The economic determinants of the market reaction to proposed mandatory accounting changes in the oil and gas industry: A cross-sectional analysis

This paper examines the economic reasons for the observed negative abnormal common stock performance of firms whose reported earnings and stockholders' equity were negatively affected by the proposed elimination of full cost accounting in the oil and gas industry. Four explanations of the market effects of this mandatory accounting change are examined: (1) naive investor theory, (2) modified naive investor theory, (3) contracting cost theory, and (4) estimation risk theory. These hypotheses are developed in detail and used to generate variables for a cross-sectional model which explains observed return behavior. The effect of the accounting change on total stockholder's equity, the existence of financial contracts denominated in terms of accounting numbers and, to a lesser extent, firm size are shown to be important explanatory variables. The importance of these variables is consistent with both the contracting cost and estimation risk theories.     

Timing Equity Issuance in Response to Information Asymmetry Arising from IFRS Adoption in Australia and Europe

This study examines the association between changes in reported financial performance resulting from mandatory adoption of International Financial Reporting Standards (IFRS) and equity issuance during the transition period leading up to IFRS adoption for listed firms in Australia and Europe. We hypothesize that firms affected by the accounting standards change strategically time equity issuance around the time the firm discloses the effects of IFRS adoption on reported financial performance. We document circumstances where market returns are associated with the reconciliation of net income between local GAAP and IFRS. We find that a firm's likelihood of equity issuance and equity issue size during the three years prior to the IFRS reconciliation disclosure are negatively associated with the unexpected change in net income resulting from the conversion to IFRS.     

Information dynamics, dividend displacement, conservatism, and earnings measurement: a development of the Ohlson (1995) valuation framework

This paper extends the Ohlson (Contemp Account Res 11, 661–687, 1995) equity valuation framework by demonstrating that dividend displacement continues to hold when dividends have a positive forecast coefficient in the linear abnormal earnings dynamic. The analysis demonstrates that such a predictive role for dividends implies a positive association between cum div book value of equity and the present value of expected abnormal earnings, consistent with both dividend displacement and accounting conservatism. While a signaling role for dividends is ruled out, a link between dividends, expected performance, and equity value is, however, demonstrated. The paper also considers a linear information model where an undefined variable replaces realized abnormal comprehensive earnings as an indicator of future performance. The role of this variable as a predictor of future abnormal comprehensive earnings is highlighted and the special case where it corresponds to recurring abnormal earnings is considered. This latter case provides useful implications for implementation of asset revaluations.     

Editorial

IAS 19: Employee Benefits (2004) enables a choice between three accounting methods of recognising actuarial gains and losses: profit or loss, equity and corridor methods. The objective of this paper is to identify the accounting method of actuarial gains and losses followed by companies after the mandatory adoption of International Accounting Standards Board (IASB) standards. Information was collected about that accounting method adopted by 523 European companies, in the first year of mandatory IASB standards adoption. It was found that most of European companies included in the sample adopted the corridor method or the equity recognition method. The results also show that the equity recognition method is more used in the United Kingdom (UK) and Ireland and the corridor method is more used by financial companies.     

The role of budgets in organizations facing strategic change: an exploratory study

Recent attention in the general management literature has focused on mechanisms and processes used by organizations to respond and adapt to changes in their operating environment. There is, however, very little broad-based empirical research examining the role that management accounting control systems can play in shaping organizational change. Much of the empirical research to date has focused on the role of accounting as a diagnostic tool for assessing and rewarding managerial performance despite the recognition that accounting can serve as a dialogue, learning and idea creation machine (Burchell et al., 1980. Accounting Organisations and Society 5,5–27). The purpose of this study is to explore how accounting can serve this alternative role. We use (Simons, R. 1990.) Accounting Organisations and Society 15, 127–143). interactive/diagnostic classification of management control systems to capture how accounting can be used as a learning machine in the formulation and implementation of strategic change. A theoretical model is developed to examine the relationship between strategic change, style of budget use and performance. It is argued that an interactive style of budget use can mitigate the disruptive performance effects of the strategic change process. The data, collected from Chief Executive Officers in 63 public hospitals, provide results that are consistent with our expectations.     

