific factors play an important role.     

Implications of the “momentum” theory of digitalization in accounting: Evidence from Ash Cloud

We aim to demystify digitalization in accounting (DIA) based on the case study of Ash Cloud, a digital factory in Shenzhen, China. From the perspective of dynamic capabilities, we develop the “momentum” theory of DIA to illustrate that firm and executive characteristics drive digital transformation and organizational capabilities. Ash Cloud’s CEO values and cultivates an organizational culture of transparency and openness, while the firm is characterized by cost pressures. Organizational capabilities shape digitalization in business processes and different approaches to DIA. Our findings suggest that the core competence of Ash Cloud is its capability for systems integration, which includes knowledge of redesign, reconfiguration and redefinition. Ash Cloud stands out because of its knowledge extending beyond the firm’s boundaries.     

Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide

This paper investigates the influence of corporate governance on financial firms' performance during the 2007–2008 financial crisis. Using a unique dataset of 296 financial firms from 30 countries that were at the center of the crisis, we find that firms with more independent boards and higher institutional ownership experienced worse stock returns during the crisis period. Further exploration suggests that this is because (1) firms with higher institutional ownership took more risk prior to the crisis, which resulted in larger shareholder losses during the crisis period, and (2) firms with more independent boards raised more equity capital during the crisis, which led to a wealth transfer from existing shareholders to debtholders. Overall, our findings add to the literature by examining the corporate governance determinants of financial firms' performance during the 2007–2008 crisis.     

Short-sale constraints: Reductions in costs of capital or overvaluation? Evidence from Hong Kong

We examine the effects of short-sale constraints in Hong Kong where stocks can be shorted only if they are included on an official short-sale list. Using revisions to the list, we test two hypotheses — 1) that short-sale constraints lead to overvaluation and 2) that they lead to lower costs of capital. We find weak support for the Diamond and Verrecchia (1987) version of the overvaluation hypothesis, but more compelling evidence supporting the Xu (2007) version of the overvaluation hypothesis and the cost of capital hypothesis. We argue that in the context of our tests the Xu overvaluation hypothesis is actually a reformulation of the cost of capital hypothesis and that the bulk of our evidence, therefore, supports the notion that short-sale constraints reduce capital costs.     

The influence of cultural factors on price clustering: Evidence from Asia–Pacific stock markets

Price clustering is the tendency of prices to be observed more frequently at some numbers than others. It increases with haziness, or imprecision, about underlying value. Most research on price clustering has been conducted in Western financial markets, where there is manifest preference for trading at round numbers.We focus on number preferences under Chinese culture. Many Chinese believe some numbers are “unlucky” and to be avoided. For instance, the number 4 is inauspicious because the Cantonese pronunciation of 4 is similar to the phrase “to die”. We first document clustering of daily closing prices on six Asia–Pacific stock markets, three with predominantly Chinese populations. Next, we fit binomial logit models within these markets to estimate the association between structural and economic factors, and culture, on price clustering. We find some support for the influence of Chinese culture and superstition on year-round number preferences of traders, but it is located solely in the Hong Kong market. Furthermore, in the Hong Kong market Chinese culture and superstition help explain the increased avoidance of the number 4 during the auspicious Chinese New Year, Dragon Boat and Mid-Autumn festivals.     

Accounting and capital market measures of risk: Evidence from Asian banks during 1998–2003

This study examines the relation between accounting and capital market risk measures for a sample of 46 listed Asian banks during the period 1998–2003. By applying a panel data analysis that includes a control for country-specific factors, the results show that the standard deviation of the return-on-assets and loan-loss-reserves-to-gross-loans are significantly related to total risk. Also gross-loans-to-total-assets and loan-loss-reserves-to-gross-loans are significantly related to non-systematic risk. These results indicate that in these Asian countries, firm-specific risk is more important than systematic risk and the results are robust even though significant differences exist across Asian countries in banking activities, capital adequacy requirements, and deposit insurance protection.     

The effect of banking system reform on investment–cash flow sensitivity: Evidence from China

This study investigates the effect of banking system reform on the investment behavior of Chinese listed firms. We find that the politically-oriented investment problem for state-controlled listed companies is mitigated by the reform due to foreign participation in the management of Chinese banks. The problem of underinvestment in non-state-controlled listed companies also appears to be alleviated due to an increase of bank loans. We include leverage in our analysis and the main findings are robust. The results provide evidence that Chinese banking system reform has increased the efficiency of resource allocation, easing investment distortions in state-controlled listed companies and reducing financial constraints in non-state-controlled listed companies.     

Bank risk-taking and corporate investment: Evidence from the Global Financial Crisis of 2007–2009

In this paper, we explore the relation between the banking sector's risk-taking and a firm's investment (“corporate investment”). Specifically, we ask whether firms' cash holdings moderate the effect of the banking sector's risk-taking on corporate investment. Based on a panel sample of publicly listed non-financial firms in 15 EU countries during the period 1990–2015, we document several key findings. First, both cash holdings and the banking sector's risk-taking are positively associated with corporate investment. Second, bank loan growth, which roughly captures the supply of bank credit, is not related to corporate investment. Third, firms with smaller cash holdings disproportionately invest more than do firms with larger cash holdings during periods of higher risk-taking by the banking sector.     

