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A large number of empirical studies have addressed the effects of adoption of International Financial Reporting Standards (IFRS), but the results have been mixed. We use a meta‐analysis of 56 empirical studies with 1,265 effect sizes to determine the impact of adoption of IFRS on financial reporting comparability, market liquidity, cost of equity, and cost of debt. This approach provides an objective view of the empirical results, in contrast to narrative reviews which offer subjective conclusions. We find that IFRS adoption has increased financial reporting comparability and market liquidity, and reduced the cost of equity. For cost of debt, a decrease is observed only for voluntary adoption. Our meta‐regression analysis explains the variation in the observed effect of adoption of IFRS across mandatory and voluntary adoption of IFRS, and choice of measures, control variables, estimation methods, and the strength of the empirical results. We emphasize the importance of these study characteristics and call for further studies focusing on the cost of debt and also studies using recent data to reflect the changes in IFRS. This study should be of interest to regulators and policymakers as they are expected to assess the impacts of adoption of IFRS.

The authors examine the likely determinants of cash holdings by New Zealand local councils. Extant finance literature suggests that organizations have transactional, precautionary and speculative m...

Tunnelling (also known as self‐dealing transactions) is defined as non‐arm’s length transactions with related parties of controlling shareholders for their private benefit and at the cost of other shareholders. Tunnelling is a governance issue between controlling shareholders and minority shareholders in both developed and developing countries. However, most studies on tunnelling focus on developed countries with the few exceptions of studies on China, India and Mexico. Using Oliver Williamson’s Market and Hierarchy model, this paper analyses the suitability of the governance requirements on tunnelling in Bangladesh and reports on interviews with non‐independent directors, independent directors and audit committee members. The study thus identifies the limitations and factors that affect the implementation and effectiveness of the current governance requirements to constrain tunnelling in companies in Bangladesh.

This study examines the impact of country level corruption on audit fees. Using a sample of 102,934 firm year observations on companies from 48 countries over the period 1998-2014, we find that audit fees are positively associated with higher levels of corruption. We also find that corruption adds a significant margin to the large premium paid to BIG_4 auditors. The study opens up a new line of research and adds to the literature on the BIG_4 audit premium.

Fair value, the value of an item in an orderly exchange, has been shown to have greater value relevance than historical cost. However, there is limited literature on the predictive ability of fair value. Our study contributes to this emerging area of research by examining the predictive ability of the SFAS 107 fair value disclosures by U.S. banks for future performance as measured by operating cash flows and earnings over a three-year time horizon. Furthermore, we provide evidence on the influence of the 2007/2008 Global Financial Crisis (GFC) on the relationships between bank fair values and future performance, thereby showing whether market illiquidity affected the underlying relationships. We also test for the impact of bank characteristics - size, capital adequacy and growth prospects - on predictive ability. Our findings suggest that fair values have predictive ability for both the cash flow and earnings measures of performance and that the GFC did not have an adverse impact on the predictive ability of bank fair values. However, we find that the predictive ability of fair value is strongest for operating cash flows. The study supports the relevance of fair value, as indicated by predictive ability for performance, and thus makes an important contribution to the fair value accounting literature and accounting standard-setting.

This study examines the effect of audit quality on earnings management and cost of equity capital of listed companies in India. Our results show that companies employing a high-quality auditor have a lower degree of earnings management and lower cost of equity capital. The results also show that companies belonging to business groups have a lower degree of earnings management and lower cost of equity capital than do stand-alone companies but that they benefit less from employing a high-quality auditor. Our results are based on a large sample of 7,303 firm-year observations on listed companies in India and are robust to alternative measures for our main variables – audit quality, earnings management, and cost of capital – and to tests for endogeneity and the impact of the global financial crisis (GFC). Given the distinctive and unique institutional features of the Indian market such as the dominant role of family business groups in the national economy, large market share of domestic audit firms, less litigious environment, and less effective professional accounting bodies in checking audit failure, our findings make a significant contribution to the literature on the role of audit quality as a corporate governance monitoring mechanism as reflected in the impact on earnings management and cost of equity capital.

This study examines how differences in national culture, as indicated by financial secrecy, affect the impact of mandatory adoption of IFRS on earnings quality across the countries of Europe. Using 24,034 firm-year observations from 16 European countries over the period 1998–2014, we find that the higher the level of secrecy in a country the lower the level of earnings quality of firms, as measured by signed abnormal accruals. We find that mandatory adoption of IFRS improves earnings quality in all countries. However, our study indicates that the impact of mandatory adoption of IFRS on earnings quality is stronger the higher the level of secrecy in a country. Our evidence thus helps to explain the different impacts of IFRS adoption on earnings quality across different jurisdictions.

