Agency costs and audit quality: evidence from France

The IFRS mandatory adoption in European countries is an excellent context from which to assess the validity of accounting choice theory, which postulates that information asymmetry, contractual efficiency (agency costs) and managerial opportunism reasons could drive the choice. With this aim, we test the impact of these factors to explain the adoption of fair value for investment properties (IAS 40) in the real estate industry, taking into account the ‘revaluation’ option offered by IFRS1 and using historical cost without revaluations as a baseline category for comparison purposes. We select a sample of European real estate companies from Finland, France, Germany, Greece, Italy, Spain and Sweden, all first-time adopters of the IFRS. Using a multinomial logistic model, we show that information asymmetry, contractual efficiency and managerial opportunism could account for the fair value choice. Particularly, the most significant findings are that size as a proxy of political costs reduces the likelihood of using fair value while market-to-book ratio is negatively associated with the fair value choice. On the other hand, leverage, another typical proxy of contracting costs, seems not to influence the choice. This evidence confirms the current validity of traditional accounting choice theory even if it reveals, in such a context, the irrelevance of the usual relations between accounting choice and leverage.     

International Financial Reporting Standards adoption and information quality: Evidence from Brazil

This paper examines whether the mandatory adoption of International Financial Reporting Standards (IFRS) in Brazil in 2010 has improved the value relevance of accounting information, information content of earnings, financial analyst forecasting activities, and liquidity. We examine the variables in the pre‐IFRS mandatory adoption sample period, considered herein as 2008 to 2009, and the post‐IFRS adoption period of 2011 to 2012. We provide evidence demonstrating improvement in value relevance of earnings and number of analysts following the firms in the period after IFRS adoption, but we do not find improvements in information content of earnings, accuracy in analyst forecasting, and liquidity in the post‐adoption period. Our findings suggest a positive relationship between IFRS adoption and some areas of information quality in Brazil. By focusing on one important economy as it takes significant steps toward full convergence with IFRS, our study contributes to the growing literature concerning the impact of IFRS adoption around the world.     

The Effects of IFRS Adoption on Observed Earnings Smoothness Properties: The Confounding Effects of Changes in Timely Gain and Loss Recognition

Ball and Shivakumar [(2006), The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44, 207–242] show that the observed smoothness of earnings (i.e. negative contemporaneous correlation between accruals and cash flows) is the joint product of the role of accruals in smoothing out transitory fluctuations in operating cash flows (noise reduction role) and the role of accruals in providing timely recognition of economic gains and losses (contracting role). These two roles of accruals have opposite effects on earnings smoothness properties. Using a regression framework that allows us to simultaneously consider both roles, we show that failing to control for changes in timely gain and loss recognition as firms shift to IFRS can lead to erroneous inferences regarding the effects of IFRS adoption on earnings smoothness, and consequently on researcher’ conclusions about how IFRS adoption has affected accounting quality. Our results are consistent with mandatory (2005) IFRS adoption resulting in a change in the contracting role rather than the noise reduction role (or smoothness role) of accruals. A decrease in timely loss recognition, an increase in timely gain recognition, and a net decrease in asymmetric timely loss recognition are what drives the change in observed smoothness properties of earnings around mandatory IFRS adoption.     

Real and Accrual‐Based Earnings Management in the Pre‐ and Post‐IFRS Periods: Evidence from China

The purpose of this study is to investigate the prevalence of both accrual‐ and activities‐based earnings management for Chinese A‐share firms surrounding the adoption of substantially IFRS‐convergent accounting standards. Since 2007, all listed A‐share firms in China have been required to comply with a new set of accounting standards that have substantially conformed to IFRS. The new reform also produced a set of new auditing standards and internal control reporting requirements. Based on a sample of 4,050 firm‐year observations from 2002 to 2011, we find that Chinese firms in the post‐IFRS period (2007–2011) are less likely to engage in accrual‐based earnings management. The magnitude of discretionary accruals also declines after IFRS adoption. In response, we see firms turning to real activities manipulation as a substitute for upward earnings management. The reduction in accrual‐based earnings management could stem from higher quality accounting standards associated with IFRS adoption and/or concurrent changes in the governance regimes introduced with the IFRS mandate. A further analysis, however, indicates that the benefits of IFRS adoption in curbing upward accrual‐based earnings manipulation are not evenly distributed across firms. Specifically, the benefit diminishes for firms that are controlled by Chinese central or local governments, are located in less developed regions, and that have weak financial performance and therefore subject to delisting status. We also find that the benefit is less pronounced for manufacturing firms than for their non‐manufacturing counterparts.     

