Do Larger Reporting Networks Yield Benefits from Information Network Effects?

IFRS Convergence and Adoption: Challenges and Opportunities

Mandatory adoption of IFRS in Latin America: A boon or a bias

The mandatory adoption of IFRS has been encouraged worldwide, with the objective to enhance the quality of accounting information. However, this effort is challenged by the argument that several factors affecting financial reporting incentives still vary across countries. Also, Gaio (2010) indicates that firm-level factors also have significant explanatory power on earning quality. Therefore, it is doubtful whether the mandatory adoption of IFRS can always lead to better quality of accounting information. This paper examines the effect of country-level and firm-level factors on value relevance of earnings and book value of equity. Among several country-level factors, this paper focuses on investor protection - proxied by anti-director right index (La Porta et al., 1998). In this study, firm-level factors refer to firm characteristics which allow or induce high use of managerial discretion. These characteristics are proxied by firm size, cash flow volatility, sales volatility, and incidence of negative earnings. Different from prior literatures which focus on level of value relevance, this paper examines the effect of country-level and firm-level factors on change in value relevance of earnings and book value of equity, arisen from the mandatory adoption of IFRS in the year 2005. By comparing value relevance of earnings and book value of equity among European Union countries during the years 1999-2007, the results indicate that the adoption of IFRS leads to improvement in value relevance. In addition, both country-level and firm-level factors have significant influence on the degree of improvement in value relevance from the IFRS adoption. In particular, the firms which operate in a weak investor protection environment and have firm characteristics which induce or allow the managers to use high managerial discretion (i.e., small size, high cash flow volatility, high sales volatility, and frequent incidences of loss) do not experience significant improvement in value relevance from IFRS adoption. The results imply that the IFRS adoption does not ensure better quality of accounting information. The improvement of the quality of accounting information depends on both country and firm characteristics, which influence financial reporting incentives.

Ball and Shivakumar [(2006), The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44, 207–242] show that the observed smoothness of earnings (i.e. negative contemporaneous correlation between accruals and cash flows) is the joint product of the role of accruals in smoothing out transitory fluctuations in operating cash flows (noise reduction role) and the role of accruals in providing timely recognition of economic gains and losses (contracting role). These two roles of accruals have opposite effects on earnings smoothness properties. Using a regression framework that allows us to simultaneously consider both roles, we show that failing to control for changes in timely gain and loss recognition as firms shift to IFRS can lead to erroneous inferences regarding the effects of IFRS adoption on earnings smoothness, and consequently on researcher’ conclusions about how IFRS adoption has affected accounting quality. Our results are consistent with mandatory (2005) IFRS adoption resulting in a change in the contracting role rather than the noise reduction role (or smoothness role) of accruals. A decrease in timely loss recognition, an increase in timely gain recognition, and a net decrease in asymmetric timely loss recognition are what drives the change in observed smoothness properties of earnings around mandatory IFRS adoption.

LaFond and Watts (2008) provide evidence that information asymmetry might be a determinant of accounting conservatism. One implication of their paper is that regulators trying to reduce information asymmetry by lowering the level of accounting conservatism might be wrong. However, there is a trend in moving away from conservative accounting. The typical example is IFRS adoption. Therefore, this paper studies information asymmetry and accounting conservatism under IFRS adoption. The results show that the level of accounting conservatism decreases after mandatory IFRS adoption, but the adoption of IFRS is likely to weaken the relationship between information asymmetry and accounting conservatism. Moreover, this paper investigates how the change of accounting conservatism under IFRS is related to the change in information environment. The finding shows that accounting conservatism increases information environment, supporting the idea that, by providing comparatively credible information, conservative accounting is beneficial to the information environment.

In this paper, we examine whether productivity improves after mandatory IFRS adoption. Using data envelopment analysis (DEA) to measure firm-level productivity, we show that production efficiency of mandatory IFRS adopters increases significantly after mandatory adoption of IFRS. The post-adoption production efficiency improves more for firms located in countries with large GAAP differences, firms exhibiting a decrease in stock return volatility and analyst forecast dispersion, and firms experiencing a large increase in the number of comparable industry peers. Taken together, the evidence suggests that firms with significant improvements in information environment from mandatory IFRS adoption are able to increase productivity substantially.

