In our paper, Effects on Comparability and Capital Market Benefits of Voluntary Adoption of IFRS by US Firms: Insights from Voluntary Adoption of IFRS by Non-US Firms, which was recently made publicly available on SSRN, we examine whether voluntary adoption of IFRS is associated with an increase in comparability of accounting amounts and capital market benefits after the firms adopt IFRS. Our evidence is based on samples of non-US firms that voluntarily adopt IFRS matched with firms of similar size in their country and industry that either adopted IFRS before them or do not adopt IFRS.

We find that after firms voluntarily adopt IFRS, their accounting amounts become more comparable to those of firms that adopted IFRS before them and less comparable to those of firms that do not adopt IFRS. We also find that adopting firms generally exhibit an increase in capital market benefits—liquidity, share turnover, and firm-specific information—relative to both adopted and non-adopting firms. However, there is little evidence of capital market consequences for adopted firms and little evidence that non-adopting firms suffer a decrease in capital market benefits.

…continue reading: Comparability, Capital Market Benefits, and the Voluntary Adoption of IFRS

In the paper, Mandatory Financial Reporting Environment and Voluntary Disclosure: Evidence from Mandatory IFRS Adoption, which was recently made publicly available on SSRN, we investigate the interaction between mandatory financial reporting environment and voluntary disclosure by employing the mandatory adoption of International Financial Reporting Standards (IFRS) in 2005 as an exogenous increase to mandatory reporting to examine changes in firms’ voluntary disclosure practices. To measure voluntary disclosure, we focus on a discretionary action, namely the extent to which managers provide earnings forecasts, the most prominent performance measure that a firm supplies to investors. Ex-ante, it is unclear how the increase in reporting quality following the mandatory adoption of IFRS could influence management forecasts. On the one hand, mandatory financial reporting and voluntary disclosure can be complements, wherein the former produces verifiable information that improves the credibility of the latter and therefore encourages managers to issue more forecasts, i.e. the confirmatory role of mandatory reporting.

Prior studies document improved reporting quality following IFRS adoption, evidenced by earnings with lower manipulation and higher value relevance, timeliness, and information content. Therefore, given the evidence that IFRS improves the verifiability of earnings, the complementary view suggests that the mandatory adoption of IFRS should increase management forecasts. On the other hand, mandatory financial reporting and voluntary disclosure could also be substitutes, as private information that was previously conveyed through voluntary disclosure is now directly reflected in mandatory financial reports. Since IFRS produces more timely and value-relevant earnings numbers, the substitution effect predicts that the increased quality of financial reporting may reduce the demand for supplementary information from investors to predict future earnings. Therefore, IFRS adoption may also lead to fewer management forecasts.

…continue reading: Mandatory Financial Reporting Environment and Voluntary Disclosure

In my paper, The Political Economy of International Financial Regulation, forthcoming in the Indiana Law Journal, I examine the current system of international financial regulation (IFR) from a historical and political perspective. In contrast with conventional theories of IFR, which see the current system of informal regulatory networks and non-binding standards as overall rational and efficient, I argue that historical path dependence and political economy play a major role in shaping outcomes in IFR. As a result, it produces mixed results—while it adequately addresses some international regulatory challenges, it is relatively ineffective at others, and avoids some altogether. This state of affairs has several important implications; perhaps most worrisome, it raises doubts that IFR can live up to the G-20’s ambitious post-crisis promises to address the international dimensions of systemic risk and moral hazard.

As readers of this blog will no doubt appreciate, there are substantial difficulties involved in developing a general account of IFR. The field is deeply fragmented, as international standards address a broad range of issues: accounting and disclosure rules, fraud, capital adequacy, prudential supervision, and cross-border resolution, to name but a few. All of these areas present different challenges and outcomes vary substantially across them. This being said, one recurrent feature of IFR is its informality. Instead of legally binding treaty obligations and formal international organizations, IFR relies almost exclusively on non-binding standards developed by networks of national regulators, such as the Basel Committee, IOSCO and IAIS. This feature is striking in comparison with many other areas of international governance where more formal mechanisms loom larger, such as trade, investment and the environment.

…continue reading: The Political Economy of International Financial Regulation

In our paper, Mandatory IFRS Reporting and Changes in Enforcement, which was recently made publicly available on SSRN, we examine the underlying sources of the capital-market benefits around the introduction of mandatory IFRS reporting. Prior work finds significant capital market benefits and also shows that the effects around IFRS adoption are significantly stronger in countries with stricter and better functioning legal systems, and that they are stronger in the EU than in other regions of the world. We argue that this evidence is consistent with several interpretations and that it is still an open question to what extent these positive effects around mandatory IFRS adoption are indeed attributable to the switch to arguably better, more capital-market oriented, and globally harmonized accounting standards.

We focus on market liquidity and rely on within- and across-country variation in the timing of IFRS adoption and of other institutional changes to disentangle several possible explanations. Specifically, we explore whether (i) the switch from local GAAP to IFRS reporting played a primary role for the observed capital-market benefits; (ii) the introduction of IFRS had capital-market benefits, but only in countries with strong institutions and legal enforcement; or (iii) the switch to IFRS reporting itself had little or no effect and, instead, concurrent changes to countries’ institutions drive the observed capital-market benefits.