The Impact of Mandatory IFRS Adoption on Equity Valuation of Accounting Numbers for Security Investors in the EU

Motivated by the European Union (EU) decision to mandate application of the International Financial Reporting Standards (IFRS) to the consolidated financial statements of all EU listed firms (Regulation (EC) 1606/2002), starting in December 2005, we compare the value relevance of accounting information in 14 European countries in the year prior to and the year of the mandatory adoption of the IFRS. We focus on three accounting information items for which measurements under IFRS are likely to differ considerably from measurements under domestic accounting practices across the EU countries prior to the introduction of the international standards: goodwill, research and development expenses (R&D), and asset revaluation. These three items, selected on an a priori basis, have been shown in previous research to differ in the effect of uncertainty on their future benefits. We use valuation models that include these three variables and in addition the book value of equity and earnings. Overall, our study suggests that the adoption of the IFRS has increased the value relevance of the three accounting numbers for investors in equity securities in the EU. Association tests support our two hypotheses: (1) in the year prior to the mandatory adoption of the IFRS, the incremental value relevance to investors of the three domestic GAAP-based accounting items was greater in countries where the respective domestic standards were more compatible with the IFRS; and (2) the higher the deviation of the three domestic GAAP-based accounting items from their corresponding IFRS values, the greater the incremental value relevance to investors from the switch to IFRS. These associations prevail when considering cross-country differences in the institutional environments, which tend to provide complementary effects.     

The Role of International Financial Reporting Standards in Accounting Quality: Evidence from the European Union

Previous studies on the effect of International Financial Reporting Standards (IFRS) on accounting quality often have difficulties to control for confounding factors on accounting quality. As a result, the observed changes in accounting quality could not be attributed mainly to IFRS. We use a unique research setting to address this issue by comparing the accounting quality of publicly listed companies in 15 member states of the European Union (EU) before and after the full adoption of IFRS in 2005. We use five indicators as proxies for accounting quality. We find that the majority of accounting quality indicators improved after IFRS adoption in the EU. That is, there is less of managing earnings toward a target, a lower magnitude of absolute discretionary accruals, and higher accruals quality. But our results also show that firms engage in more earnings smoothing and recognize large losses in a less timely manner in post‐IFRS periods. In addition, we examine the effects of institutional variables on financial reporting quality. Our contribution to the literature is that we show the improved accounting quality is attributable to IFRS, rather than changes in managerial incentives, institutional features of capital markets, and general business environment, etc.     

Environmental management accounting in Europe: current practice and future potential

Abstract

We examine the impact of managerial financial reporting incentives on accounting quality changes around International Financial Reporting Standards (IFRS) adoption. A novel feature of our single-country setting based on Germany is that voluntary IFRS adoption was allowed and common before IFRS became mandatory. We exploit the revealed preferences in the choice to (not) adopt IFRS voluntarily to determine whether the management of individual firms had incentives to adopt IFRS. For comparability with previous studies, we assess accounting quality through multiple constructs such as earnings management, timely loss recognition, and value relevance. While most existing literature documents accounting quality improvements following IFRS adoption, we find that improvements are confined to firms with incentives to adopt, that is, voluntary adopters. We also find that firms that resist IFRS adoption have closer connections with banks and inside shareholders, consistent with lower incentives for more comprehensive accounting standards. The overall results indicate that reporting incentives dominate accounting standards in determining accounting quality. We conclude that it is unwarranted to infer from evidence on accounting quality changes around voluntary adoption that IFRS per se improves accounting quality.     

