05 International accounting (Including IFRS) (IA)

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    Cross-Border Investments in Private Firms: The Benefits of Comparability for Foreign Investors
    ( 2022) Allee, Kris D. ; Dinh, Tami ; Stenzel, Arthur
    We examine the benefits of accounting comparability for cross-border investments in private firms. Exploiting a quasi-experimental setting, we examine the effect of an increase in accounting comparability using a difference-in-differences research design. We find that increases in accounting comparability after a major accounting reform leads to an average increase in foreign ownership of about 2 to 6 percent. Cross-sectional and industry results confirm that the effect is stronger for smaller, highly profitable, intangible-intensive, and more stable firms that are in the consumer durables and manufacturing industries. The findings are robust to alternative matching procedures, various measurement windows, and a placebo-test. Our large sample evidence based on private firms provides insights on the effects of increasing the comparability of local GAAP for foreign-direct investments in private firms. Additionally, our findings are relevant to standard setters as countries converge towards and endorse International Financial Reporting Standards and update their local GAAP.
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    The Cost of Regulatory Inaction: Evidence from IFRS Non-adoption
    ( 2022) Liu, Miao ; Xu, Wanrong ; Zhang, Rachel
    Numerous countries adopted IFRS in 2005 for a more detailed and comparable financial reporting regime. But many others did not. We study the consequences of regulatory inaction by non-adopting countries. We first show that IFRS adoption by other countries does not affect the liquidity of S&P 1500 US firms. Using S&P 1500 US firms as the control group, we find that the liquidity of firms in non-US countries that did not adopt IFRS significantly declined after the fourth quarter of 2005, suggesting a deteriorating information environment. To search for the forces behind the liquidity drop, we further show that analysts and institutional investors migrated away from non-adopting countries to adopting countries after 2005. Overall, our findings suggest that regulatory inaction can be costly – valuable information production resources can shift attention away to cover companies in the new regime, resulting in a worse information environment for companies that stay in the old regime.
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    The Effect of Ancestral Kinship Structure on Country-Level Financial Reporting Quality
    ( 2022) Ali, Ashiq ; Fan, Zhongwen ; Jia, Yifan ; Li, Siman
    This study examines the effect of ancestral kinship structure on financial reporting quality. We argue that in countries characterized with high kinship tightness, stakeholders are more likely to access information through their private networks and hence have less demand for public financial statements. While prior studies show that financial reporting is shaped by many country-level attributes, these attributes are highly interdependent and not much is known about the fundamental primitives underlying firms’ reporting practices. Our measure of historical kinship tightness is based on information on the social structures of 1,311 pre-industrialization ethnic groups and has been widely used in social science. Using a sample of more than 70 countries, we show that firms in countries with tighter ancestral kinship structures have lower financial reporting quality, measured by earnings management and accounting conservatism. Differences in kinship tightness explain 33 percent and 29 percent of the variation in earnings management and accounting conservatism, respectively. An instrumental variable approach exploiting the Western Church’s transformation of kinship system yields consistent inference. Kinship structure affects several country-level attributes examined by prior studies, and the effects of these attributes on accounting quality are diminished in the presence of kinship. The association between kinship structure and accounting quality is persistent over our 20-year sample period, which includes the period of globalization of economic activities and accounting standard harmonization. Our results suggest that a country’s historical kin-based institutions, considered by anthropologists as our species’ most fundamental institutions, have a large, long-lasting, and likely causal influence on contemporary accounting practices.
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    “No Comment”: Language Barriers and the IASB’s Comment Letter Process
    ( 2022) Flores, Eduardo ; Monsen, Brian ; Shafron, Emily ; Yust, Christopher
    The International Accounting Standards Board (IASB) asserts that global stakeholder participation in the standard-setting process is critical for developing and maintaining high-quality accounting standards. However, the myriad languages used by countries that use International Financial Reporting Standards (IFRS) create impediments to this participation. We are the first to systematically examine the effect of language barriers on formal participation in the standard-setting process. We find that the IASB is less likely to receive comment letters from stakeholders in countries with languages exhibiting higher linguistic distance from English. We also find that linguistic distance impairs comment letter readability, likely decreasing their impact in the redeliberation process. Finally, we find that linguistically distant comment letters are less likely to be quoted in IASB staff-prepared comment letter summaries. Collectively, our results show that language barriers appear to impede the IASB’s efforts to equitably obtain valuable feedback, which undermines the standard-setting process.
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    The Accounting Tower of Babel: Language and the Translation of International Accounting Standards
    ( 2022) Shafron, Emily
    I assess whether IFRS translations published by the IASB improve non-English-speaking firms’ accounting quality relative to English-speaking control firms. I find that translations are associated with significant improvement in three accounting quality measures (lower abnormal accruals, less smoothing, and more-timely loss recognition), suggesting that translations allow firms to implement accounting standards in a way that better reflects their underlying economics. I also find that as the distance between the translated language and English (linguistic distance) increases, translations become less effective. Moreover, translations into low-linguistic-distance languages are associated with significant increases in all three accounting quality measures, while translations into high-linguistic-distance languages are only associated with significant increases in accruals quality (lower abnormal accruals). Overall, my analyses suggest that translations have a measurable economic effect on firms domiciled in non-English-speaking countries. I provide the first empirical evidence that the IASB’s translations are effective at increasing accounting quality but that high-linguistic-distance attenuates these benefits.
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    International Auditing Standards, Audit Quality, and Information Asymmetry
    ( 2022) Kausar, Asad ; Park, Youil Chris
    Using hand-collected data on public firms listed on the Alternative Investment Market (AIM) in the U.K. between 2000 and 2007, we investigate whether mandatory adoption of International Standards on Auditing (ISA) for auditors affects audit quality and information asymmetry. In a difference-in-differences analysis, we find that the probability of receiving a going-concern opinion is greater while the propensity to report a small profit and the level of absolute accruals are smaller for AIM firms following ISA adoption relative to a control group. These results are unlikely driven by the mandatory adoption of International Financial Reporting Standards (IFRS), as AIM firms are not required to adopt IFRS in our sample period. We also find a significant reduction in information asymmetry for AIM firms after ISA adoption, measured by the number of zero-return days, bid-ask spreads, and price impact of trades. Our results suggest that mandatory ISA adoption for auditors enhances audit quality and capital market information environment.