Does IFRS Mandatory Adoption Affect Information Asymmetry in the Stock Market?

The purpose of International Financial Reporting Standards (IFRS), adopted mandatorily by European listed firms in 2005, is to increase the transparency and the comparability of accounting information, which should have led to improvements in these firms’ information environments. This study uses market microstructure proxies for information asymmetry to examine the effects of IFRS adoption on the level of information asymmetry in the Spanish stock market. Therefore, we consider a setting with substantial differences between local standards – Spanish Accounting Standards (SAS) ? and IFRS and where the level of enforcement is low. By controlling for conventional determinants of information asymmetry and firms’ characteristics that influence their information environments, we find a reduction of information asymmetry after IFRS adoption. Our findings suggest that the mandatory switch from local accounting standards to IFRS conveys benefits to the market, even when the enforcement level is not strong.     

Does IFRS Adoption Increase the Accuracy of Chinese Analysts’ Forecasts?

This article investigates the impact of International Financial Reporting Standards (IFRS) adoption on the accuracy of Chinese analysts’ earnings forecasts. We find that after IFRS adoption, the accuracy of Chinese analysts’ forecasts decreases rather than increasing as they do in developed countries documented by the extant literature. Further investigation finds that this decrease is associated with a fair value measurement of financial assets held for trading. Our finding provides empirical evidence supporting the argument that the effectiveness of IFRS adoption could be negative in a developing country depending on its setting and fair value measurement brought about by IFRS could contribute to the negative effect in this setting.     

Does Public Firms’ Mandatory IFRS Reporting Crowd Out Private Firms’ Capital Investment?

We investigate how the mandatory adoption of International Financial Reporting Standards (IFRS) by publicly listed firms in the European Union affects peer private firms. We find that private firms’ capital investment decreases significantly after the IFRS mandate, relative to public firms. Private firms also display decreased investment when benchmarked against firms relatively insulated from the impact of the IFRS mandate, but the magnitude of the effect is smaller in this case. These results are consistent with the hypothesis that mandatory IFRS reporting (combined with other reforms), while increasing public firms’ financing and investment, crowds out funding for private firms. The effect is more pronounced for larger private firms and in industries where public peers have greater external financing needs. Our evidence suggests that financial reporting regulations cause shifts in resource allocation in an economy.     

Does Earnings Management Relieve the Negative Effects of Mandatory Pension Contributions?

Mandatory pension contributions (MCs) are negative shocks to a firm's liquidity that can unfavorably impact its cost of capital, financing, and investment plans. We examine whether firms faced with MCs use both noncash (NEM) and cash‐generating earnings management (CEM) to partially offset their negative effects. Firms increase CEM, but not NEM, when they experience MCs. We also find that earnings management associated with MCs does not substantially lower the weighted cost of capital or boost external funding and investment. Our findings suggest that MC firms use CEM as it directly generates cash to fund MCs, while NEM does not.     

Guaranteeing Healthcare: What Does the Care Guarantee Do?

Abstract: According to the Swedish Health and Medical Services Act, healthcare is to be provided to the population according to need and on equal terms. It must also be accessible – a part of healthcare that has been criticized. In an effort to improve accessibility, the Swedish Association of Local Authorities and Regions and the government have both agreed to introduce a national care guarantee with effect from 01‐11‐2005. On 01‐07‐2010, the guarantee was incorporated into the Health and Medical Services Act. This paper considers, using the ideas of Foucault (discursive formation), Butler and Callon (performativity), how the idea of a care guarantee came to be influential during the formulation of Sweden's healthcare policies and on the management of services in hospitals. The concept of performativity is used to illustrate how the care guarantee becomes binding on the county council, as a promise to the patient.     