Determinants and Valuation Implications of Compulsory Stock Option Disclosures in a Weak Regulatory Setting—The Case of France

Using a sample of listed French firms in 2005, the year of mandatory IFRS adoption in the European Union (EU), we investigate the determinants of disclosure compliance of stock option expenses under IFRS 2, Share‐based Payment. Stock options are a popular means of executive compensation in France relative to other EU countries. Prior to 2005, French accounting standards and corporate governance regulations did not require recognition of option expense amounts and required minimal supplementary disclosures. There was also a perception that enforcement was imperfect, in particular with respect to IFRS 2. Given this setting, we explore what factors influence the willingness of firms to follow compulsory IFRS requirements in a weak regulatory setting. We find that overall compliance with IFRS 2 disclosure requirements increases with U.S. and U.K. institutional ownership, U.S. cross‐listing, provision of English language statements, and decreases with CEO and family ownership of the firm. We also investigate how stock market prices are affected by the recognition and disclosure of stock option expenses according to IFRS 2 in this regulatory setting and find that investors value option expenses positively, particularly when accompanied by high‐disclosure compliance. Our findings have implications for other jurisdictions in the process of adopting or converging to IFRS.     

Testing long‐run PPP with infinite‐variance returns

This paper investigates the long‐run purchasing power parity hypothesis when exchange rate returns and inflation rates are assumed to be heavy‐tailed stochastic processes. More specifically, residual‐based and likelihood‐ratio‐based cointegration tests of PPP that explicitly allow for infinite‐variance innovations are applied to monthly data (1973:1–1999:12) for Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, and the United Kingdom. Our test results are marginally less supportive of PPP when the innovations are assumed to be infinite‐variance, α‐stable processes. Copyright © 2003 John Wiley & Sons, Ltd.     

SFAS 133 and income smoothing via discretionary accruals: The role of hedge effectiveness and market volatility

This study investigates whether the Statement of Financial Accounting Standard No. 133 (SFAS 133) influences firms’ income smoothing via discretionary accruals decisions. Moreover, we investigate whether the level of hedge effectiveness and market volatility affects the impact of SFAS 133 on firms’ income smoothing via discretionary accruals decisions. Consistent with our predictions, we find a significant increase in income smoothing via discretionary accruals activity after the adoption of SFAS 133. We also find that income smoothing via discretionary accruals after the adoption of SFAS 133 increases with the level of hedge ineffectiveness. By contrast, we find that perfect hedgers do not engage in more income smoothing via discretionary accruals after the adoption of SFAS 133. Finally, we find that the higher the market volatility is the larger the income smoothing is via discretionary accruals after the adoption of SFAS 133. This implies that higher market volatility makes it more difficult for firms to meet hedge accounting requirements, thereby increasing unmanaged earnings volatility and income smoothing. Prior studies suggest that regulators are expressing concern about the effect of earnings management on the quality of reported earnings and the functioning of capital markets (e.g., Barton, 2001 ). In this regard, our findings imply that accounting standard setters should take into account the trade‐off between transparency and income smoothing.     

Demand for money in the Euro area

We analyzed the stability of the money demand function using panel data from January 1999 through March 2006, covering the 11 EU countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain). First, we found that the money demand function was stable with respect to M3. This arguably supports the suitability of the ECB's focus on M3 money supply in its monetary policy. Second, the stability of the money demand function was recognized with respect not only to M3, but also to M1 and M2. Accordingly, the ECB's adoption of M1 or M2 growth as a reference value should probably be considered depending on how conditions change going forward.     

