Does Mandatory IFRS Adoption Affect Crash Risk
TL;DR: This article examined the impact of mandatory IFRS adoption on firm-level "crash risk", defined as the frequency of extreme negative stock returns, and found that crash risk decreases relatively more among industrial firms where IFRS results in more credible changes to local GAAP.
Abstract: We examine the impact of mandatory IFRS adoption on firm-level “crash risk,” defined as the frequency of extreme negative stock returns. An important feature of our study is that we separately analyze industrial firms and firms in finance-related industries. This is important because IFRS adoption is likely to affect industrial firms through different mechanisms than financial firms, and as a result may affect crash risk differently. We find that for companies in poor information environments, crash risk decreases among industrial firms and increases among financial firms after the IFRS mandate. We also find that crash risk decreases relatively more among industrial firms where IFRS results in more credible changes to local GAAP, and that crash risk increases relatively more among banks with less restrictive regulations. In addition, we find that earnings volatility declines after IFRS adoption for industrial firms but increases for financial firms. Overall, our findings are consistent with mandatory IFRS adoption decreasing crash risk among industrial firms by improving reporting quality, and increasing crash risk among financial firms by inducing greater volatility and affording more opportunities for manipulation.
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TL;DR: This article examined the association between chief executive officer (CEO) overconfidence and future stock price crash risk and found that firms with overconfident managers overestimate the returns to their investment projects and misperceive negative net present value (NPV) projects as value creating.
Abstract: This study examines the association between chief executive officer (CEO) overconfidence and future stock price crash risk. Overconfident managers overestimate the returns to their investment projects and misperceive negative net present value (NPV) projects as value creating. They also tend to ignore or explain away privately observed negative feedback. As a result, negative NPV projects are kept for too long and their bad performance accumulates, which can lead to stock price crashes. Using a large sample of firms for the period 1993–2010, we find that firms with overconfident CEOs have higher stock price crash risk than firms with non-overconfident CEOs. The impact of managerial overconfidence on crash risk is more pronounced when the CEO is more dominant in the top management team and when there are greater differences of opinion among investors. Finally, it appears that the effect of CEO overconfidence on crash risk is less pronounced for firms with more conservative accounting policies.
351 citations
Cites background from "Does Mandatory IFRS Adoption Affect..."
...In the same vein, DeFond et al. (2015) and Kim and Zhang (2015) show that International Financial Reporting Standards and accounting conservatism increase transparency and reduce crash risk....
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...Using a traditional agency theory framework, a growing body of recent theoretical and empirical research has identified a variety of firm characteristics that are determinants or precursors of stock price crashes (Benmelech et al. 2010; Bleck and Liu 2007; DeFond et al. 2015; Hutton et al. 2009; Jin and Myers 2006; Kim et al. 2011a, 2011b; Kim and Zhang 2015)....
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350 citations
TL;DR: This paper examined the impact of financial statement comparability on ex ante crash risk and found that expected crash risk decreases with comparability, and this negative relation is more pronounced in an environment where managers are more prone to withhold bad news.
259 citations
Cites background from "Does Mandatory IFRS Adoption Affect..."
...Other studies examine comparability by focusing on the adoption of International Financial Reporting Standards (IFRS) (e.g., Lang et al., 2010; DeFond et al., 2011, 2013; Barth et al., 2012, 2013; Yip and Young, 2012; Wang, 2014)....
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TL;DR: The authors reviewed the literature on the effects of International Financial Reporting Standards (IFRS) adoption and provided a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing.
Abstract: This paper reviews the literature on the effects of International Financial Reporting Standards (IFRS) adoption. It aims to provide a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing. In addition, we also present discussion of studies that focus on specific attributes of IFRS, and also provide detailed discussion of research design choices and empirical issues researchers face when evaluating IFRS adoption effects. We broadly summarize the development of the IFRS literature as follows: The majority of early studies paint IFRS as bringing significant benefits to adopting firms and countries in terms of (i) improved transparency, (ii) lower costs of capital, (iii) improved cross-country investments, (iv) better comparability of financial reports, and (v) increased following by foreign analysts. However, these documented benefits tended to vary significantly across firms and countries. More recent studies now attribute at least some of the earlier documented benefits to factors other than adoption of new accounting standards per se, such as enforcement changes. Other recent studies examining the effects of IFRS on the inclusion of accounting numbers in formal contracts point out that IFRS has lowered the contractibility of accounting numbers. Finally, we observe substantial variation in empirical designs across papers which makes it difficult to reconcile differences in their conclusions.
