IFRS Adoption, Legal Systems and the Voluntary Disclosure of Human Capital: Cross-country Evidence from the Banking Industry

Abstract

This study examines the value relevance of voluntary human capital disclosures by banks and the effect of the adoption of International Financial Reporting Standards (IFRS) on the value relevance of these disclosures. Human capital disclosures allow capital market participants to evaluate the intellectual capital of the disclosing banks, which in theory may enable market participants to assess the competitiveness of the bank’s human resource strategy and the productivity of the workforce vis-à-vis benchmark performance. While IFRS does not mandate particular form of voluntary human capital disclosures (VHCD), VHCD is expected to possess information content that is useful to market participants in their equity pricing decisions. The study is conducted using a cross-country sample of 10,199 bank-years that reported labor costs. Market participants, however, are found to relate VHCD negatively to prices and returns in common and civil law countries alike. Results also suggest that IFRS adoption reduces the value relevance of VHCD due to the abundance of alternative information provided under the more comprehensive IFRS framework that helps in the prediction of future cash flows. Finally, market participants find VHCD value relevant after IFRS adoption in common law countries potentially because it reduces uncertainty about an important determinant of the bank’s future performance. On the other hand, market participants in civil law countries view VHCD as value relevant but coming at added time and financial investment. As an application of the results to an emerging economy, the implications for the Egyptian accounting profession, banking sector and capital markets are discussed.