On the Relationship between Voluntary Disclosure,Earnings Smoothing and the Value-Relevance of Earnings: The Case of Switzerland

Abstract

This paper examines whether voluntary disclosure by Swiss firms constrains the use of discretionary accruals to smooth earnings, and explores the effect of voluntary disclosure on the value relevance of earnings. We focus on Swiss firms because Switzerland's financial reporting system provides managers with extensive discretion in corporate disclosure, and there are important variations in the level of information provided in their annual reports. We consider that managers can choose two different ways to voluntarily convey information, either through the quality and quantity of annual report disclosure or, through compliance with International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (GAAP). Relying on a simultaneous equations approach, our results suggest that Swiss firms use discretionary accruals to smooth earnings. However, this relation is reduced for firms that voluntarily disclose more information in their annual report or comply with IAS/IFRS or US GAAP. Moreover, we show that discretionary accruals of high disclosers or of firms voluntarily complying with IAS/IFRS or US GAAP receive a lower valuation weight.     

Accounting Discretion in Goodwill Impairments: UK Evidence

This study examines managers’ use of discretion in determining goodwill impairment losses following the mandatory adoption of IFRS 3 “Business Combinations,” and whether this discretion reflects opportunistic reporting by managers or the provision of their private information. Although IFRS 3 was issued to improve the accounting treatment for goodwill and provide users with more useful and value‐relevant information regarding the underlying economic value of goodwill, it has been criticized on the grounds of the managerial discretion inherent in impairment testing. Therefore, ex‐ante, it is unclear how the impairment‐only approach has affected the reporting of goodwill impairment losses. After controlling for economic factors, empirical results reveal that managers are exercising discretion in the reporting of goodwill impairments following the adoption of IFRS 3. Specifically, goodwill impairments are more likely to be associated with recent CEO changes, income smoothing and “big bath” reporting behaviors. However, the results also indicate that goodwill impairments are strongly associated with effective governance mechanisms suggesting that managers are more likely to be exercising their accounting discretion to convey their private information about the underlying performance of the firm rather than acting opportunistically. These inferences are robust to various modeling specifications and variable definitions, suggesting that IFRS 3 has provided managers with a framework to reliably convey their private information about future cash flows consistent with the IASB's objectives in developing the impairment standard.     

Evolution of intangible asset accounting: Evidence from Australia

This study investigates how the adoption of IFRS in Australia has changed the accounting for goodwill and identifiable intangible assets (IIA). Based on unique hand‐collected data for 802 Australian firm‐years during 2000–2010, we find that expenses related to IIA are higher under IFRS, which is consistent with the view that IFRS accounting policies for IIA are stricter than those under Australian domestic accounting standards pre‐2005 (AGAAP). Our results show two effects that accompany higher IIA expenses under IFRS, which reduce a negative impact on earnings: (i) lower goodwill expenses, and (ii) a shift in recognition of IIA from those with finite useful life to IIA with indefinite useful life. Finally, our market value analyses suggest that the market does not treat mechanical goodwill amortization as a genuine expense, but does treat as genuine expenses discretionary impairment charges, and more lenient IIA amortization under AGAAP. Our results are in line with prior Australian studies claiming that imposing stricter accounting rules for intangible assets under IFRS tends to diminish the quality of investors' information set.     

Determinants of Capital Structure: United Kingdom Versus Continental European Countries

In this paper, we analyze how country‐specific differences influence capital structure indirectly through firm‐specific variables. We apply a system Generalized Method of Moments technique to a panel data sample of companies from five countries (France, Germany, Italy, Spain and the United Kingdom) during the period 1998–2008. As the different financial systems of European economies (bank‐oriented or market‐oriented) may influence capital structure differently through firm‐specific variables, we first examine the determinants of capital structure for each country separately and we then analyze whether the observed differences between the United Kingdom and the continental European countries are relevant. The results show that there are substantial differences in the capital structure choices of firms across five major European countries. These differences are motivated by the type of financial systems of the countries (bank‐oriented and market‐oriented) and influence the capital structure indirectly through the firm‐specific variables. Overall, our results support the relevance of the differences in the capital structure choices of firms across five major European countries, and in particular, the singularity of the United Kingdom (a market‐oriented economy) as opposed to continental European countries (bank‐oriented economies).     

