When does comparability better enhance relevance? Policy implications from empirical evidence

This study investigates the user-specific contexts under which comparability better enhances relevance of accounting information. We first confirm the intuition in the FASB’s (2010) current conceptual framework by documenting that the short-window earnings response coefficient (ERC) is positively associated with the pre-determined level of comparability. Using the cross-sectional variation in the positive relation between ERC and comparability, we show that the link between ERC and comparability is more pronounced for firms with higher investor sophistication and lower information asymmetry among investors. We further support our predictions using analysts’ earnings forecast revisions and various alternative measures of earnings informativeness. In sum, our paper shows that comparability improves information users’ ability to identify similarities and differences across different firms to a greater extent when investor base is more sophisticated and private information is less prevalent. These results suggest that standard setters, regulators, and practitioners should devote more attention to the role of comparability in firms whose investors are less sophisticated and information environment is more opaque.     

Earnings quality and firm valuation: international evidence*

This study uses a sample of over 7000 firms in 38 countries to investigate the relation between firm valuation and earnings quality. We find a positive and significant relation between firm valuation and an aggregate earnings quality measure based on seven earnings attributes (accruals quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism). This relation is particularly strong for firms with greater investment opportunities and more need for external finance, and for firms in low investor protection countries. Thus, firms are able to compensate for a weak legal environment by adopting higher earnings quality standards, particularly when they need to gain access to global capital markets. Overall, our findings suggest that firms with higher earnings quality are valued more highly in stock markets, supporting the idea that investors require a premium for the information risk associated with lower‐quality earnings.     

The effects of analyst forecasts and earnings trends on perceptions of management forecast credibility

We examine whether analyst forecasts influence investors’ perceptions of the credibility of a good news management earnings forecast. We hypothesize that the effect of analyst forecasts will depend on whether the analyst forecast confirms management’s forecast and the extent to which management’s forecast is consistent with the prior earnings trend. Findings indicate that the positive effect of a confirming analyst forecast is greater when the management forecast is trend inconsistent than when it is trend consistent. The negative effect of a disconfirming analyst forecast does not differ based on management forecast trend consistency.     

Engagement partner specialization and corporate disclosure transparency

This paper explores the association of audit partners' industry specialization with corporate disclosure transparency and the latter's informativeness. The distinctive institutional designs of partner signature requirement and Information Disclosure and Transparency Ranking System (IDTRS) adopted in Taiwan allow us to empirically address the issue. We posit and find that the rankings from the IDTRS are higher for firms audited by industry specialist engagement partners than for firms audited by non-specialist engagement partners. Additionally, the results show that the probability of informed trade (PIN) proxy for information asymmetry is negatively associated with the rankings for clients of industry specialist engagement partners, but not for clients of industry non-specialist engagement partners. The results are robust with respect to alternative estimation method and alternative measures of industry specialization. Overall, the evidence suggests that industry specialist engagement partners enhance the credibility of corporate disclosure transparency, through which information asymmetry is further declined. The evidence provides policy implications to the partner signature requirement adopted in Taiwan and China.     

Converging to International Accounting Standards: Views from Japan

Many countries, including the European Union member states and Australia, adopted international accounting standards in 2005. This year was also critical in Japan for convergence activities. Based on a review of 2005 financial statements and a survey of securities analysts, this study identifies key issues for convergence of Japanese and international accounting standards. We find that accounting requirements relating to fair value measurement, comprehensive income items, leases and business combinations are relevant to Japanese firms. A survey of 974 members of the Security Analysts Association of Japan about these issues indicated support for convergence and the use of fair value measurement, disclosure of comprehensive income, recognition of leases and use of the purchase method for consolidation. We report support for several positions favoured by the International Accounting Standards Board (IASB), a positive signal for achieving convergence goals in Japan, which will be of interest to capital market participants in Japan and other countries .     

The Impact in the United States of Global Adoption of IFRS

This paper presents the pros and cons of the use of IFRS by US companies. The quest for one set of high-quality accounting standards recognised globally is clearly the ideal goal. However, before making a decision on the use of IFRS in the United States (US), the Securities Exchange Commission (SEC) should develop a blueprint to ensure that prerequisites for achieving a true global standard are satisfied and that convergence will continue. An 'improve and then adopt' approach appears to represent the best way forward for the US.     