Does Mandatory Shareholder Voting Prevent Bad Acquisitions? The Case of the United Kingdom

A large number of studies have shown that many companies have made large acquisitions that their own shareholders probably would not have approved if given the opportunity to do so. In this article, which summarizes the findings of their study published recently in the Review of Financial Studies, the authors present evidence that suggests the effectiveness of shareholder voting as a corporate governance mechanism designed to prevent such value‐reducing acquisitions from taking place. The authors' study focused on acquisitions in the U.K. where proposed transactions that exceed a series of 25% relative size (target's as a percentage of the acquirer's) thresholds are defined as “Class 1” transactions and require shareholder approval. The authors found strikingly positive stock market reactions to the announcements of such Class 1 acquisitions—as compared to zero if not negative average announcement returns for Class 2 transactions that were not subject to a shareholder vote. And when the authors extended their analysis to U.S. M&A markets, they found that the larger (again, in relative size) U.S. deals—large enough that they would have required a shareholder vote in the U.K.—provided returns to their shareholders that were negative, and thus significantly lower than those of their U.K counterparts. In terms of the economic significance of their findings, the authors found that Class 1 transactions were associated with aggregate gains to acquirer shareholders of $13.6 billion. By contrast, U.S. transactions of similar size, which again were not subject to shareholder approval, were associated with aggregate losses of $210 billion for acquirer shareholders; and Class 2 U.K. transactions, also not subject to shareholder approval, were associated with aggregate losses of $3 billion. In a further series of tests designed to shed light on how mandatory shareholder voting generates such substantial value improvements for acquirer shareholders, the authors also found evidence suggesting that when faced with the requirement of a shareholder vote, CEOs and boards are more likely to resist the temptation to overpay to close a deal. And the fact that the shareholders of the Class 1 acquirers did not end up blocking a single transaction that was submitted to a vote suggests that this mechanism works without the need for shareholders to actually vote down a deal. In other words, mandatory shareholder voting on acquisitions is a powerful deterrent to “bad deals” because, first of all, the vote is triggered automatically by the relative size tests and, second, CEOs and boards, with the help of their bankers, have a pretty good idea well in advance of the vote whether their shareholders are going to vote “no”—and such a vote would be viewed by top management as a major rejection, a strong vote of no confidence.     

Does the adoption of IFRS affect corporate social disclosure in annual reports?

In this exploratory study we investigate the impact of the implementation of IFRS on corporate social disclosures (CSD) within the context of stakeholder theory. We measure the level of CSD in annual reports using a disclosure instrument based on the United Nations Conference on Trade and Development report “Guidance on Corporate Responsibility Indicators in Annual Reports”. We find that IFRS adoption had a differential effect on CSD based on a firm's institutional setting i.e., the stakeholder–management relationship prevalent in their institutional environment. Firms in the stakeholder countries did not have a significant change in the level of CSD following the mandatory adoption of IFRS while firms from the shareholder countries experienced a significant increase over the same period resulting in shareholder countries providing an overall higher level of CSD after IFRS adoption than stakeholder countries. These findings suggest that firms' reactions to the requirements of IFRS and the stakeholder pressure to provide additional CSD are influenced by institutional environment. Further, our results provide support for the use of stakeholder theory to predict the level of CSD.     

Voluntary disclosure of financial information by French firms: Does the introduction of IFRS matter?

This paper addresses the relationship between mandatory and voluntary information. The introduction of IFRS in 2005 modified mandatory information requirements and influenced the content and level of the discretionary information disclosed by firms. This background allows us to test whether the complementary or substitution hypothesis dominates. A French firm data panel is used to empirically analyze the consequence of IFRS introduction. Referring to the 2003–2008 period gives a long-term perspective and allows us to identify discretionary communication policies by building a proprietary voluntary disclosure score. We find that voluntary disclosure policies experienced an upward swing with the introduction of IFRS, giving support to the complementary hypothesis. We also demonstrate a dynamic relationship between disclosure and the dispersion of analysts' earnings forecasts. The practical implication of the paper is to show that firms' discretionary communication policies follow both a long-term and a short-term component to meet analysts' demands for information. Our contribution is to refer to a long-term sample in one country where the environment and regulation context is homogenous. Our disclosure score index seems to be a good measure to outline that idiosyncratic communication policies are complex and strategic.     