A large number of empirical studies have addressed the effects of adoption of IFRS, but the results have been mixed. We use a meta-analysis of 55 empirical studies with 1,259 effect sizes to determine the impact of adoption of IFRS on financial reporting comparability, market liquidity, cost of equity and cost of debt. This approach provides an objective view of the empirical results, in contrast to narrative reviews, which offer subjective conclusions. We find that IFRS adoption has increased financial reporting comparability, market liquidity, and reduced cost of equity. For cost of debt, decrease is observed only for voluntary adoption. Our meta-regression analysis shows how the results differ across mandatory and voluntary adoption of IFRS and that the measurement choices, type of control variables, study design, and strength of results explain the variation in the observed effect of adoption of IFRS. We emphasise the importance of these study characteristics and call for further studies using more recent data, on the debt market, and the long-term effect of IFRS adoption. This study should be of interest to regulators and policymakers as they are expected to assess the impacts of adoption of IFRS.

This paper examines whether corporate donations, a form of CSR activity, have a positive impact on firm value. The impact of donations on value may suffer from agency problems or poor quality in the choice of donee. However, we expect that, on balance, donations would have a positive impact on value. We use a sample of 52,199 firm-year observations from 42 countries for the period 1998 to 2014 and conduct our tests using the Collins et al. (1999) adaptation of the Ohlson (1995) model. Our evidence supports our expectation that corporate donations have a positive impact on firm value. We also find that CSR performance, and the country level variables for culture and corruption, moderate the contribution to value. Our results are robust to several sensitivity tests including an alternative measure of donations, additional country-level control variables, and variation in the study sample.

Intellectual capital (IC) is considered as a key resource in business. However, it is difficult to measure and compare across firms due to its intangible nature. The Value Added Intellectual Coefficient (VAIC) model proposed by Pulic (1998; 2000) might be used to overcome these issues. The purpose of this study is to apply the VAIC model to investigate the impact of IC on market performance among RD but not in respect of human capital.

This paper investigates the economic consequences of adoption of IFRS for reporting by New Zealand listed companies as indicated by the effect on the cost of equity capital. We analyse a sample of 290 firm year observations on New Zealand listed companies over the periods 1998–2002 and 2009–2013. We find that there is a significant negative association between IFRS adoption and the cost of equity capital. These results are robust to several variations in model specification and sample composition. To the extent that higher quality accounting standards reduce the cost of equity capital, the result suggests that IFRS is a higher quality set of accounting standards than pre IFRS New Zealand GAAP. This is the first study to provide empirical evidence on the impact of adoption of IFRS on the cost of equity capital of New Zealand companies. The evidence supports the findings for European companies and thus points to the benefits potentially available to companies in countries that have yet to adopt IFRS, such as US and Japan.

This study uses a cross-country sample to examine the impact of adoption of IFRS on seasoned equity offering (SEO) underperformance. The empirical literature on SEOs has established that information uncertainties contribute to SEO underperformance. Given the growing number of countries that have adopted IFRS, it is therefore important to assess whether adoption of IFRS reduces the uncertainties surrounding SEOs and, thus, subsequent underperformance. The study employs a control sample of non-IFRS adoption countries and applies a difference-in-difference design to capture the incremental change between the treatment and control samples. We find that SEO underperformance decreases for IFRS adopters. The decrease in SEO underperformance is influenced by increased disclosure, increased comparability, and number of accounting changes. We find that the impact of adoption of IFRS on SEO underperformance exists only for firms in countries with strong enforcement, and is conditional on the implementation credibility of countries. These findings are statistically robust to the application of different measures of SEO underperformance, but vary in economic terms. Overall, our study provides global evidence on SEOs and potentially encourages firms to increase disclosure of financial information and to consider issuing SEOs in countries that enforce standards and implement the standards credibly.

The increasing number and influence of charities in the economy, evidence of mismanagement and the need for information for policymaking are all reasons for establishing charity regulators. Public interest and public choice theories explain charity regulation which aims to increase public trust and confidence in charities (and thus increase voluntarism and philanthropy) and to limit tax benefits to specific organisations and donors. Nevertheless, regulation is resource intensive, and growing pressure on government budgets requires efficiencies to be found. This study proposes regulation differentiated according to charities' main resource providers, to reduce costs and focus regulatory effort, and provides a feasible segmentation.