How do accounting variables explain stock price movements? Theory and evidence

This paper provides theory and evidence showing how accounting variables explain cross-sectional stock returns. Based on Zhang, G. [2000. Accounting information, capital investment decisions, and equity valuation: theory and empirical implications. Journal of Accounting Research 38, 271–295], who relates equity value to accounting measures of underlying operations, we derive returns as a function of earnings yield, equity capital investment, and changes in profitability, growth opportunities, and discount rates. Empirical results confirm the predicted roles of all identified factors. The model explains about 20% of the cross-sectional return variation, with cash-flow-related factors (as opposed to changes in discount rates) accounting for most of the explanatory power. The properties of the model are robust across various subsamples and periods.     

The effects of governmental accounting methods on asset-acquisition decisions: A theoretical model and three case studies

This study explores possible effects of municipal accounting practices on asset-acquisition decisions. Theoretical decision models are developed using expenditure and depreciation accounting for reporting performance. The models suggest that expenditure accounting may lead to uneconomical leasing. Case studies of three cities focused on comparing present values of their leases to purchase alternatives and on interviewing department administrators. Significant uneconomical leases were found. The case studies suggest that a complete model of municipal administrators' acquisition decisions include consideration of accounting methods used to report performance; perceived risk of obsolescence; restrictions of grantors, third-party reimbursers and higher management; and administrators' background and training.     

Sensitivity of executive pay to accounting performance measures in all-equity firms

We investigate the relation between chief executive officer compensation and accounting performance measures as a function of the firm's capital structure. We specifically analyse pay–performance relationships for all‐equity firms relative to high‐levered firms. We find a significant positive association between return on equity and the level of compensation for all‐equity firms. Consistent with optimal contracting theory, we cannot discern any such relationship for high‐levered firms. Because of agency costs of debt, managerial compensation in high‐levered firms plays the role of a precommitment mechanism in addition to its conventional role of aligning management incentives with shareholder interest.     

The valuation consequences of voluntary accounting changes

Firm management typically claims that voluntary accounting method changes (VACs) are made to enhance the informativeness of earnings by better matching accounting practices with economic reality. In contrast, skeptics argue that managers adopt new accounting procedures to opportunistically manage earnings and influence their firm’s stock price. In this paper, we investigate these alternative motives for VACs. Specifically, we investigate whether VACs cause equity prices to deviate from their fundamental values in the short-term by studying the long-run stock-price performance for a sample of firms that voluntarily change accounting methods. In addition, we investigate changes in earnings informativeness by examining the behavior of earning response coefficients and the relationship between earnings and future cash flows in years surrounding the VAC event. In contrast to prior research, we find little evidence that a strategy based solely on the earnings effect of a VAC can generate abnormal returns. While we find weak evidence of post-VAC abnormal returns for extreme VACs, this result appears to be driven by the accruals anomaly documented in Sloan [Sloan, R. G. (1996). The Accounting Review, 71, 289–315]. Our evidence further suggests that earnings informativeness is not significantly altered by voluntary changes in accounting methods. Taken together, our evidence suggests the market recognizes the financial statement effects of alternative acceptable accounting methods and efficiently processes the valuation implications of VACs.

An analysis of the share price and accounting performance of rights offerings in China

This study examines both the short- and long-term share price and accounting performance of Chinese rights issues. Employing data from 432 rights offerings issued between 1994 and 1999, the study documents a statistically significant positive abnormal stock return of 4.8% on the ex-date. Over the long run, rights issuing firms significantly outperform control portfolios of firms matched on the basis of size, the book-to-market ratio, and both size and the book-to-market ratio. Similar to the case of U.S. experience, investors in China appear to underreact to the initial announcements of new equity offerings, but in the opposite direction. Interestingly, although firms issuing rights generally underperform their non-issuing peers in important operating performance metrics such as return on assets, their growth rates of sales and capital expenditures far outstrip non-issuers. Finally, the findings document that changes in the long-term stock performance of rights issuing firms are positively correlated with changes in post issue accounting performance.     