The Effect of IFRS Adoption Conditional Upon the Level of Pre-adoption Divergence

Prior studies on whether or not International Financial Reporting Standards (IFRS) adoption improves earnings quality have found mixed results. We note that some of the countries that have adopted IFRS had national accounting standards similar to IFRS prior to adopting IFRS, while others had national accounting standards divergent from IFRS. We examine the effects of IFRS adoption by taking into account the level of divergence prior to the adoption of IFRS. We find that countries experience a greater drop in earnings management when they have a higher level of divergence from IFRS prior to IFRS adoption. More specifically, high divergence countries with higher levels of enforcement benefit the most followed by high divergence countries with lower levels of enforcement. Lower divergence countries with higher levels of enforcement do not significantly benefit from IFRS adoption. Lower divergence countries with lower levels of enforcement do not benefit from IFRS adoption at all. Our results support the contention that countries with lower quality local accounting standards prior to IFRS adoption benefit more from IFRS adoption.     

Financial crisis and accounting quality: Evidence from five European countries

This study investigates how the economic crisis affects the scope for earnings manipulation and the value relevance of reported financial numbers for companies that are audited by a big 4 auditor. The analysis is focused on Portuguese, Irish, Italian, Greek and Spanish listed companies. The findings show that Portugal, Italy and Greece tend to engage more in earnings management in their effort to improve their lower profitability and liquidity, and accommodate their higher debt and growth. Ireland exhibits less evidence of earnings manipulation, while the findings for Spain are to some extent conflicting. Additionally, the reported financial numbers of Portuguese and Greek companies that are audited by a big 4 auditor were found to be of higher quality before the crisis. In contrast, Irish, Italian and Spanish companies report more value relevant financial numbers during the crisis. The results of this study are particularly useful for accounting regulators when preparing accounting rules that seek to reduce information asymmetry and earnings manipulation and increase the quality of reported disclosures in light of a crisis and for investors that need further assistance for the establishment of a profitable investment strategy in periods characterized by high uncertainty and volatility.     

Accounting disclosure and firms' financial attributes: Evidence from the UK stock market

This paper focuses on the disclosure of accounting information in the financial statements of UK firms. The primary objective of the study is to analyse the financial characteristics of firms that provide extensive disclosures, and assess the financial impact of their motives, such as for example the need to raise equity finance. The study examines the financial attributes of firms that disclose information about key accounting issues including risk exposure, changes in accounting policies, use of international financial reporting standards and hedging practices. Firms are inclined to disclose accounting information in order to assure the market participants that their accounting policies are consistent with the accounting regulation and meet the information needs of their stakeholders. The study shows that in order to raise finance in the capital and debt markets, firms tend to provide extensive accounting disclosures. Firms that provide informative accounting disclosures appear to display higher size, growth and leverage measures. The findings also show that the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementation of international financial reporting standards enhances the quality and the comparability of financial statements; hence it promotes consistency and reliability in financial reporting and facilitates companies in raising capital internationally.     

Does Mandatory Adoption of IFRS Guarantee Compliance?

In this study, we examine whether the mandatory adoption of IFRS by Turkish listed companies in 2005 was successful in practice and what role firm and country level factors played in the adoption. We determine the firm-specific factors that affect the degree of change in both measurement and disclosures by conducting a multivariate analysis. Further, we conduct interviews with external auditors to throw light on the challenges associated with adoption and the outcomes of adoption. We find that while the standards clearly impact certain accounts, adoption is not uniform across accounts. The overall measurement change is positively associated with auditor prominence and gearing, and negatively associated with the degree of free float. With regard to disclosures, we find that although there are some improvements, the vast majority of the disclosure items required by IFRS were not disclosed. Auditor type, size, and the degree of foreign ownership of shares exert a positive impact on the overall improvement in disclosures. Our interview analysis reveals that the dominance of tax laws, the lack of enforcement, corporate governance issues, and inadequate management information systems were all significant constraints to the successful adoption of IFRS.     

The adoption of IFRS in Australia: The case of AASB 138 (IAS 38) Intangible Assets

AASB 138 Intangible Assets, adopted by reporting entities in Australia for annual reporting periods beginning on or after 1 January 2005, required derecognition of internally generated intangible assets. Prior to its adoption, the standard was widely expected to have a substantial impact on the reports of affected listed entities. On the basis of information available in the 2004/05 annual reports, this paper projects the expected effects of AASB 138 on reported intangible assets and on key financial measures. It compares these projected measures to the realised measures, reported under both Australian GAAP and AIFRS in the 2005/06 reports. While reported intangible assets and the debt to equity ratio were expected to change significantly as a result of AASB 138, the reported AIFRS results show a significant change in only the debt to equity ratio. The paper considers reasons why the pre-adoption expected changes did not eventuate, and also how the actual changes were reported to stakeholders in the management discussion sections of the annual reports. The conclusion draws implications regarding the transparency of communication in annual reports.     

