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.     

Does accounting quality change following a switch from U.S. GAAP to IFRS? Evidence from Germany

This study examines whether accounting quality changed following a switch from U.S. GAAP to IFRS. Using a sample of German high tech firms that transitioned to IFRS from U.S. GAAP in 2005, we find that accounting numbers under IFRS generally exhibit more earnings management, less timely loss recognition, and less value relevance compared to those under U.S. GAAP. In addition, after analyzing the accounting quality of firms that applied IFRS throughout the entire sample period, we find that, for the metrics suggesting a decline in accounting quality for both groups of firms, the change is significantly more pronounced for firms switching to IFRS from U.S. GAAP. Overall, our findings indicate that the application of U.S. GAAP generally resulted in higher accounting quality than application of IFRS, and a transition from U.S. GAAP to IFRS reduced accounting quality. Our findings provide the first evidence on the potential consequences of a switch from U.S. GAAP to IFRS.     

Value Relevance of Environmental Provisions Pre‐ and Post‐IFRS

The purpose of this paper is to compare the value relevance of environmental provisions as recorded under Canadian/U.S. GAAP and IFRS accounting frameworks with consideration of the impact of voluntarily issuing stand‐alone sustainability reports. The value relevance of environmental provisions is tested using a modified Ohlson (1995) model. We exploit IFRS reconciliations as a quasi‐experimental setting to conduct this comparison. Results indicate that environmental provisions recorded under either framework only act as liabilities for oil and gas firms that release stand‐alone sustainability reports. For other firms in the oil and gas industry, and the mining industry, the liability nature of these provisions appears to be discounted by the market. Furthermore, for firms in the oil and gas industry that do not have stand‐alone CSR reports, provisions appear to be interpreted by the market as a costly signal about future growth. Instead of downwardly affecting market values, this information is associated with higher market values. In terms of the transition to IFRS, we find that, while the IFRS provisions are significantly higher than under former GAAP, they do not improve value relevance for investors. Accounting standard setters should consider examining the changes in the current standards from the original Canadian environmental provision reporting requirements under Capital Assets section 3060.39, as it was rightfully shown to be a relevant proxy for unbooked liabilities (Li and McConomy, 1999; Bewley, 2005) rather than earnings expectancy. The study builds upon prior research to examine the value of accounting standards that have gone through significant changes.     

International financial reporting standards and experts' perceptions of disclosure quality

From 2005, over 7,000 listed firms in the European Union and many more around the world are required to adopt International Financial Reporting Standards (IFRS). The introduction of a uniform accounting regime is expected to ensure greater comparability and transparency of financial reporting around the world. However, recent research has questioned the quality of financial statements prepared under IFRS standards, particularly in the presence of weak enforcement mechanisms and adverse reporting incentives ( Ball et al. , 2003 ). In this paper, we assess the quality of the financial statements of Austrian, German and Swiss firms which have already adopted internationally recognized standards (IFRS or U.S. GAAP). The study makes use of available disclosure quality scores extracted from detailed analyses of annual reports by reputed accounting scholars ('experts'). This work complements other contemporary research on the quality of IFRS financial statements where the properties of earnings are used as an evaluation metric ( Barth et al. , 2005 ). Our evidence shows that disclosure quality has increased significantly under IFRS in the three European countries we analyse. This result holds not only for firms which have voluntarily adopted IFRS or U.S. GAAP, but also for firms which mandatorily adopted such standards in response to the requirements of specific stock market segments. Although we cannot establish direct causality due to the inherent self-selection issues for most of our sample firms, the evidence shows that the quality of financial reports has increased significantly with the adoption of IFRS.     

Do IFRS Reconciliations Convey Information? The Effect of Debt Contracting

We examine whether earnings reconciliation from U.K. generally accepted accounting principles (GAAP) to International Financial Reporting Standards (IFRS) convey information. As a result of debt contracting, mandatory accounting changes are expected to affect the likelihood of violating existing covenants based on rolling GAAP, leading to a redistribution of wealth between shareholders and lenders. Consistent with this prediction, we find significant market reactions to IFRS reconciliation announcements. These market reactions are more pronounced among firms that face a greater likelihood and costs of covenant violation and early announcements. While the association between later announcements and weaker market reactions is consistent with contractual implications of technical changes to earnings, which investors quickly learn to predict, it is inconsistent with IFRS forcing all firms in the sample to reveal firm-specific information through accruals. Thus, by showing that mandatory IFRS also affects debt contracting, we expand on existing IFRS research that focuses on how accounting quality and cost of capital are impacted.     