Accounting Standards Harmonization and Financial Statement Comparability: Evidence from Transnational Information Transfer

This paper investigates whether accounting standards harmonization enhances the comparability of financial information across countries. I hypothesize that a firm yet to announce earnings reacts more strongly to the earnings announcement of a foreign firm when both report under the same rather than different accounting standards. My analysis of abnormal price reactions for a global sample of firms supports the prediction. Next, in an attempt to control for the underlying economic comparability and the effects of changes in reporting quality, I use a difference‐in‐differences design around the mandatory introduction of International Financial Reporting Standards. I find that mandatory adopters experience a significant increase in market reactions to the release of earnings by voluntary adopters compared to the period preceding mandatory adoption. This increase is not observed for nonadopters. Taken together, the results show that accounting standards harmonization facilitates transnational information transfer and suggest financial statement comparability as a direct mechanism.     

The persistence of international accounting differences as measured on transition to IFRS

The international accounting classification literature emphasises the importance of understanding how institutional factors shape accounting regulations and practices. With the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union and Australia in 2005, our empirical study examines whether three international accounting classification systems relating to equity financing, law and culture still had merit as measured on transition to IFRS and explore whether they are effective in grouping accounting systems. Using IFRS as the yardstick, we find statistically significant differences in the measurement of shareholders’ equity as between strong (Class A) versus weak (Class B) equity financing systems, common law versus code law systems and cultural systems based on ‘Anglo’, ‘Nordic’ and ‘More Developed Latin’ cultural groups. With regard to the measurement of net income, however, we find statistically significant differences only in respect of strong (Class A) versus weak (Class B) equity financing systems. Our findings demonstrate that traditional international accounting system differences still persisted at the time of IFRS adoption even after long periods of harmonisation and growing international accounting convergence.     

基于强互惠理论的会计准则变迁研究

强互惠理论将人类的精神活动因素引入制度变迁研究中,扩展了人们将制度作为外部环境的接受者,制度变迁是自发演化过程或理性设计过程简单＂二分法＂的认识。会计准则作为一种制度安排,能够运用制度的理论框架予以分析。本文在强互惠理论博弈解说的基础上,对1992~2006年中国会计准则变迁过程进行分析。研究结论显示：中国会计准则变迁是自发演化与理性设计的统一,中国会计准则变迁过程中体现出自愿性和强制性双重强互惠特征,而且自愿性强互惠是主要特征,政府型强互惠滞后。     

Sources of Corporate Financing and Operating Performance: The effects of strategic ownership and financial restatements

Using a sample from European markets this study documents that changes in external financing, both in the form of equity and debt, can predict future operating performance (profitability and cash flows). In terms of future profitability, increases in equity (debt) financing particularly benefit large-size growth firms (large-size value firms). It is notable that a firm environment of low information quality, indicated by the presence of accounting restatements, intensifies the association between external financing and operating performance, due to the heightened scrutiny investors/lenders apply to firms that have recently restated their financials. In addition, strategic ownership in the firm has no significant effect on the financing – operating profitability association but may amplify the positive effects of equity financing on future operating cash flows. Moreover, financial analysts' forecasts of operating profitability and operating cash flows reflect the impact of external financing changes on future operating performance but exhibit a financing-related systematic inefficiency particularly for firms that have recently announced a material restatement of their prior financial results. Finally, controlling for information contained in analyst forecast surprises, the market is efficient overall and incorporates the effects of equity and debt financing changes into stock prices.     

Financial analysts' forecasts of earnings: A better surrogate for market expectations

The specification of the market expectation of accounting numbers is a common feature of many empirical studies in accounting and finance. Givoly and Lakonishok (1979) found that financial analysts' forecasts have information content. This study evaluates the quality of analysts' forecasts as surrogates for the market expectation of earnings and compares it with that of prediction models commonly used in research. Results indicate that prediction errors of analysts are more closely associated with security price movements, suggesting that analysts' forecasts provide a better surrogate for market expectations than forecasts generated by time-series models. The study also identifies factors that might contribute to the performance of the financial analysts'forecasts. The broadness of the information set employed by analysts and, to a lesser extent, their reliance on information released after the end of the fiscal year appear to be important contributors to their performance.     