This paper examines whether firms' auditor choice reflects the strength of corporate ethics. Based on a sample of 132,853 firm year observations from forty-six countries around the globe during the period from 1998 to 2007 and controlling for a number of firm- and country-level factors, we find that firms in countries where “high corporate ethical values” prevail are more likely to hire a Big 4 auditor. We also find that the positive effect of home country corporate ethical values on the likelihood of hiring a high-quality auditor is reinforced by the extent of the firm's board size. These results establish an indirect link between corporate ethics and financial reporting quality through the firms' choice of auditor.

This paper proposes a basis for progress in the development of the conceptual framework (CF) as a foundation for developing accounting standards. This topic has gained increased prominence following the IASB's (2013) release of its Review of the Conceptual Framework for Financial Reporting (RCFFR) proposing changes to the CF. In this paper the broad socio-economic environment is seen as determining the primary purpose of General Purpose Financial Reporting (GPFR), which, in turn, establishes the high-level properties of a CF suitable to meet that primary purpose. This is to support market stability and efficiency through the provision of an account of the financial position and performance of an entity that accords with economic reality. The case is made that the primary purpose of a CF is to provide the principles for the development of accounting standards that will result in GPFR that is useful. This requires theoretical coherence. The CF should drive the standards and if standards depart from the CF principles, such departures should be justified. This proposal is consistent with the position adopted in the RCFFR. However, in contrast to the RCFFR, this paper accents the purposive approach and links the formation of standards directly to the CF. This approach implies that standards are subordinate to CF principles; therefore compliance with standards should not provide a basis for compromising the faithful representation of economic reality. From the purpose identified for GPFR, the paper argues for a default presumption in favour of Fair Value Accounting, a retreat from the asset/liability approach, and a re-casting of the income statement to focus on operational flows.

The Basel Accords require financial institutions to regularly validate their loss given default (LGD) models. This is crucial so banks are not misestimating the minimum required capital to protect them against the risks they are facing through their lending activities. The validation of an LGD model typically includes backtesting, which involves the process of evaluating to what degree the internal model estimates still correspond with the realized observations. Reported backtesting examples have typically been limited to simply measuring the similarity between model predictions and realized observations. It is however not straightforward to determine acceptable performance based on these measurements alone. Although recent research led to advanced backtesting methods for PD models, the literature on similar backtesting methods for LGD models is much scarcer. This study addresses this literature gap by proposing a backtesting framework using statistical hypothesis tests to support the validation of LGD models. The proposed statistical hypothesis tests implicitly define reliable reference values to determine acceptable performance and take into account the number of LGD observations, as a small sample may affect the quality of the backtesting procedure. This workbench of tests is applied to an LGD model fitted to real-life data and evaluated through a statistical power analysis.

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.

Purpose – The purpose of this paper is to examine the impact of corporate governance on auditor quality choice by IPO companies in an emerging market setting. It seeks to identify whether efficienc ...

We examine the role of shareholder takeup in rights offerings on the subscription period price reaction and liquidity. Our results indicate that takeup information is reflected in price adjustments over the subscription period and that quality-related information disclosed on the rights announcement date further impacts prices in this period. Higher shareholder takeup improves liquidity. We do find some evidence of inefficiencies in the adjustment process over the subscription period that, in part, is consistent with a model where markets are characterized by overconfident investors and that also articulates with takeup information arriving in the market.

PurposeThe purpose of this paper is to test whether dominant shareholder(s) of a firm enhance performance in Bangladesh and thus examines the arbitrary moves by the regulatory bodies, in the name of promoting “good corporate governance”, to restrict ownership concentration.Design/methodology/approachBuilding on the established literature, a simultaneous equations approach is applied to model the relationship between ownership concentration and performance and is tested on a sample of 567 observations on firms listed on the Dhaka Stock Exchange over a seven‐year period. The two equations model consists of firm performance and ownership concentration as endogenous variables along with other governance variable.FindingsThe results suggest a significant positive co‐deterministic relationship between ownership concentration and firm performance indicating that ownership concentration and firm performance simultaneously impact each other. It suggests that the ownership restriction imposed by the Securities and Exchange Commission is unjustified and detrimental to firm performance/growth in emerging countries such as Bangladesh.Practical implicationsThis new evidence from an emerging market enhances our understanding of corporate governance in Asian countries. The study has implications for stakeholders, regulators and policy makers to revisit their attempt to limit founder‐family ownership holdings. Instead, their aim should be to balance the home‐grown unique features, such as a Top‐1 dominant shareholder, with Western governance mechanisms.Originality/valueThe paper is the first to consider Top 1 shareholder's ownership as the measure of ownership concentration, which is an important feature of the corporate sector in emerging markets. In emerging markets, founder‐family ownership concentration acts as an alternative governance mechanism substituting for strong and effective legal backing and other market‐driven monitoring mechanisms.

