On the Asymmetric Recognition of Good and Bad News in France, Germany and the United Kingdom

We investigate whether accounting systems recognise bad news more promptly in earnings than good news, where news is proxied by changes in share price. The analysis is based on a sample of firm/years drawn from France, Germany, and the UK during 1990 to 1998. These three countries are the originators of three distinct legal traditions. Previous studies have argued that asymmetric recognition, one manifestation of conservative accounting, is sensitive to legal background and history. We find that in all three countries the contemporaneous association between earnings and returns is much stronger for bad news (i.e. when price changes are negative) than for good news, and although the results are strongest for the UK, and then France, the inter-country differences are not statistically significant. The stronger reaction to bad news is more pronounced for firms with relatively low capitalisation. We also find that the relative persistence of profits and losses are consistent with asymmetric recognition in France and the UK, but not in Germany, and that the more timely recognition of bad news is maintained even when we control for earnings persistence. When we extend the model to include price changes from previous periods, we see that the stronger reaction to bad news decays over time. The results from this model also suggest that 'pervasive' conservatism, unrelated to news, is observed in Germany and France, but the UK results are consistent with optimism. Although asymmetric recognition is generally strongest in the UK and weakest in Germany, and this broadly conforms to our expectations, the differences are less clear than the results from earlier periods.     

On the ‘Review of Structure and Effectiveness of the IFRS Foundation’: the EAA’s Financial Reporting Standards Committee’s View

In July 2015 the International Financial Reporting Standards (IFRS) Foundation launched its third five year review of its structure and effectiveness of the organisation. In a public call, the Trustees solicited stakeholders’ input on the relevance of IFRS Standards with respect to broadening the IFRS scope and to the impact of new technology, on the consistent application of IFRS and on the governance and funding of the International Accounting Standards Board and the IFRS Foundation. The European Accounting Association (EAA)’s Financial Reporting Standards Committee responded to this request for views by submitting a comment letter based on research-informed opinions. This article provides an overview of this Review of Structure and Effectiveness of the IFRS Foundation and the EAA’s opinions in response to this Review.     

Lobbying on Accounting Standards: Evidence from IFRS 2 on Share-Based Payments

Lobbying is an essential part of the International Accounting Standards Board (IASB) standard-setting process. There is still much to learn, however, about key aspects of the roles played and arguments employed by various constituents when lobbying practices do occur. This paper focuses on the regulation of share-based payments. As these transactions were under-regulated before International Financial Reporting Standard (IFRS) 2, we expect that the strong debate that occurred during the 1990s resulted in conflicting opinions when this standard was under discussion. To analyse lobbying behaviour and assess its influence on the IASB's decision-making, we conducted a content analysis of 539 letters addressing the documents issued by the G4+1 and the IASB preceding IFRS 2. Consistent with the rational-choice model, our analysis of lobbying activity shows that preparers constituted the most active group, particularly when the IASB started the project, whereas participation of standard-setters increased at the end, which is more consistent with institutional theory. A common strategy was to provide arguments merely on points of disagreement. Preparers and consultants constituted the only groups using economic-consequences arguments to disagree, but later enlisted conceptual arguments as well. The IASB considered only conceptual arguments, and no interested party had a dominant influence.     

The influence of company characteristics and accounting regulation on information disclosed by Spanish firms

Accounting information is subject to two different influences: market pressures and pressure from regulatory bodies. This paper provides an empirical analysis of the influence of both these forces on information disclosure by Spanish firms. To test hypotheses concerning the influence of regulation, annual reports of three different years for 49 companies have been analysed. Given that new Spanish accounting rules have been in force since 1990, annual accounts of a sample of quoted companies have been analysed for the period 1989–1991. In order to consider the influence of positive accounting theory, several characteristics relating to company attributes were selected and tested empirically for the sample of 49 companies. The information disclosed by the sample companies was measured through an information index, based on a list of 50 items of information, and it was regressed on the variables related to company characteristics. The influence of regulation was analysed through a panel data analysis including time effects. The results suggest that time as a surrogate for regulation explains the level of information disclosure, although it does not influence the amount of voluntary information disclosed. However, several firm characteristics were also found to influence the level of disclosure, namely size, auditing and stock exchange.     