ABSTRACT
 This study investigated the mandatory role of IFRS adoption in the association of accounting conservatism and investment efficiency in Pakistan. The study applied the model of Basu's (1997) to measure the conditional accounting conservatism for timely recognition of expected loss and gain. For empirical analysis, the study took a sample of 165 firms listed at Pakistan Stock Exchange and employed panel data methodology over the data of 2008-2017. Firms size, leverage, return on assets, and growth are taken as control variables to assess the relationship between accounting conservatism and investment efficiency. Findings of the study revealed that conditional accounting conservatism significantly affected the firms’ investment efficiency with the mandatory adoption of IFRS in Pakistan. IFRS adoption enhanced the firms’ investment efficiency and motivated to adopt the principle of accounting conservatism for recognizing the expected losses in timely manner in order to achieve investment efficiency. Timely recognition of expected losses played an important role in reducing agency problems and asymmetric information. In Pakistani setting, it is the pioneer study which highlighted the importance of accounting conservatism in protecting the surplus resources of investors and enhancing the overall investment efficiency under mandatory adoption of IFRS. These findings offer policy implications for focusing on the adaptation of IFRS in Pakistan.

The present paper is primarily designed to investigate the relationship binding the IFRS mandatory adoption and the corporate capital cost. Additionally, it is focused on assessing this relationship associated growth opportunities, along with an evaluating of the informational environment moderating role. This study is focused on the French context through implementation of longitudinal data. The study sample involves the entire companies belonging to the CAC All Tradable index, observed over the period ranging between 2002 and 2012. The results appear to reveal that the IFRS mandatory adoption proves to help greatly in reducing the French listed firms' capital cost. Actually, no evidence has been discovered to prevail as the informational environment moderating effect on the relationship binding the IFRS adoption and capital cost. Conversely, some evidence was found of the interaction between the company's growth opportunities and IFRS adoption highlighting cost reduction.

Synopsis The research problem We investigated three questions: (1) Has the usefulness of accounting information in predicting future earnings and cash flows out-of-sample (OOS) changed after the mandatory IFRS adoption? (2) If there is a change in this type of usefulness, is it universal or conditional on institutional characteristics of the adopting countries, such as legal enforcement, securities regulation, and the differences between their domestic accounting standards (DAS) and IFRS? (3) If there is a change in this type of usefulness, does it have an economic significance in terms of improved investment performance? Motivation or theoretical reasoning The IASB indicates in its conceptual framework that the objective of financial reporting is to provide information to help existing and potential stakeholders assess the amount, timing, and uncertainty of future net cash inflows to an entity. Therefore, examining whether IFRS achieve this objective using the OOS prediction tests needed in investment practice is critical in evaluating the benefit of the switch from DAS to IFRS. Equally important is to shed light on the debate, in an IFRS setting, about the usefulness of earnings and accruals relative to cash flows in future cash flow prediction. The test hypotheses With respect to our first research question, we expected that mandatory IFRS adoption improves national accruals-based accounting systems and strengthens the reporting of cash flows. With respect to our second research question, we expected the level of improvement in the predictive ability of accounting information to vary with national institutions such as legal enforcement, securities regulation, and differences between DAS and IFRS. With respect to our third research question, we expected the enhanced predictive ability of accounting information to translate into improved economic significance of forecasts under IFRS. Target population We employed a sample of 1,197 firms from 12 European Union (EU) countries, Australia, and South Africa that mandatorily adopted IFRS in 2005. Adopted methodology We developed OOS earnings and cash flow forecasts and tested the statistical significance of the changes in OOS prediction performance using a bootstrapping approach. We also evaluated whether the change in the predictive ability of accounting information following IFRS adoption translated into improved economic significance in terms of portfolio investment performance based on the OOS forecasts. Analyses Our analyses focused on comparisons of OOS prediction performance between the pre- and post-IFRS periods, while controlling for economy-wide conditions unrelated to IFRS adoption by constructing a constant matched benchmark sample using non-IFRS firms that have only used DAS. In addition, we analyzed the effect of IFRS adoption on OOS prediction performance conditional on national institutions in both univariate tests and multivariate regression analyses. Finally, we performed portfolio analyses based on the OOS forecasts to evaluate the economic significance of the effect of IFRS adoption. Findings We found that the earnings and cash flow forecast accuracy improved after adoption, and the effect persisted after controlling for firm characteristics and institutional characteristics. Total accruals generally remained (became) useful in the prediction of earnings (cash flows) after adoption regardless of national institutions. Earnings did (did not) better inform about future cash flows than cash flows alone under weak (strong) enforcement/regulation and high (low) DAS differences from IFRS. Stock portfolios based on the OOS forecasts generated higher hedge returns after adoption, with exceptions in low-legal-enforcement countries, corroborating the improved forecast accuracy. Overall, our findings suggest that mandatory IFRS adoption comes with an improved accruals-based accounting system and reporting of cash flows.