Impact of IFRS in New Zealand on Accounts and Earnings Quality

The impact of the adoption of International Financial Reporting Standards (IFRS) on the accounts and the quality of earnings of New Zealand firms is examined. Our analysis of IFRS adjustments for the last period under pre‐IFRS NZ Generally Accepted Accounting Principles (GAAP) reveals that total assets, total liabilities and net profit were significantly higher under IFRS than under pre‐IFRS GAAP. Profit and equity under IFRS were increased by adjustments for goodwill and other intangibles and investment property, and decreased by adjustments for employee benefits and share‐based payments. Using data for 2002–2009, we find that absolute discretionary accruals were significantly higher under IFRS than under pre‐IFRS NZ GAAP, suggesting lower earnings quality under IFRS than under pre‐IFRS NZ GAAP. However, we find no significant differences in signed discretionary accruals and the ability of earnings to predict one‐year‐ahead cash flows between pre‐IFRS NZ GAAP and IFRS. These results are consistent across alternative measures of accruals quality, sample selection and whether firms elected to adopt IFRS in 2005 rather than comply with them in 2007.     

Cross-market information transfers of ADR firms: An investigation of emerging market economies

Level II and III ADRs permit issuers to be listed on the major U.S. exchanges with the stipulation that they comply with extensive SEC disclosure requirements. Foreign private issuers are compelled to file a set of audited financial statements prepared in accordance with U.S. GAAP, or alternatively, IFRS or Home Country Accounting Principles with attendant reconciliation to U.S. GAAP prior to 2008. Although the Form 20-F reconciliation is discontinued in 2008 for IFRS filers, non-U.S. issuers are required to satisfy other Form 20-F stipulations such as expanded Item 17 and Item 18 disclosures. We conjecture that non-U.S. firms choosing to be listed on the major U.S. exchanges will incur the added costs associated with the supplemental disclosure requirements in order to attract sufficient investor attention as to have the disclosures impounded in the home country equity share price in the manner described by Fishman et al. (1989). Because a prominent attribute of ADR firms is that they benefit from multiple-market trading, we investigate whether the Form 20-F disclosure cross-market information transfers are associated with emerging market economy status. We employ models of the cross-market ADR and equity security share returns and trading volume controlling for the emerging economy status and incremental firm-specific SEC Form 20-F accounting principles disclosures. Preliminary results indicate that (1) U.S. listed ADR firms from emerging economies experience greater cross-market information transfers associated with the SEC Form 20-F filing, and (2) that the increased cross-market information transfers associated with the SEC Form 20-F filing are proportional to the difference in quality of accounting principles employed for home country reporting purposes vis-à-vis the accounting principles employed for SEC Form 20-F reporting purposes. Results are consistent with a feedback process through which the new information disclosed by the SEC Form 20-F reporting requirements in the ADR market attenuates the price discovery process in the home country equity market when the difference in information environment quality is large.     

Relevance of Differences between Net Income based on IFRS and Domestic Standards for European Firms

Net income adjustments resulting from mandatory 2005 IFRS adoption in Europe are value relevant for financial and non‐financial firms. Differences in relevance of the aggregate adjustment and adjustments related to several IFRS standards, for financial and non‐financial firms and across country groups, suggest differences in domestic standards and institutions affect investors’ assessment of the relevance of IFRS accounting amounts. Despite these differences, except for French/German non‐financial firms, investors view net income measured using IAS 39 Financial Instruments: Recognition and Measurement as more relevant than that measured using domestic standards, which is notable because IAS 39 was highly controversial in Europe.     