…continue reading: Mandatory IFRS Reporting and Changes in Enforcement

In the paper, Mandatory IFRS Adoption and the Contractual Usefulness of Accounting Information in Executive Compensation, forthcoming in the Journal of Accounting Research, we investigate the contracting implications of the transition to IFRS. Specifically, we examine how the mandatory adoption of IFRS affects the contractual usefulness of accounting information in executive compensation, as reflected in pay-for-performance sensitivity (PPS) and relative performance evaluation (RPE). These tests allow us to infer whether compensation committees of European companies view IFRS as leading to increased earnings quality and comparability.

The mandatory adoption of International Financial Reporting Standards (IFRS) on January 1, 2005, by the European Union (EU) and several other countries (e.g., Australia; South Africa) marks major progress toward a single set of high-quality, globally accepted accounting standards (Daske et al., [2008]). IFRS is primarily aimed at enhancing earnings quality and achieving a high degree of comparability of financial statements (Regulation (EC) No. 1606/2002 of the European Parliament and of the Council). The extant research, however, has provided mixed evidence on whether mandatory IFRS adoption has achieved these goals (e.g., Barth et al., [2008], Ahmed et al. [2010], DeFond et al. [2011], Lang et al. [2010]).

…continue reading: Mandatory IFRS Adoption, Accounting Information, and Executive Compensation

In the paper, The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS, forthcoming in the Journal of Accounting & Economics as published by Elsevier, we examine whether the information content of earnings announcements increased in countries that mandated adoption of IFRS compared to countries that retained domestic accounting standards. We address this research question using a sample of 20,517 earnings announcements from 16 countries that mandated adoption of IFRS and 11 countries that retained domestic accounting standards. We measure information content of earning announcements based on abnormal trading volume and return volatility around firms’ earnings announcements.

…continue reading: The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS

In 2008, the Council of Institutional Investors (Council) adopted a policy regarding the independence of international accounting and auditing standard setters. The Council’s policy supports the goal of convergence to a single set of high quality accounting standards designed to produce comparable, reliable, timely, transparent and understandable financial information that will meet the needs of investors and other consumers of financial reports. Importantly, the policy also opposes replacing U.S. accounting standards and standard setters with international accounting standards and standard setters unless and until seven criteria have been achieved.

In a recent white paper commissioned by the Council of Institutional Investors, Criteria for an Independent Accounting Standard Setter How Does the IASB Rate? I explore evidence and views regarding each of the seven criteria. The paper is designed to assist Council members and other interested parties in evaluating whether the International Accounting Standards Board (IASB) and its International Financial Reporting Standards (IFRS) satisfy any or all of the criteria. This evaluation is particularly timely.

…continue reading: Criteria for an Independent Accounting Standard Setter

In our paper, Mandatory IFRS Adoption and Financial Statement Comparability, which was recently made publicly available on SSRN, we examine the effect of mandatory IFRS adoption on financial statement comparability. To isolate the effects of comparability, we use firms domiciled in the UK as our setting. Prior academic and practitioner research argues that UK domestic standards are similar to those under IFRS. Thus, any effects of changing to IFRS for UK firms are more likely driven by changes in comparability of financial statements (such as between UK firms and non-UK firms) versus changes in information quality. To proxy for changes in the information environment, we use two measures: abnormal returns to insider purchases of stock, and abnormal returns to analyst recommendation upgrades. Both insiders and analysts represent sophisticated users likely to possess private information regarding the firm. If IFRS reduces private information by enhancing the comparability of financial statements, we predict that abnormal returns to insider purchases and analyst recommendation upgrades will be reduced following mandatory IFRS adoption in the UK. Empirical results are consistent with these expectations. We find that abnormal returns to both insider purchases as well as analyst recommendation upgrades decrease following IFRS adoption. These findings occur in univariate and multivariate analyses, and across 1-month, 3-month, and 6-month return windows.

…continue reading: Mandatory IFRS Adoption and Financial Statement Comparability

In the paper, Different Approaches to Corporate Reporting Regulation: How Jurisdictions Differ and Why, which was recently made publicly available on SSRN, I discuss differences in countries’ approaches to reporting regulation and explore reasons why they exist in the first place and why they are likely to persist. After delineating various regulatory choices and discussing the tradeoffs associated with these choices, I provide a basic framework based on the notion of institutional complementarities that helps us understand existing differences in corporate reporting and other regulation. The paper also provides descriptive and stylized evidence on regulatory and institutional differences across countries. It highlights that there are robust institutional clusters around the world.

…continue reading: Different Approaches to Corporate Reporting Regulation

In our paper, How Did Financial Reporting Contribute to the Financial Crisis? forthcoming in the European Accounting Review, we scrutinize the role that financial reporting for fair values, asset securitizations, derivatives, and loan loss provisioning played in contributing to the Financial Crisis. Because banks were at the center of the Financial Crisis, we focus our discussion and analysis on the effects of financial reporting by banks. We begin by discussing the objectives of financial reporting and bank regulation to help clarify that information standard setters require firms provide to the capital markets and information required by bank regulators for prudential supervision will not necessarily be the same. This distinction is important to understanding why financial reporting played a limited role in contributing to the Financial Crisis.

…continue reading: How Did Financial Reporting Contribute to the Financial Crisis?