258 citations
Posted Content•
TL;DR: The authors reviewed the literature on the effects of International Financial Reporting Standards (IFRS) adoption and provided a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing.
Abstract: This paper reviews the literature on the effects of International Financial Reporting Standards (IFRS) adoption. It aims to provide a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing. In addition, we also present discussion of studies that focus on specific attributes of IFRS, and also provide detailed discussion of research design choices and empirical issues researchers face when evaluating IFRS adoption effects. We broadly summarize the development of the IFRS literature as follows: The majority of early studies paint IFRS as bringing significant benefits to adopting firms and countries in terms of (i) improved transparency, (ii) lower costs of capital, (iii) improved cross-country investments, (iv) better comparability of financial reports, and (v) increased following by foreign analysts. However, these documented benefits tended to vary significantly across firms and countries. More recent studies now attribute at least some of the earlier documented benefits to factors other than adoption of new accounting standards per se, such as enforcement changes. Other recent studies examining the effects of IFRS on the inclusion of accounting numbers in formal contracts point out that IFRS has lowered the contractibility of accounting numbers. Finally, we observe substantial variation in empirical designs across papers which makes it difficult to reconcile differences in their conclusions.
195 citations
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TL;DR: This paper examined legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries and found that common law countries generally have the best, and French civil law countries the worst, legal protections of investors.
Abstract: This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common law countries generally have the best, and French civil law countries the worst, legal protections of investors, with German and Scandinavian civil law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights.
14,563 citations
"Does Mandatory IFRS Adoption Affect..." refers background in this paper
...Our proxy for strong enforcement is the mean of the three enforcement measures from La Porta et al. (1998): (1) the efficiency of the judicial system, (2) the rule of law, and (3) corruption....
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...Enforcement: The mean of the three enforcement measures from La Porta et al. (1998): (1) the efficiency of the judicial system, (2) the rule of law, and (3) the corruption index; higher values indicate stronger enforcement....
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TL;DR: In this article, the authors examined the relation between stock returns and stock market volatility and found that the expected market risk premium (the expected return on a stock portfolio minus the Treasury bill yield) is positively related to the predictable volatility of stock returns.
4,348 citations
"Does Mandatory IFRS Adoption Affect..." refers result in this paper
...This is also consistent with the empirical observation that volatility is related to negative returns (French et al., 1987) and with volatility feedback effects (Campbell and Hentschel, 1992)....
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TL;DR: The 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption as discussed by the authors.
Abstract: This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. The authors also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. They find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time. The aggregate indicators, together with the disaggregated underlying indicators, are available at www.govindicators.org.
3,059 citations
"Does Mandatory IFRS Adoption Affect..." refers methods in this paper
...To check the robustness of the results, we use the following alternative measures of enforcement in Kaufmann et al. (2007): (1) the rule of law score in 2005; (2) the governance effectiveness score in 2005, or (3) the average of the six governance scores in 2005....
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TL;DR: In this paper, the authors study German firms that have switched from the German to an international reporting regime (1AS or U.S. GAAP) and show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely, the bid-ask spread and trading volume behave in the predicted direction compared to firms employing the German reporting regime.
Abstract: Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the United States is that, under current U.S. reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (1AS or U.S. GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firmsnamely, the bid-ask spread and trading volume-behave in the predicted direction compared to firms employing the German reporting regime.
2,984 citations
TL;DR: In this paper, the authors present a method for measuring beta when share price data suffer from this problem, using a one-in-three random sample of all U.K. Stock Exchange shares from 1955 to 1974.
2,690 citations
"Does Mandatory IFRS Adoption Affect..." refers background in this paper
...market index returns to allow for nonsynchronous trading (Dimson, 1979), and includes a...
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...In addition, equation (1) includes lead and lagged terms for the local and US market index returns to allow for nonsynchronous trading (Dimson, 1979), and includes a US stock return index to proxy for global market returns because most international economies are exposed to foreign capital....
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