The Effects of International Financial Reporting Standards on the Accounts and Accounting Quality of Australian Firms: A Retrospective Study

We examine the effect of Australian equivalents to International Financial Reporting Standards (IFRS) on the accounts and accounting quality of 1,065 listed firms, relying on retrospective reconciliations between Australian Generally Accepted Accounting Principles (AGAAP) and IFRS. We find that IFRS increases total liabilities, decreases equity and more firms have earnings decreases than increases. IFRS earnings and equity are not more value relevant than AGAAP earnings and equity and while adjustments for changes in accounting for provisions and intangibles other than goodwill are value relevant, they weaken associations with market value. Goodwill adjustments improve associations with market value. We also find that the reconciliation note for the earnings adjustments contained no new information.     

Market reaction to and valuation of IFRS reconciliation adjustments: first evidence from the UK

We investigate the market reaction to, and the value-relevance of, information contained in the mandatory transitional documents required by International Financial Reporting Standards 1 (2005). We find significant negative abnormal returns for firms reporting negative earnings reconciliation. Although the informational content of the positive earnings adjustments is value-relevant before disclosure, for negative earnings adjustments it is value-relevant only after disclosure. This finding is consistent with managers delaying the communication of bad news until IFRS compliance. A finer model shows that adjustments attributed to impairment of goodwill, share-based payments, and deferred taxes are incrementally value-relevant but that only the impairment of goodwill and deferred taxes reveal new information. Our results indicate that mandatory IFRS adoption alters investors’ beliefs about stock prices.     

Value relevance of accounting information: Evidence from an emerging market

Without making any distinction of the applicable accounting standards, this paper investigates, firstly, the value relevance of accounting information from 1999 to 2012 in different segments of the Chinese stock market. This investigation includes A-shares, prepared under Chinese Accounting Standards (CAS) for domestic firms; B-shares, prepared under either the International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) for both domestic and overseas firms; and H-shares prepared under either the IAS or Hong Kong GAAP for Hong Kong and overseas firms. Then, the paper examines whether or not the converged IFRS with CAS, applicable from 2007 onwards, is more value relevant when compared with prior to the 2007's standards (CAS, IAS, Hong Kong GAAP for A-share, B-share, and H-share markets, respectively). Based on 34,020 firm-year observations and after controlling for industry- and year-fixed effects, the findings suggest that accounting information is value relevant with A- and B-share markets, while it is partially relevant with the H-share market. The paper finds that the converged IFRS with CAS is more value relevant in A-shares and B-shares and it is partially more value relevant with the H-share market. These findings have implications for both policymakers and investors since they provide further empirical evidence for the current policy procedure which harmonizes local GAAP with IFRS.     

German Reporting Practices: An Analysis of Reconciliations from German Commercial Code to IFRS or US GAAP

This paper presents the results of research analyzing reconciliations of net income and stockholders’ equity from reports prepared according to Germany's Commercial Code (HGB) to either International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (US GAAP). We describe the distribution of the reconciling items and assess their value relevance to firm market values 3 months after the financial statement date. The work helps to identify many issues not apparent from research that focuses only on promulgated accounting standards. Among other things, the research presented in this paper demonstrates that, when reconciling to IFRS or US GAAP, German companies must reverse significant software and film licensing revenue. Other areas of significant difference, not surprisingly, show greater conservatism in reporting under HGB than IFRS or US GAAP, particularly in asset capitalizations and write-offs as well as in accruals of provisions and reserves. The latter category is value relevant to the firms’ market values after controlling for all other categories of reconciling items from HGB to either IFRS or US GAAP, indicating that German markets value these companies’ provisions and accruals under the German reporting system.     

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.     

Expected earnings growth and the cost of capital: an analysis of accounting regime change in the European financial market

This study focuses on the relation between the cost of equity capital and earnings expectations when the properties of accounting that determine earnings vary across different regulatory regimes. More particularly, it addresses the European setting where different types of GAAP regime have continued to function in the presence of the gradual harmonization of the underlying legal framework, and where the adoption of internationally recognized accounting standards by certain firms has anticipated the requirement for International Financial Reporting Standards. On the basis of estimates of the cost of equity that are implied by analysts' earnings forecasts, the article provides evidence that financial market integration may have already contributed to mitigating the economic consequences of accounting diversity, and that switching to IFRS could have a short lived impact on capital markets. Moreover, based on firm level transparency and disclosure rankings provided by Standard and Poor's, it is shown how the quality of financial reporting conditions the implied cost of equity under different GAAP.     