The Role of Ownership Concentration and Debt in Downturns: Evidence from Brazilian Firms During the 2008–9 Financial Crisis

This article aims to reconcile conflicting literature about the role of ownership concentration in the responsiveness of stock prices to macroeconomic shocks. We modified a previous theoretical model, adding leverage as a disciplining device. An important implication of our model is that only in deep crises ownership concentration plays a role in attenuating the effect of macroeconomic shock on firm value. We test this hypothesis using a sample of Brazilian firms during distinct phases of the 2008–9 crisis. Our empirical analyzes shows that only in the most critical part of the crisis, ownership concentration reduced the negative effects of the financial crisis.     

Constructing Fama–French Factors from Style Indices: Evidence from the Islamic Equity Market

This study has contributed to the analysis of the Fama–French three-factor model by proving the validity of model using the newly constructed Fama–French factors from Malaysian Islamic stock market. With generalized method of moments and robustness tests, our results compliment earlier studies by comparing the results over two sub-periods, before and after the financial crises and the fall of Lehman Bros. The results of the analysis suggest that the reversal of size effects exists after periods of financial crisis. This is the first attempt to create FF factors and test the model from Islamic equity style indices.     

Equity index variance: Evidence from flexible parametric jump–diffusion models

This paper analyzes a wide range of flexible drift and diffusion specifications of stochastic-volatility jump–diffusion models for daily S&P 500 index returns. We find that model performance is driven almost exclusively by the specification of the diffusion component whereas the drift specifications is of second-order importance. Further, the variance dynamics of non-affine models resemble popular non-parametric high-frequency estimates of variance, and their outperformance is mainly accumulated during turbulent market regimes. Finally, we show that jump diffusion models yield more reliable estimates for the expected return of variance swap contracts.     

Administrative division adjustments and stock price comovement: Evidence from the city–county mergers in China

Under the background of Chinese market segmentation, whether government-led administrative division adjustments can promote regional economic integration is a practical issue. Taking interregional firms’ stock price comovement as a micro measurement of regional integration, this paper investigates the regional integration effect of administrative division adjustments, i.e., city–county mergers. We find that stock price comovement between county-level and municipal district-level firms in the merged counties and municipal districts significantly improve after city–county mergers, particularly in regions with a higher degree of market segmentation and lower degree of marketization. We further find that the increase in stock price comovement caused by city–county mergers emerges from the increase in comovement of real activities between firms in the merged counties and municipal districts. Taken together, our results suggest that government-led administrative division adjustments effectively promote regional integration.     

The Determinants of Foreign Currency Hedging–Evidence from Hong Kong Non-Financial Firms

Hong Kong is one of the largest trading economies in the world. Business opportunities attract the presence of more and more multinational companies and different currencies. Hedging currency risks has become an important and vital activity for a success business entity in Hong Kong. This paper empirically tests the determinants of foreign currency hedging for a large sample of Hong Kong non-financial firms. The findings are potentially useful for increasing firms’ economic benefit and shareholders’ wealth as well as improving the economic efficiency of currency hedging for companies in Hong Kong as well as in the mainland of China. JEL classification: F30, G32, G33     

Audit market structure,fees and choice in a period of structural change: Evidence from the UK – 1998–2003

This paper presents evidence on audit market concentration and auditor fee levels in the UK market in the crucial period of structural change following the PricewaterhouseCoopers’ (PwC) merger and encompassing Andersen’s demise (1998–2003). Given the current interest in auditor choice, analysis is also undertaken at the individual audit firm level and by industry sector. There is evidence of significant upward pressure on audit fees since 2001 but only for smaller auditees. Audit fee income for top tier auditors (Big 5/4) did not change significantly while the number of auditees fell significantly, consistent with a move towards larger, less risky, clients. A decomposition analysis of the aggregate Big 5/4 concentration ratio changes over the period identifies the impact of four distinct consumer-based reasons for change: leavers; net joiners; non-par auditor switches; and (only for the audit fees measure) audit fee changes. Andersen’s demise markedly reduced the level of inequality among the top tier firms but PwC retained its position as a ‘dominant firm’. On switching to the new auditor, former Andersen clients experienced an initial audit fee rise broadly in line with inflation, with no evidence of fee premia or discounting. They also reported significantly lower NAS fees, consistent with audit firms and auditees responding to public concerns about perceptions of auditor independence. There is no general evidence of knowledge spillover effects or cross-subsidisation of the audit fee by NAS. The combined findings provide no evidence to indicate that recent structural changes have resulted in anticompetitive pricing; the key concerns remain the lack of audit firm choice and issues concerning the governance and accountability of audit firms.