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.     

Do Harmonised Accounting Standards Lead to Harmonised Accounting Practices? An Empirical Study of IAS 39 Measurement Requirements in Some European Union Countries

The objective of this paper is to investigate the level of harmonisation for IAS 39 Financial Instruments: Recognition and Measurement and to identify if different levels of harmonisation are associated with company-specific factors. Based on Rahman et al. (2002) , we used the Jaccard (JACC) index to determine the level of harmonisation between IAS 39 and the financial reporting practice of a broad-based sample of European-listed companies in 2005. We applied regression analysis to identify companies' specific characteristics that affect the level of convergence of the reporting practice of financial instruments. The results of this study show a high level of harmonisation between accounting practices of European companies included in our sample and IAS 39.     

The Effects of Compensation and Board Quality on Non-GAAP Disclosures in Europe

This study reports international evidence on the impact of compensation and board quality on the voluntary disclosure of non-GAAP earnings numbers. We find that compensation contracts of board directors that are linked to firm's market performance are associated with a higher probability of disclosure of non-GAAP figures in the earnings announcements' press release. Furthermore, when this type of compensation is used, firms tend to report non-GAAP figures in the title of the press release, make more adjustments for recurring items, and avoid reporting reconciliations. These reporting practices have been associated with opportunistic disclosure. We also show that an efficient governance structure of the board of directors can help restrain most of these discretionary disclosure decisions regarding non-GAAP reporting.     

Terrorist attacks and company financial numbers: Evidence on earnings management and value relevance from Madrid, London and Istanbul

This study focuses on three major terrorist attacks that took place in Madrid on 11 March 2004, in London on 7 July 2005, and in Istanbul on 27 July 2008. It examines firms that belong to banking, insurance and leisure sectors and assesses the earnings management potential and the value relevance of reported financial numbers before and after the terrorist attack. The study shows that, in general, a terrorist attack is likely to increase the scope for earnings management and reduce the value relevance of reported financial numbers. The terrorist attacks in Madrid and Istanbul have led to higher earnings management potential and less value relevant financial numbers. In contrast, the UK terrorist attack has not increased the potential for earnings management, while the value relevance of reported financial numbers has increased. The findings indicate that the insurance industry and the leisure industry are more inclined to use earnings management after the attacks. Comparing the common-law and code-law countries after the attack, the study shows that the UK displays lower discretionary accruals and higher value relevance of reported financial numbers. It is noteworthy that, after the attacks, the UK exhibits higher profitability, leverage and liquidity compared to Spain and Turkey.     

Do investors turn a blind eye to risk-factor disclosures by state-supported firms?

There is scant empirical evidence on how government involvement affects investor reactions toward firm-specific information. Our study provides new evidence on how investors respond to risk-factor disclosures in IPO prospectuses in China, where state-supported firms presumably receive government-offered implicit insurance against bankruptcy risk while bearing significant agency risks. We find an insignificant association between risk-factor disclosure quality and IPO underpricing (or post-IPO stock return volatility) among state-supported firms. The finding suggests that state-offered implicit insurance becomes the predominant consideration when investors value IPO shares of state-supported firms, thereby weakening investor reactions to high-quality risk-factor disclosures. Our study expands the scope of IPO underpricing literature by implying that simply increasing disclosure transparency in the IPO prospectus may not resolve the IPO underpricing issue in a government-dominated economy such as China.     

投资者保护研究综述：财务会计信息的作用

资本市场的信息不对称不仅阻碍了资源的有效配置,而且妨碍了投资者获取投资回报。财务会计信息在投资者保护中具有重要作用,它可以减轻由于信息不对称带来的两个基本问题:信息问题和代理问题。本文提出一个扩展的框架分析财务会计信息在缓解信息不对称、促进投资者保护中的作用机制,以及公司层面、市场层面和国家层面一些重要因素对这种作用机制的影响。在此基础之上,本文综述了近期国外研究中的主要相关文献,并为未来研究提出建议。     

What Drives TBL Reporting: Good Governance or Threat to Legitimacy?

This paper provides two complementary explanations for the adoption of triple bottom line (TBL) reporting by Australian companies. The first explanation is that companies adopt TBL reporting to legitimise their relationship with society because of adverse publicity from the media. The second explanation is that TBL reporting is adopted because of the company's desire to achieve high‐quality reporting and transparency inferred by strong corporate governance. Companies with TBL reporting had significantly more adverse media coverage before implementing TBL reporting than non‐TBL companies. TBL reporting is also significantly and positively related to the existence of an environmental or sustainable development committee and the frequency of meetings of the audit committee.