Does the Mandatory Bid Rule Add Value to Target Shareholders?

I investigate whether implementation of the mandatory bid rule—the rule that grants all shareholders the right to participate in a takeover transaction at equal terms—affects target announcement returns. I use a difference‐in‐differences approach and the staggered adoption of the rule across 15 European countries. I find that the rule change leads to higher target returns. In full transactions, better accounting standards and shareholder protection norms of the acquirer leads to higher target returns. In majority transactions, greater value transfer from acquirers with weak accounting standards leads to higher target returns. I find weak evidence of overpayment by acquirers.     

IFRS Ten Years on: Has the IASB Imposed Extensive Use of Fair Value? Has the EU Learnt to Love IFRS? And Does the Use of Fair Value make IFRS Illegal in the EU?

Abstract

This paper is a commentary on issues related to the first decade's mandatory use of International Financial Reporting Standards (IFRSs) in the EU. Three specific but related questions are addressed, as in the paper's title. On the first (imposition and use of fair value (FV)), I conclude that the International Accounting Standards Board has not substantially extended the use of FV in its 15 years of work and that most companies hold few assets or liabilities on the FV basis. On the second question (adoption in the EU), I analyse a consultation exercise which strongly suggests that the EU's imposition of IFRSs will continue. On the third question (legality of IFRSs), I explain why recent UK legal opinions that question the legality of reporting under IFRSs are not persuasive.     

Has Adoption of IFRS Increased Non–North American Institutional Investment in the Canadian Stock Markets?

We investigate whether non–North American (non‐NA) institutional investment in firms listed on the Canadian stock markets increased between the pre‐ and post‐IFRS adoption periods relative to such investment in firms listed on the U.S. stock markets. Prior to IFRS adoption, Canada had high‐quality financial reporting standards that were similar to the U.S. standards. As consequences of IFRS adoption, Canadian financial statements became more comparable with European and other IFRS country financial statements and less comparable with neighboring U.S. financial statements. Thus, a question of interest is whether the enhanced comparability with non‐NA companies was beneficial in terms of attracting non‐NA investment to Canadian companies versus U.S. companies. We find that there was no significant change in non‐NA institutional investment in Canadian firms relative to U.S. firms for the very largest (fifth quintile) and for smaller (first, second, and third quintiles) Canadian companies. However, intermediate‐sized Canadian companies in the fourth size quintile lost non‐NA institutional investment relative to their U.S. peer companies, suggesting that non‐NA investors cared more about comparability with U.S. peer companies than non‐NA peer companies for companies in this size quintile.     

Does IFRS 10 on Consolidated Financial Statements Abandon Accepted Economic Principles?

The 2007 global financial crisis revealed a deficiency in the financial reporting of off‐balance‐sheet vehicles. To better reflect risks associated with such items, International Financial Reporting Standard (IFRS) 10 provided new principles for determining an investor's control of an investee for the purpose of preparing consolidated financial statements. We show that an applicative example appearing under the new guidelines contradicts the conclusion drawn from widely accepted power indices: the Shapley‐Shubik value and the Banzhaf index. Our study adds to the literature aiming to incorporate methodological economic thought into accounting principles.     

Does mandatory IFRS adoption improve information quality in low investor protection countries?

We examine the effect of mandatory IFRS adoption on the information quality of financial reporting in France, Germany and Sweden. These three Western European civil law countries are characterized as low investor protection by the World Economic Forum's 2012/2013 Global Competitiveness Report. Using data for 2003 and 2011, we find significant improvement in both forecast accuracy and forecast dispersion following mandatory IFRS adoption in all three countries. Furthermore, the effect on information quality is greater the lower the strength of investor protection. These results suggest that mandatory IFRS adoption in low investor protection countries leads to an improvement in information quality. A tentative implication of the results is that standard setters should not delay IFRS adoption pending regulators implementing a high investor protection.     

