Management earnings forecasts and IPO performance: evidence of a regime change

Companies undertaking initial public offerings (IPOs) in Greece were obliged to include next-year profit forecast in their prospectuses, until the regulation changed in 2001 to voluntary forecasting. Drawing evidence from IPOs issued in the period 1993–2015, this is the first study to investigate the effect of disclosure regime on management earnings forecasts and IPO long-term performance. The findings show mainly positive forecast errors (forecasts are lower than actual earnings) and higher long-term returns during the mandatory period, suggesting that the mandatory disclosure requirement causes issuers to systematically bias profit forecasts downwards as they opt for the safety of accounting conservatism. The mandatory disclosure requirement artificially improves IPO share performance. Overall, our results show that mandatory disclosure of earnings forecasts can impede capital market efficiency once it goes beyond historical financial information to involve compulsory projections of future performance

Setting the Bar: Earnings Management During a Change in Accounting Standards

MimeoThis study examines how European Union firms used the flexibility of IFRS 1 during the 2004/2005 mandatory transition from Local GAAPs to IFRS to set their 2004 reconciliated IFRS earnings. More precisely, we analyze earnings reconciliations published during the 2004/2005 mandatory transition from Local GAAPs to IFRS in Europe, a period during which firms had to disclose earnings both under the old GAAP and IFRS. Our sample is comprised of 1,635 firms from the nine countries subject to IFRS 1 where early adoption of IFRS was not allowed. We posit and find that firms with negative Local GAAP earnings are more likely to report positive Local GAAP-to-IFRS earnings reconciliations, while firms with large positive earnings under Local GAAP are more likely to report negative Local GAAP-to-IFRS earnings reconciliations. We also find firms that increase (decrease) their first benchmark IFRS earnings are more likely to show a decrease (increase) in earnings in subsequent reporting periods. Markets returns are associated with meeting or beating last year earnings only if managers set the bar high in the previous period, consistent with compensation related factors to this IFRS transition earnings management. Overall, this evidence is consistent with firms using the flexibility of IFRS1 and resulting reconciliations to manage their earnings

The European IFRS experiment: objectives, research challenges and some early evidence

This paper provides an academic perspective on the development of the EU's harmonisation project based on International Financial Reporting Standards (IFRS), on the costs and benefits of IFRS adoption in Europe, and on the research challenges that arise. The paper reviews the accumulating academic evidence, emphasizing the effectiveness and transparency of the enforcement framework, and documenting the main lessons to be learned from the research programme on EU IFRS implementation conducted within the INTACCT network. Results on the consequences of IFRS adoption and the quality of implementation are far from uniform across Europe, and depend on factors reflecting preparer incentives and the effectiveness of local enforcement. The paper also outlines a possible alternative proposal for the organisation and development of enforcement activities in Europe

Value relevance of intangibles: A literature review

Value relevance can be defined as the association between accounting values and market values and it is one of the most important quality attributes of financial reporting. Recognizing, measuring, and reporting the intangible assets properly has become gradually more important due to the increasing importance of intangibles in the statement of financial position and the shift from a tangible-based economy to an intangible-based economy. Value relevance of intangibles examines how well accounting treatments of intangibles are related to stock market values and it is a controversial and heavily debated issue in the literature. Thus, the purpose of this study is to demonstrate how valuable intangibles and to provide useful information about the value relevance of intangibles by reviewing the most cited literature. For this purpose, the study investigates R&D expenditures, goodwill, patents, brands, and advertising expenditures by comparing the results of the studies. According to the results, while IFRS adoption is expected to provide more comparable and high-quality information, the overall value relevance of intangibles has generally declined after the IFRS. In addition, capitalizing the R&D expenditures seem to be more value relevant than the expensed portion. These results are also consistent with the other intangibles such as patents and brands. © Springer Nature Singapore Pte Ltd. 2021.2-s2.0-8509789079

International Differences in Conditional Conservatism - The Role of Unconditional Conservatism and Income Smoothing

Prior research documents that conditional conservatism, measured as the asymmetric timeliness of earnings reflecting bad vs. good news, varies with cross-country differences in institutional regimes. In this paper, we examine the determinants of conditional conservatism and related earnings attributes internationally. First, using panel data, we investigate whether competing earnings attributes such as unconditional conservatism and income smoothing affect conditional conservatism and its international differences. We find that these attributes are predictably correlated with conditional conservatism. Second, we address the question whether income smoothing and conditional conservatism are two fundamentally different earnings attributes. We show theoretically that both attributes yield different earnings distributions and that the motivations for producing earnings which possess these attributes differ. To test these predictions empirically, we calculate firm-specific time-series measures of asymmetric timeliness, using a novel trigonometric measure based on the standard Basu (1997)-type regression. Using this cross-sectional data, we test whether conditional conservatism and income smoothing are different and find them to be only weakly correlated for a broad international sample. Also, we demonstrate that income smoothing explains international differences in conditional conservatism. Finally, we estimate simple determinant models of conditional conservatism and income smoothing, showing that both earnings attributes are driven by different explanatory firm-level factors: Conditional conservatism increases with the importance of debt financing, while income smoothing increases with the importance of dividends. Despite some important limitations, we believe our results to be meaningful because they show that cross-country differences in conditional conservatism are influenced by the effects of other accounting properties, predominantly income smoothing. Especially, legal regime appears to drive income smoothing while losing its explanatory power for conditional conservatism when firm-specific factors are controlled for.