This paper examines the economic consequences of mandatory International Financial Reporting Standards (IFRS) reporting around the world. We analyze the effects on market liquidity, cost of capital, and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects occur prior to the official adoption date. Partitioning our sample, we find that the capital-market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self-selection, the latter result cautions us to attribute the capital-market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries make concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects.

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Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences

The corporate information environment develops endogenously as a consequence of information asymmetries and agency problems between investors, entrepreneurs, and managers. We provide a framework for analyzing the three main decisions that shape the corporate information environment in a capital markets setting: (1) managers’ voluntary reporting and disclosure decisions, (2) reporting and disclosures mandated by regulators, and (3) reporting decisions by third-party intermediaries (analysts). We review current research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure and financial reporting decisions. We conclude that in the last ten years, research has generated a number of useful insights. Despite this progress, we call for researchers to consider interdependencies between the various decisions that shape the corporate information environment and highlight changes in the economic financial environment that raise new and interesting issues for researchers to address.

The Financial Reporting Environment: Review of the Recent Literature

Instrumental variable (IV) methods are commonly used in accounting research (e.g., earnings management, corporate governance, executive compensation, and disclosure research) when the regressor variables are endogenous. While IV estimation is the standard textbook solution to mitigating endogeneity problems, the appropriateness of IV methods in typical accounting research settings is not obvious. Drawing on recent advances in statistics and econometrics, we identify conditions under which IV methods are preferred to OLS estimates and propose a series of tests for research studies employing IV methods. We illustrate these ideas by examining the relation between corporate disclosure and the cost of capital.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1505074_code113360.pdf?abstractid=694824&rulid=9740146&mirid=4

On the Use of Instrumental Variables in Accounting Research

What is the role of information intermediaries in corporate governance? This paper examines equity analysts' influence on managers' earnings management decisions. Do analysts serve as external monitors to managers, or do they put excessive pressure on managers? Using multiple measures of earnings management, I find that firms followed by more analysts manage their earnings less. To address potential endogeneity problem of analyst coverage, I use two instrumental variables that are based on change in broker size and on firm's inclusion in the S&P 500 index, and find that the result is robust. Finally, given the size of coverage, analysts from top brokers and more experienced analysts have stronger effect against earnings management.

Analyst Coverage and Earnings Management

Globally, companies increasingly publish separate general purpose, non-financial (sustainability) reports. Some of these are independently assured and assurers may or may not be from the auditing profession. We seek to understand this emerging voluntary assurance market. Using a sample of 2,113 companies (from 31 countries) that produced sustainability reports between 2002-2004, we use sequential logit analysis to identify the factors associated with the decision to voluntarily purchase assurance and the choice of assurance provider. We hypothesize that a company's need to enhance credibility through assurance and choice of assurance provider will be a function of company, industry and country-related factors. Our results support the argument that companies seeking to enhance the credibility of their reports and build their corporate reputation are more likely to have their sustainability reports assured, although it does not matter whether the assurance provider comes from the auditing profession. We also find that companies operating in stakeholder orientated countries are more likely to choose the auditing profession as an assurer.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1140133_code890265.pdf?abstractid=1025467&mirid=1&type=2

Assurance on Sustainability Reports: An International Comparison

This paper uses a sample of over 2,500 firms from 27 countries to investigate the relation between ownership structure, analyst following, investor protection and valuation. We find that analysts are less likely to follow firms with potential incentives to withhold or manipulate information, such as when the Family/Management group is the largest control rights blockholder. Further, this relation is stronger for firms from low shareholder protection countries. Using valuation regressions that take into account potential endogeneity between analyst following and firm value, we find a positive valuation effect when analysts cover firms that have both potentially poor internal governance and weak country-level external governance. Overall, our findings suggest that corporate governance plays an important role in analysts’ willingness to follow firms and that increased analyst following is associated with higher valuations, particularly for firms likely to face governance problems. • Email addresses for the authors are langm@bschool.unc.edu, finkvl@business.utah.edu, damiller@indiana.edu. We thank Richard Leftwich (the editor) and an anonymous referee for detailed suggestions on improving the paper. We also thank Yiorgos Allayannis, Amy Dittmar, William Goetzmann, Rebecca Hahn, Ole-Kristian Hope, Mike Lemmon, Yvonne Lu, Marlene Plumlee, Dan Rogers and seminar participants at McGill University, Swedish School of Economics, University of Arizona, University of Oregon, University of Southern California, University of Utah, and University of Virginia (Darden) and for helpful comments. Laura Knudson, Alan Montgomery, and Ugur Lel provided valuable research assistance. We are grateful for analyst forecast information provided by I/B/E/S Inc. and ownership data from Mara Faccio and Larry Lang. Miller acknowledges financial support from a DaimlerChrysler Faculty Fellowship. A previous version of the paper was entitled “Do analysts matter most when investors are protected least? International evidence.”

Alan Montgomery

Papers

Do Analysts Matter Most When Investors are Protected Least