Transition to IFRS and compliance with mandatory disclosure requirements: What is the signal?

The present study examines 153 Greek listed companies' compliance with all IFRS mandatory disclosure requirements during 2005 and complements and extends prior literature in the following way. The unique setting i.e., measuring compliance with IFRS mandatory disclosure requirements during the first year of IFRS implementation, allows for examination of the possibility that the changes in the 2004 shareholders' equity and net income, as a result of the adoption of IFRS, constitute explanatory factors for compliance. Thus, this study hypothesises that, in addition to the financial measures and other corporate characteristics that prior literature identifies as proxies for explaining compliance, a significant change in fundamental financial measures, because of the change in the accounting regime, may also explain compliance based on the premises of the relevant disclosure theories. The findings confirm these hypotheses. This study also makes a methodological contribution on measuring compliance with all IFRS mandatory disclosure requirements by using two different disclosure index methods and pointing out the different conclusions may be drawn as a result.     

Risk Changes around Calls of Convertible Bonds

We examine changes in equity and asset betas around convertible bond calls and report two major findings. First, calling firms exhibit an increase in asset betas following the call. We argue that the finding is consistent with the implications of the sequential financing theory but not of the backdoor equity financing theory. Second, abnormal returns at call announcements are negative only for the subsample of firms that also exhibit an increase in equity beta. We conclude that risk changes help explain the market reaction to convertible bond calls.     

Problem-centred research and knowledge-based theory in the professional accounting setting

The paper discussess the emerging need for theory development and much more extensive task and context analysis with respect to cognition in the professional accounting setting (“accounting” being taken to include the various accounting, auditing, tax and related subjects about which accounting professionals exercise judgment). The paper examines how such theory development and task and context analysis can improve the research and its contribution to understanding the professional settings that are the province of accounting research. Our analysis reflects our proposal that accounting judgment research contribute more strongly to the general body of accounting research, and deal better with practitioners' problems. From our analysis, we conclude that the lack of theory development is associated with several problems in the research, including an over-emphasis on transference of simplified models from psychology, inappropriate use of normative criteria for evaluating performance, and an over-emphasis on accountants and auditors rather than accounting and auditing. We offer a large number of constructive comments about task analysis, theory development and other steps to guide future accounting judgment research.     

Convergence of accounting standards and financial reporting externality: evidence from mandatory IFRS adoption

Using mandatory adoption of International Financial Reporting Standards (IFRS) as a natural experiment, we examine whether reporting externalities can be magnified when financial disclosures are based on a common set of accounting standards. Specifically, we investigate and find that the changes in publicly available information of mandatory IFRS adopters (due to the convergence of accounting standards) can impact the investment efficiency of prior voluntary adopters. While we document positive externalities of mandatory IFRS, we also observe heterogeneity in these spillover effects at the firm and the country level, suggesting that externalities increase with improvements in the comparability of accounting information.     

The relation between corporate governance and CEOs’ equity grants

We investigate whether the firm’s corporate governance affects the value of equity grants for its CEO. Consistent with the managerial power view, we find that more poorly-governed firms grant higher values of stock options and restricted stock to their CEOs after controlling for the economic determinants of these grants. We show that the negative relation between governance strength and equity grants is not likely to be attributable to omitted economic factors or substitution effects between governance strength and equity incentives. As further evidence consistent with the managerial power view, we show that firms with poorer governance in the pre-Enron era cut back more on using employee stock options (ESOs) for their CEOs in the post-Enron era, a period when the accounting and outrage costs of ESOs increased, consistent with poorly-governed firms taking more advantage of opaque ESO accounting rules than better-governed firms. We show that the association between governance strength and abnormal equity grants is less negative in the post-Enron period than it was in the pre-Enron period, consistent with firms making more efficient equity-granting decisions after the corporate governance changes mandated by the Sarbanes–Oxley Act of 2002 and the major US stock exchanges took effect.