The adoption of international accounting standards, namely the IFRS, at the country level has sparked two contrasting, but not mutually exclusive, viewpoints. One view is that IFRS engenders better reporting standards, and uniform adoption allows for greater comparability. The upshot is that IFRS adoption will improve a firm's information environment and hence contribute toward a lower cost of capital. The alternative view is that disclosure quality is shaped by political and economic forces, and hence higher-quality accounting standards will not necessarily translate into higher-quality reporting. We empirically evaluate these arguments on IFRS adoption using both private and public-traded firm observations from Kenya, a developing country with relatively open capital markets but limited enforcement resources. Our analysis takes advantage of a unique dataset involving firm-specific measurements of IFRS compliance. We find that while both private and public firms are required to adhere to IFRS, public, rather than private firms, exhibit greater IFRS compliance. Highlighting the influence of capital market openness, we find that foreign ownership is positively and significantly correlated with IFRS compliance. Probing the underlying causal relationship, additional analysis suggests that greater foreign ownership leads to greater IFRS compliance. Examining the effects of IFRS compliance, higher compliance is positively associated with share turnover. Overall, our evidence illustrates both the importance of economic incentives in shaping IFRS compliance and the capital market benefits to being compliant with IFRS in a low enforcement country. JEL Classifications: M41; M44; M47; G15; G38.

The adoption of international accounting standards, namely the IFRS, at the country level has sparked two contrasting, but not mutually exclusive, viewpoints. One view is that IFRS engenders better reporting standards and uniform adoption allows for greater comparability. The upshot is that IFRS adoption will improve a firm’s information environment and hence contribute towards a lower cost of capital. The alternative view is that accounting quality is shaped by political and economic forces and hence higher quality accounting standards will not necessarily translate into higher quality reporting. We empirically evaluate these arguments on IFRS adoption using both private and publicly traded firm observations from Kenya, a developing country with relatively open capital markets but limited enforcement resources. Our analysis takes advantage of a unique dataset involving firm-specific measurements of IFRS compliance. We find that while both private and public firms are required to adhere to IFRS, public, rather than private firms, exhibit greater IFRS compliance. Highlighting the influence of capital market openness, we find that foreign ownership is positively and significantly correlated with IFRS compliance. Probing the underlying causal relationship, additional analysis suggests that greater foreign ownership leads to greater IFRS compliance. Examining the effects of IFRS compliance, higher compliance is positively associated with share turnover. Overall, our evidence illustrates both the importance of economic incentives in shaping IFRS compliance and the capital market benefits to being compliant with IFRS in a low enforcement country.

