Legal and voluntary investor protection and early IFRS-adoption: A study of European companies.

Previous studies (Dumontier and Raffournier, 1998, El-Gazzar et al, 1999; Cuijpers and Buijink, 2004) typically explain the early adoption of IFRS by firm-specific benefits. However, the adoption of IFRS also leads to costs for company insiders, namely less managerial discretion and as a consequence smaller private benefits due to increased disclosure requirements and less accounting method choices. This paper argues that the cost of adopting IFRS depends on characteristics of the institutional environment, more specifically the level of investor protection. Using a sample of European companies, we find that IFRS is more likely adopted in countries with strong laws protecting investors and/or extensive corporate governance recommendations where the loss of private benefits following IFRS-adoption is lower. Furthermore, the results show that corporate governance recommendations are as effective as hard laws in stimulating IFRS-adoption and that their impact increases as laws become weaker. This suggests that by improving corporate governance codes, countries can easily reduce the extraction of private benefits by managers and enhance the quality of the financial information. However, when looking at specific recommendations and laws, we find that shareholder rights with regard to voting rights and the general meeting need to be regulated by law in order to effectively reduce the level of private benefits.Accounting; Characteristics; Choice; Companies; Corporate governance; Cost; Costs; Country; Disclosure; Early adoption of IFRS; Governance; Impact; Information; Law; Legal investor protection; Managers; Order; Private benefits of control; Quality; Recommendations; Requirements; Research; Studies;

Corporate governance and performance: Controlling for sample selection bias and endogeneity.

Studies investigating the relation between corporate governance and performance find only weak evidence that corporate governance affects performance. One reason could be that these studies fail to control properly for sample selection bias and endogeneity. Without controlling for these problems, the relation between corporate governance and performance is not inferred correctly. With this study, we provide evidence on the influence of endogeneity and sample selection bias on the coefficient of corporate governance. We use panel data for the FTSE Eurotop 300 companies over 5 years, from 1999 to 2003. We find that using a sample of the 300 largest companies induces selection bias in the results. Furthermore, the results show that an endogeneity problem is present. This endogeneity problem is caused by a negative reverse causality between performance and corporate governance. After controlling for both problems the coefficient on corporate governance increases and becomes highly significant, where it is insignificant when we use OLS. The results also show that controlling for both problems at the same time is important as by controlling for just one of these problems the bias is only partially reduced. Furthermore, we find that both problems have an equally large impact on the bias in the coefficient. Overall, our findings indicate that the lack of significant results in prior studies is due to not controlling properly for sample selection bias and endogeneity.Negotiations; performance; Selection bias; Law; Panel data; Trade liberalization;

The Effects of Reporting Frequency on Analyst Coverage Decisions

Using hand-collected data on analyst coverage decisions, we study how changes in reporting frequency affect analyst coverage decisions for European firms along with the impact on their forecast performance. Following the enactment of the Transparency Directive, we find that analysts’ expertise, with respect to greater reporting frequency, significantly influences the coverage decision. Particularly, analysts, with higher levels of disclosure expertise, are 150% more likely to initiate new coverage for firms that increase their disclosure frequency. Moreover, we identify that this type of analyst primarily produces firm-specific information as their initiations lead to increased firm-specific volatility, which signals more information-laden stock prices. Subsequently, analysts also provide significantly more accurate forecast on firms with changes in their reporting frequency. Overall, our findings indicate that reporting frequency not only directly impacts the available information about a firm, but also indirectly, by affecting the strategic coverage decisions of information intermediaries

Are banks’ below-par own debt repurchases a cause for prudential concern?

Leading up to the implementation of Basel III, European banks repurchased debt securities that traded below par. Banks are subjected to a prudential filter that excludes unrealized gains on liabili- ties from changes in own credit standing from the calculation of capital ratios. By repurchasing debt securities below par, unrealized gains become realized and increase Core Tier 1 capital. Using data of 720 European Liability Management Exercises (LMEs) conducted between April 2009 and De- cember 2013, we show that poorly capitalized banks repurchased securities and lost about 9.1bn euro in premiums to compensate debt holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern

Are banks’ below-par own debt repurchases a cause for prudential concern?

Leading up to the implementation of Basel III, European banks repurchased below-par debt securities. Banks are subjected to a prudential filter that excludes unrealized gains on liabilities from changes in own credit standing from the calculation of capital ratios. By repurchasing securities, unrealized gains become realized and increase Core Tier 1 capital. We show that poorly capitalized banks repurchased securities and lost about e9.1bn in premiums to compensate debt holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern

The IFRS option to reclassify financial assets out of fair value in 2008:the roles played by regulatory capital and too-important-to-fail status

Amendment of IAS 39 by the IASB in 2008 provided an option to reclassify investments from fair value to historical cost. We predict that too-important-to-fail (TITF) banks took less advantage of this option because the political protection they enjoyed insulated them from regulatory pressure. Banks that did not enjoy this protection had greater reason to make use of this option since doing so would protect their Tier 1 capital. As predicted, findings reveal that TITF banks made less use of the reclassification option to protect their Tier 1 capital and there is a significant moderating influence of TITF status on the incentive to reclassify investments for banks with lower regulatory capital. This finding is consistent with TITF banks placing less weight on protecting regulatory capital and thereby retaining flexibility to sell assets. Our findings provide evidence that accounting choices are affected by the importance of banks to their economies

The IFRS option to reclassify financial assets out of fair value in 2008:the roles played by regulatory capital and too-important-to-fail status

Amendment of IAS 39 by the IASB in 2008 provided an option to reclassify investments from fair value to historical cost. We predict that too-important-to-fail (TITF) banks took less advantage of this option because the political protection they enjoyed insulated them from regulatory pressure. Banks that did not enjoy this protection had greater reason to make use of this option since doing so would protect their Tier 1 capital. As predicted, findings reveal that TITF banks made less use of the reclassification option to protect their Tier 1 capital and there is a significant moderating influence of TITF status on the incentive to reclassify investments for banks with lower regulatory capital. This finding is consistent with TITF banks placing less weight on protecting regulatory capital and thereby retaining flexibility to sell assets. Our findings provide evidence that accounting choices are affected by the importance of banks to their economies