The value relevance of earnings disaggregation provided in the Spanish profit and loss account

This study analyses the value relevance of the different components of the earnings figure that appear in the Spanish profit and loss account in order to determine the preferred level of disaggregation by investors. It is considered that the disaggregation may help to evaluate the earnings quality; that is, its predictive ability about future earnings. We use a valuation model based on Ohlson (1995), which models firm value as a function of book value of equity and earnings, adding the earnings components to determine whether they provide incremental price-relevant information beyond aggregate earnings. In addition, we allow the parameters to vary under some firm-specific circumstances. Our results support the usefulness of the earnings decomposition for valuation purposes, resting primarily on the disclosure of the corporation tax, particularly for either small companies, or with a high-risk profile or with low persistence of earnings. It seems that neither financial profit nor extraordinary earnings have additional information content over the bottom-line figure, which is consistent with the IASC's position on ordinary versus extraordinary items.     

An analysis of self-employment subsidies with duration models

The determinants of continuity of subsidized self-employment activities are studied by means of duration models in Asturias (Spain). Variables related to socio-economic characteristics of the self-employed and to subsidized businesses are included in the models. Moreover, to consider the economic situation, the regional unemployment rate has been taken into account. A general survival analysis is complemented with a competing risk model that considers two types of exits from self-employment (failure versus other reasons). The significant variables that explain survival are age, industry, whether the business is the main source of family income or not and the unemployment rate.     

Valuing the Benefits of Coastal Water Quality Improvements Using Contingent and Real Behaviour

Recent moves in the European Union have beenmade towards a toughening of legislation onbathing water quality. This has focussedpolicy-makers thoughts on the welfare benefitsresulting from such improvements, especiallygiven their cost. Our paper uses a combinedstated and revealed preference approach tovalue coastal water quality improvements,focussing on an area of Scotland which hasconsistently failed to meet standards under theBathing Waters Directive. We combine data onreal behaviour with data on contingentbehaviour using a random effects negativebinomial panel model. This allows us to predictboth the change in participation (trips) shouldwater quality be improved, and the welfareincrease per trip. Our model includes allowancefor the existence of substitute sites, and forchanges in recreational behaviour during abeach visit.     

High food commodity prices: will they stay? who will pay?

Much of the public discussion of the food price crisis has focused on the sharply increased use of food commodities for biofuel production, framing debate in simple food versus fuel terms. Reality is more complex. Multiple forces drove food prices to high levels and, according to findings we report in this article, these forces will sustain high prices over the medium term. We also find that the distinction between high world prices for food commodities and the consumer costs of food is an important one to make. Food consumers do not buy raw food commodities at international prices. The degree to which the price of traded food commodities and the price of food are related depends on a long list of factors, most of which operate to dampen price transmission. In the search for appropriate policy response, it is essential to measure consumer effects correctly and to apportion properly the causes of current high prices.     

High-growth firms: does location matter?

The challenge for economies lies in boosting employment growth, not just by fostering entrepreneurship, but also by improving the growth potential of existing firms. Consequently, many studies have focused on assessing the dynamism of firms, and especially the capacity of high-growth firms (HGFs) to generate employment. This study aimed to identify HGFs in Spain during two periods, 2003–2006 and 2007–2010 and to analyse their characteristics and territorial distribution during the initial years of the economic crisis. Accordingly, a key area of inquiry of the study was the influence of agglomeration (in metropolitan areas, industrial districts and technological districts) on the locations of HGFs. To analyse the influence of location on the probability of firms being HGFs, a logit model was estimated. The main results supported the study’s hypotheses that technological districts and large urban areas are significantly associated with the probability of firms being HGFs, because firms profit from comparative locational advantages offered by these areas. The importance of HGFs requires special emphasis in relation to Spain’s context of economic crisis and high unemployment levels because of their significant contribution to employment generation.