This dissertation investigates how external factors shape a firm’s information environment. A transparent firm information environment is important to the efficiency of capital markets. To make informed decisions, economic agents such as investors, creditors, and suppliers rely not onlyon the information provided by firms, but also on other sources outside the firms’ control. The dissertation aims to expand our understanding of how external factors—namely, financial analysts’ earnings forecasts, the quality of auditors’ assurance services, and peer firms’ influence—contribute to a firm’s information environment.In the first essay, I find evidence of bounded rationality in financial analysts and how it affects the information that analysts produce. I argue that analysts face a limited attention constraint. Consequently, they must strategically choose which information to pay attention toand which information to ignore when making earnings forecasts. This prevents them from fully utilizing the available information to produce the most accurate forecasts. I rely on rational inattention theory (Sims 2003) to develop and formalize the relationships among the factors thatdetermine analyst attention and how analyst attention affects forecast accuracy. To map my theoretical predictions to the data, I construct a novel measure of attention that varies across stocks followed by the same analyst during the same fiscal period. I find that analysts tend to pay more attention to firms with volatile earnings and firms in their industry specialization while paying less attention to those that are new to their portfolio. Importantly, I find that attentiveanalysts are more accurate, and the effect of attention is larger for inexperienced analysts and stocks with highly volatile earnings. My findings imply that it is not just analyst coverage that matters; it is attentive coverage that reduces the information asymmetry between firms andinvestors. In the second essay, I study whether and to what extent the job satisfaction of employees affects the quality of their auditing services. To do so, I utilize a novel large-scale data set on job satisfaction from Glassdoor.com and an identification approach based on local precipitation to pindown the direction of causality and to show that employee job satisfaction has a significant positive effect on audit quality. Further, the evidence suggests that satisfied employees are better at detecting significant accounting irregularities but remain the same as other employees atdetecting minor accounting errors. Among job satisfaction indicators, these effects are driven by management quality and career opportunities. Overall, these findings demonstrate the importance of individual audit employees to the audit process and have practical implications for audit firms’ treatment of employees and audited firms’ information environments. In the third essay, I investigate the strategic interactions among industry peers with respectto financial reporting behaviors. Exploiting quasi-exogenous variation in the timing of peers' earnings announcements based on the SEC's threshold-based reporting deadline rules, I present evidence that peers have a disciplining effect on firm disclosure timing decisions. I find that firmsrespond to early peer announcements by announcing their own earnings early. Furthermore, I show evidence suggesting that peer effects operate under two mechanisms: disciplining and information transfer. Discipline occurs because investors may infer bad news from delay relativeto reporting peers. Information transfer occurs because peer reports contain information that is directly value relevant for the focal firm. Importantly, peer effects impose a significant spillover cost in the form of increased audit fees on firms facing peer pressure to report early. My findingshighlight a novel externality of financial reporting regulation with benefits and costs that should be considered by policymakers concerned with the timing of earnings information releases.

This study documents that M&A delistings are associated with a deterioration in the quality of analysts’ information environment for industry peer firms, measured by an increase in analysts’ absolute forecast errors and dispersion. This effect persists for six quarters and is larger when the delisting target firm contributes relatively more to the industry information environment. Further, we find that, among analysts forecasting earnings for an industry peer firm, those who also followed the delisted target firm in the pre-M&A period experience a larger increase in their absolute forecast errors. A comparison based on public versus private target firms also suggests that the loss of target firms’ public disclosures plays a role in the deterioration in the quality of analysts’ information environment. In additional analyses, we find evidence consistent with this effect resulting from a deterioration in analysts’ ability to exploit across-firm information complementarities. JEL Classifications: G14; G18; G34; M40.

Purpose With deepening digitalization and reliance on technology, cyberattack incidents are a rising concern for regulators, market participants and companies. Previous and anecdotal evidence suggests that the detrimental effects of cyberattacks extend far beyond the targeted firms. This study examines the spillover effects of cyberattacks on the costs of going public by non-targeted industry peers. Design/methodology/approach The authors employ several analysis techniques, including ordinary least squares regressions, propensity score matching methodology, entropy balancing, impact threshold analysis and probit estimation. The sample consists of US firms for the 2005–2018 period. Findings The results indicate that firms going public within one year of a cyberattack on an industry peer experience, on average, 5.4% higher first-day returns than their counterparts with no cyberattacks on industry peers in the pre–initial public offering (IPO) period. The findings are robust to alternative industry definitions and cyberattack proxies, filtering on prominent cyberattacks and the inclusion of a battery of controls. Furthermore, a cyberattack on an industry peer after the IPO filing increases the probability that the firm will withdraw its offering by 17.5%. These findings suggest that cyberattacks on industry peers result in costly IPOs for non-targeted newcomers. Practical implications This study has important implications for mandating prompt disclosures by companies about cybersecurity risks and incidents to improve investor confidence and thereby facilitate capital formation. Originality/value This study presents private firms with an additional factor to consider (i.e. cyberattack activity in their industry) when assessing the marginal costs of going public.

This study examines the effects of secrecy and mandatory IFRS adoption on earnings quality proxied by signed abnormal accruals and earnings conservatism. Using 19,324 firm-years from 14 countries over the period 1998-2011, we find that firms in a high secrecy country tend to report higher abnormal accruals and earnings conservatism, which result in lower earnings quality. On the other hand, we find that mandatory IFRS adoption improves earnings quality by decreasing abnormal accruals and earnings conservatism. Interestingly, the effect of IFRS adoption reinforces the effect of secrecy is positively related to earnings quality. The reason can be that IFRS encourages managers to enforce high quality standards and to share information with outside investors, improving earnings quality. The result highlights the benefit of IFRS adoption to earnings quality and the need for policy maker to consider the interaction between IFRS and culture.