How different GAAPS affect performance of valuation models: Evidence from Asia-based companies

Use of accounting information to assess a firm's value is a very important subject for financial analysts, investors, lenders, policy-makers, and other market participants. Given the current worldwide movement toward adoption of IFRS, understanding how it compares to other GAAPs and affects valuation models is an important matter. This study compares the relative performance of three valuation models based on a sample of all relevant American Depositary Shares (ADRs) from selected Asian countries and a matched sample of US counterparts, using accounting variables reported under International Financial Reporting Standards (IFRS), US generally accepted accounting principles (GAAP), and non-IFRS/US GAAP. Results indicate that there are substantial differences between the three models' explanatory power and that the dominant (most explanatory) valuation model will vary depending on which GAAP (IFRS, US GAAP, and non-IFRS/US GAAP) is used.     

IFRS adoption and analysts’ earnings forecasts: Australian evidence

We study 145 large listed Australian firms to explore the impact of international financial reporting standards (IFRS) adoption on the properties of analysts’ forecasts and the role of firm disclosure about IFRS impact. We find that analyst forecast accuracy improves, and there is no significant change in dispersion in the adoption year, suggesting that analysts coped effectively with transition to IFRS. However, we do not observe the expected relationship between firms’ IFRS impact disclosures in their financial statements issued at the end of the transition year with forecast error and dispersion in the adoption year. The results question the timeliness and usefulness of financial statement disclosure, even in a setting where disclosure was mandated by accounting standards (AASB 1047 and AASB 1) and firms had strong incentives to provide information to analysts.     

The effect of information shocks on dividend payout and dividend value relevance

We exploit the mandatory adoption of International Financial Reporting Standards (IFRS) as a source of exogenous shock to the corporate financial information environment to study the potential effect that this information shock might have on the dividend payout policy and dividend value relevance in the UK and France. We employ a difference-in-differences research design, in which our choice of the control and treatment groups is mainly based on the divergence between domestic accounting standards and IFRS, while holding institutional factors constant. The UK domestic accounting standards slightly diverge from IFRS (low-divergence firms), whereas French domestic accounting standards substantially diverge from IFRS (high-divergence firms). Nevertheless, both countries have similar institutional factors that might confound the effect of IFRS adoption. Our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason for the free cash flow problem (Jensen, 1986) and cash over-retention (Myers & Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among high-divergence firms via reduction of asymmetric information. Moreover, improving the information environment helps investors become more confident about using accounting numbers to assess firm financial performance, which causes a significant reduction in dividend value relevance among high-divergence firms.     

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.     

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.     

Earnings changes associated with relaxing the reconciliation requirement in non-U.S. firms’ SEC filings

We investigate the changes in earnings information content and earnings attributes for non-U.S. firms listed in U.S. equity markets following the 2007 relaxation of the SEC requirement to reconcile IFRS earnings and stockholders’ equity to U.S. GAAP in annual regulatory filings. We analyze a sample of non-U.S. firms listed on U.S. exchanges from 2005 to 2008 that use IFRS, and compare them to non-U.S. firms that continue to use domestic GAAP or U.S. GAAP. Prior literature finds no changes in informativeness following the regulatory change for IFRS-using firms. However, when we partition the IFRS-using firms into two groups based on their history of providing reconciliation information, we find that firms which previously provided more information about the differences between their reporting GAAP and U.S. GAAP had significant increases in the information content of their earnings. In contrast, there is no change in earnings informativeness for firms that provided less informative reconciliations. We regard the reconciliation informativeness as a proxy for firms’ efforts to provide more informative disclosures, which is driven by their disclosure incentives. We also document that the change in the information content of earnings for more informative reconcilers was contemporaneous with a change in earnings attributes for these firms. Consistent with no change in earnings informativeness for less informative reconcilers, there is little change in their earnings attributes. Our results underscore the importance of incorporating disclosure incentives when examining the consequences of a regulatory change.