This paper shows how the duration measure of a mixed stream comprising positive and negative flows can be derived, and its property as an index of interest elasticity is illustrated. It is shown that Durand's [1974] measure of the duration of a mixed stream is incorrect. Blocher and Stickney [1979], following Durand, used duration measures, some of which relate to mixed streams, in assessing illiquidity risk in capital budgeting. This aspect of their analysis is suspect.

We conduct an experiment to investigate the potential benefits of an alternative format for the income statement, the matrix format, initially developed by the International Accounting Standards Board (IASB) and UK Accounting Standards Board in their joint project on performance reporting. Sophisticated financial statement users (financial analysts and professional accountants) and less sophisticated financial statement users (MBA students) were asked to extract information from a set of financial statements that included an income statement either in the IAS 1 format or in the matrix format. We find that the matrix format improves the accuracy with which users extract financial information. This result is driven by greater accuracy, for all user groups, on “below-the-line” items. Furthermore, despite lack of familiarity with the matrix format, its use did not appear to affect the time taken, the ease of extracting financial information, or users' task completion confidence; further experience with the matrix format could lead to benefits along these lines as well. Our findings may assist the FASB and IASB in their joint project on financial statement presentation.

This paper models the corporate ownership and performance relationship in Bangladesh listed firms using a simultaneous equations approach. Consistent with contemporary literature a “reverse-way” causality relationship between the two is documented. Using an unbalanced pooled sample of 660 firm-years, our results suggest that ownership does not have a significant impact on performance (Tobin's Q or ROA). However, performance does appear to have a significant negative impact on ownership. With few exceptions, other governance and control variables appear to have significant effects on both performance and ownership. These results imply that despite significant governance differences between Bangladesh and developed market economies there are strong similarities in “internal governance mechanisms” and the implications of agency theory.

Insurance companies sell protection to policy holders against many types of risks: property damage or loss, health and casualties, financial losses, etc. In return for this risk protection, insurance companies receive a premium from the policy holder, which is used to cover expenses and the expected risk. For longer-term risk protections, part of the premiums are invested to get higher yields. Although the protection buyer mitigates the individual risk to the large and better diversified portfolio of the insurer, it does not mean that the risk is completely reduced since the insurer may default his obligations. Insurers need to have sufficient equity or buffer capital to meet their obligations in adverse conditions when their losses on the diversified portfolio exceed the expected losses. Ratings provide an assessment of the ability of the insurer to meet its obligations to policy holders and debt holders. In this paper, the relationship between financial ratios and the rating is analyzed for different types of insurance companies using advanced statistical techniques that are able to detect non-linear relationship. The resulting rating model approach is similar to the approach for a low default portfolio, which uses a common set of explanatory variables (such as capitalization, profitability, leverage and size) which is generally applicable for all insurance types, and is complemented with insurance type specific ratios. The resulting model is found to yield a good accuracy, with 75% of the model ratings differing at most one notch from the external rating.

This paper describes the background to and implementation of the decision to adopt International Financial Reporting Standards (IFRS) in New Zealand with particular focus on the issue of sector neutrality in financial reporting standards. New Zealand's financial reporting standards were originally developed for application only by profit-oriented entities. However, the major public sector management reforms of the 1980s led to increasing calls for financial reporting standards for public sector entities. Separate standards for the public sector were launched in 1987, but this path was abandoned in 1993 in favour of standards that would be applicable to all entities – sector neutral standards. The decision to adopt IFRS was made in the expectation that sector neutrality could be maintained by developing NZ IFRS that would contain additional requirements on recognition and measurement to cover public sector reporting issues but doing so without introducing conflicts with the original IFRS. However, it was discovered that compliance with such NZ IFRS would not allow profit-oriented entities to claim compliance with IFRS. It was therefore necessary to specify that the additional requirements in NZ IFRS apply only to public sector entities and thus – in effect – bring to an end sector neutrality in financial reporting standards in New Zealand.

Measurement is an important current issue for financial accounting standard-setters. Current values are increasingly replacing historical cost measures, but an important unresolved issue is the pre...