Does Form 20-F reconciliation elimination for IFRS filers affect the risk forecasting ability of accounting numbers?

This study investigates the effect of the elimination of Form 20-F reconciliation items on the risk relevance of accounting information. Using a sample of U.S. companies and American depositary receipts adopting domestic standards that are generally in accordance or fully compliant with IFRS, this paper finds that IFRS better reflect macroeconomic fluctuations after Form 20-F reconciliation elimination. This paper also finds that Form 20-F reconciliation elimination has no negative effect on the usefulness of accounting data under IFRS in the formulation of superior risk forecasts. Further, this paper finds that the elimination of Form 20-F reconciliation items is associated with lower idiosyncratic risk. Overall, the findings indicate some benefits from Form 20-F reconciliation elimination.     

Does Size Influence the Suitability of the IFRS for Small and Medium-Sized Entities? – Empirical Evidence from Germany

This study is set within the context of the IASB's initiative to develop an IFRS for small and medium-sized entities (SMEs). It is based on a questionnaire survey of small and medium-sized entities in Germany exploring the suitability of the IASB's proposed SME standard for entities of different size classes. Quantitative size criteria are used in many national jurisdictions to differentiate financial reporting requirements between entities. However, there is very little empirical evidence on the question whether the economic size of an entity has an impact on the economic issues that should be regulated by accounting rules and on management's preferences for specific accounting methods. This paper addresses these deficiencies by exploring to what extend an entity's economic size has an impact on its international exposure, the relevance of specific accounting issues and preparers’ perceptions on costs and benefits associated with the application of selected accounting methods. Our findings are ambiguous. Size effects are revealed with regard to the structure of entities, their international exposure and to a large extent to the relevance of particular accounting issues. Cost and benefit assessments of accounting methods also differ within and between the size clusters investigated, albeit a generalisation of size as a factor determining the cost-benefit considerations of firms with regard to particular accounting treatments and methods is not supported by the study's results.     

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.     

Does IFRS make analysts more efficient in using fundamental information included in financial statements?

This paper investigates the efficiency with which analysts use fundamental signals when forecasting one-year-ahead change in earnings per share (EPS) in Australian and European contexts and the impact of International Financial Reporting Standards (IFRS) on this efficiency. Results reveal that adoption of IFRS seems to increase analysts’ awareness of fundamental signals useful for predicting future changes in EPS. However, overall, analysts remain only as efficient as they were pre-IFRS in using these fundamental signals. While their efficiency in using the earnings signal decreased, it increased for non-earnings signals in the post-compared to pre-IFRS period. Furthermore, analysts substantially underutilise the earnings signal in common compared to code law countries. These findings are likely to be of interest to analysts and market participants when making forecasts and investment decisions, and to standard setters and regulators in evaluating the impact of accounting standards.     

Why do private firms adopt IFRS?

Do private firms voluntarily adopt IFRS? If so, why? Answers to these questions have been very limited so far, mainly due to the absence of financial data on private firms. In this paper, I exploit the German setting where the financial statements of private firms are widely available. I estimate multi-period logit regressions on the choice between national GAAP and IFRS for the consolidated financial statements of nearly 3000 German private firms with more than 14,000 firm-years in the period 1998–2010. My results suggest that the expected net benefits of IFRS adoption vary substantially across the group of private firms, depending on their financing needs, governance system, and organizational and informational complexity. Specifically, I find that private firms using IFRS have more growth opportunities, are more leveraged, are externally rated, seek to raise external capital by issuing public bonds or equity, are registered as a stock corporation, are characterized by private equity (PE) involvement, have more international sales and operations, and have a Big Five auditor. These insights should be of great interest to both preparers and regulators in the current debate about the future of financial reporting in private firms.