Temporary jobs and job search effort in Europe

Using longitudinal data on individuals from the European Community Household Panel (ECHP) for eleven countries during 1995-2001, I investigate temporary job contract duration and job search effort. The countries are Austria, Belgium, Denmark, Finland, France, Greece, Ireland, Italy, the Netherlands, Portugal and Spain. I construct a search model for workers in temporary jobs which predicts that shorter duration raises search intensity. Calibration of the model to the ECHP data implies that at least 75% of the increase in search intensity over the life of a 2+ year temporary contract occurs in the last six months of the contract. I then estimate regression models for search effort that control for human capital, pay, local unemployment, and individual and time fixed effects. I find that workers on temporary jobs indeed search harder than those on permanent jobs. Moreover, search intensity increases as temporary job duration falls, and roughly 84% of this increase occurs on average in the shortest duration jobs. These results are robust to disaggregation by gender and by country. These empirical results are noteworthy, since it is not necessary to assume myopia or hyperbolic discounting in order to explain them, although the data clearly also do not rule out such explanations.     

Implementation of IFRS for SMEs in Emerging Economies: Stakeholder Perceptions in the Czech Republic,Hungary, Romania and Turkey

This research investigates the perceptions of stakeholders involved in financial reporting in four emerging economies (the Czech Republic, Hungary, Romania, and Turkey) regarding the possible implementation of IFRS for SMEs, in terms of costs, benefits, and strategy of adoption. In‐depth, semi‐structured interviews were conducted with representatives of main stakeholders (preparers, auditors, regulators, professional bodies, and users). We find more support for IFRS for SMEs implementation in these four countries than suggested by the results of the European Commission's 2010 consultation for the European Union. Interviews reveal differences between stakeholder groups and between countries regarding the preferred implementation approach (mandatory adoption, voluntary adoption or convergence of national regulations with IFRS for SMEs). Interviews indicate the most support for the convergence approach. However, users oppose convergence and prefer the adoption of IFRS for SMEs. The convergence approach moves regulators' attention from users' needs to preparers' preferences and preparedness. This finding is relevant in the decision‐making process of national regulators, who should balance the needs of various stakeholders, but also the country's political and economic objectives.     

IFRS Adoption and Accounting Quality: A Review

Abstract

In 2002, the European Union (EU) Parliament passed a regulation that requires consolidated and simple accounts for all companies listed in the EU to use International Financial Reporting Standards (IFRS) for fiscal years starting after 1 January 2005. This change in accounting systems will have a large impact on the information environment for EU companies. This paper provides a review of the literature on adoption of different Generally Accepted Accounting Principles (GAAP). We thus provide background and guidance for researchers studying the change in accounting quality following widespread IFRS adoption in the EU. We argue that cross-country differences in accounting quality are likely to remain following IFRS adoption because accounting quality is a function of the firm's overall institutional setting, including the legal and political system of the country in which the firm resides.     

IFRS and Secrecy: Assessing Accounting Value Relevance Across Africa

We examine the value relevance of accounting across several African countries and test whether IFRS improved the value association of earnings and equity book values. We report a stronger valuation association between accounting and stock prices in African countries classified as having a secrecy culture. This increases after IFRS and more so for earnings. On the other hand, IFRS induced a stronger increase in the book value coefficient in the less secretive and more developed South African market. We surmise that the more conceptual focus of IFRS induced an increased demand for higher‐quality accounting professionals, which had a filtering‐down effect of improving quality information flow and breaking down the secrecy culture. Our research highlights the diverse impacts of IFRS and the role of culture, asset markets and accounting professionalism, in driving the relevance of accounting components across Africa.     

The Impact of Corporate Governance on IFRS Adoption Choices

We investigate the association between corporate governance strength and EU listed firms' choices with respect to International Financial Reporting Standards (IFRS) adoption in 2005. We measure governance strength by aggregating variables such as board independence, board functioning and audit committee effectiveness. The firms exhibit heterogeneity in both compliance and disclosure quality; some firms do not even meet the minimum disclosure requirements. Regression results show that stronger governance firms disclose more information, comply more fully and use IAS 39's carve-out provision less opportunistically. These findings are germane to accountants, managers and regulators in countries soon to adopt IFRS.