The problems of agency theory related to security valuation are normally discussed in the context of “owner‐managers” and “outside shareholders”, and/or equity‐holders and debt‐holders. In this paper we discuss agency problems that emerge when there is only one shareholder (and no debt), but where the shareholder is a trust with separate income and capital beneficiaries. Trust ownership of this sort is not uncommon. The agency problems emerge as the two classes of beneficiaries have claims on cash flows that occur at different times, with income beneficiaries having claims until “capital” is transferred to the capital beneficiaries. The agency problems that are discussed are dividends, risk shifting, capital structure, cost capitalisation, and investment policy. In all cases agency problems arise, and in some respects the agency problems are more pervasive than in the more “orthodox” settings.

We assess the impact of NZ IAS 32 on the financial reporting of convertible financial instruments by retrospective application of the standard to a sample of New Zealand companies over the period 1988 ‐ 2003. NZ IAS 32 has a broader definition of liabilities than does the corresponding current standard (FRS‐31) and it does not permit convertibles to be reported under headings that are intermediate to debt and equity. The results of the study indicate that in comparison with the reported financial position and performance, the reporting of convertibles in accordance with NZ IAS 32 would result in higher amounts for liabilities and higher interest. Thus, analysts using financial statement information to assess risk of financial distress will need to revise the critical values of commonly used measures of risk and performance when companies report under NZ IAS

The Basel II capital accord encourages banks to develop internal rating models that are financially intuitive, easily interpretable and optimally predictive for default. Standard linear logistic models are very easily readable but have limited model flexibility. Advanced neural network and support vector machine models (SVMs) are less straightforward to interpret but can capture more complex multivariate non-linear relations. A gradual approach that balances the interpretability and predictability requirements is applied here to rate banks. First, a linear model is estimated; it is then improved by identifying univariate non-linear ratio transformations that emphasize distressed conditions; and finally SVMs are added to capture remaining multivariate non-linear relations.

This paper develops a version of the Capital Asset Pricing Model that views dividend imputation as affecting company tax and assumes differential taxation of capital gains and ordinary income. These taxation issues aside, the model otherwise rests on the standard assumptions including full segmentation of national capital markets. It also treats dividend policy as exogenously determined. Estimates of the cost of equity based on this model are then compared with estimates based on the version of the CAPM typically applied in Australia, which differs only in assuming equality of the tax rates on capital gains and ordinary income. The differences between the estimates can be material. In particular, with a high dividend yield, allowance for differential taxation can result in an increase of two to three percentage points in the estimated cost of equity. The overall result obtained here carries over to a dividend equilibrium, in which firms choose a dividend policy that is optimal relative to the assumed tax structure.

We empirically examine the effect of IFRS adoption on the information quality of financial reporting in low investor protection countries. We examine the capital markets of France, Switzerland and Sweden, three Western European civil law countries, which are regarded as low investor protection, owing primarily to their respective systems of law according to the World Economic Forum’s 2011/2012 Global Competitiveness Report. By utilising and analysing data from 2003 and 2011, we find a significant improvement in both forecast accuracy and forecast dispersion following the mandatory adoption of IFRS in all three of the countries sampled, confirming our hypotheses. These results are robust to an increase in sample size as well as the removal of financial companies from the primary sample. These results suggest that the mandatory adoption of IFRS in low investor protection countries will lead to an improvement in information quality and international comparability.

Emerging evidence suggests that performance measurement systems may generate positive psychological effects, leading to higher levels of managerial performance. We extend this literature by examining the extent to which diagnostic vis-a-vis interactive utilisation of performance measures may be associated with decreasing role ambiguity and increasing psychological empowerment with positive consequences for performance. We find that the interactive utilisation of non-financial performance measures can be particularly important for generating a positive psychological experience and (indirectly) increasing performance. Our study contributes further evidence of the psychologically beneficial role played by management control systems.

This paper explores the relationship between selected corporate governance attributes and auditor choice behaviour in a developing country setting. Results of four auditor choice models suggest that client size and growth opportunities significantly explain auditor choice. Sponsor shareholding, institutional shareholding, and the presence of audit committees also have significant influence on auditor choice in some but not all the models. The big-four affiliated audit firms do not enjoy significant market power. They are responsible for auditing only 17.1 percent of listed companies. Their market share ranges from 17.1 percent to 56.1 percent depending on the measure of market share used.

This paper reexamines and extends the work of Ben Horim and Levy [1], which argued that risk decomposition should be based on standard deviation rather than on variance. Their analysis showed that decomposition of variance is wrong when β < 0 and that, in general, this procedure produces incorrect estimates of undiversifiable risk. This paper shows that these conclusions also apply to the no-risk-free asset extended CAPM if risk is adjusted for the unavoidable risk associated with the global minimum variance portfolio.