Information Asymmetry and Accounting Disclosures for Joint Ventures
by Chee Yeow Lim, Gillian H.H. Yeo and Chao-Shin Liu

Key Words: Joint ventures; Information asymmetry; Accounting disclosures

Abstract: In September 1999, the Financial Accounting Foundation issued a special report recommending the use of the equity method supplemented with appropriate disclosures for corporate joint ventures in the United States. This study, using data for corporate joint ventures in Singapore, provides some preliminary evidence regarding the effect of the supplementary information disclosure on information asymmetry among market participants as measured by bid-ask spreads. The results show that the disclosure of supplementary information of joint ventures is associated with a significant decline in bid-ask spreads The results also indicate that the decline in information asymmetry is larger when the investment in joint ventures is significant and that larger investing firms tend to have a smaller decline in information asymmetry compared to smaller investing firms. The implications of this study, that the provision of supplementary information about joint ventures could reduce information asymmetry among participants in equity markets, thus leveling the playing field among traders, could have implications for policy makers.

Quality of Financial Reporting: Evidence from the Listed Saudi Nonfinancial Companies
by Kamal Naser and Rana Nuseibeh

Abstract: This study assesses the quality of information disclosed by a sample of non-financial Saudi companies listed on the Saudi Stock Exchange. The study also compares the extent of corporate disclosure before and after the creation of the Saudi Organization of Certified Public Accountants (SOCPA). We classified into three main categories: mandatory; voluntary related to mandatory; and voluntary unrelated to mandatory disclosure. Information disclosed in the company annual reports we classified. The sample provided 63 percent and 66 percent of the total population of companies listed on the Saudi Stock exchange in the years 1992 and 1999.

In departure from most previous studies conducted in this area of research, we weighted the indexes of disclosure by the mean and median responses of seven users of the annual reports in Saudi Arabia. The results of both unweighted and weighted indexes are reported. The outcome of the analysis indicated a relatively high compliance with the mandatory requirements in all industries covered by the study, with the exception of the electricity sector. As for the voluntary disclosure, whether related or unrelated to mandatory disclosure, the analysis revealed that Saudi companies disclose information more than the minimum required by law. The level of voluntary disclosure, however, is relatively low. The analysis also showed that the creation of SOCPA has had little impact on corporate reporting in Saudi Arabia.

Effect of Foreign GAAP Earnings and Form 20-F Reconciliations on Revisions of Analysts’ Forecasts
by Judith A. Hora, Rasoul H. Tondkar and Ruth Ann McEwen

The results indicate that the release of foreign GAAP earnings (at earnings announcement dates) and reconciled information (at the time of filing Form 20-F) contains relevant information as measured by analysts’ revisions. Further, variables representing analyst following, change in reconciled earnings, and dispersion of analysts’ expectations are significant in explaining the variation observed in positive abnormal revisions.

Regulatory Flexibility and Management Opportunism in the Choice of Alternative Accounting Standards: An Illustration Based on Large French Groups
by Hervé Stolowy and Yuan Ding

Key Words: Alternative standards; International accounting standards; Accounting harmonization; France

Abstract: Due to the flexibility of domestic accounting regulations, French groups are entitled to refer to International or American standards for their consolidation. The objective of this research paper is to focus on the choices made by the 100 largest French companies during the last 16 years (1985-2000). In practice, apart from the French rules, three "alternative" sets of standards are used: IAS standards, "international principles," and U.S. GAAP. The percentage of companies referring to alternative (i.e. non-French) standards rose in the first part of the period, then fell. Additionally, while the number of companies choosing U.S. GAAP increased over the period as a whole, the number preferring IASs or "international principles" has been in sharp decline from 1994-1995. Our results show that in this voluntary move towards international accounting harmonization, the choices made by French companies have clearly varied according to developments in French accounting regulations and the changing power balance between the IASC and the SEC-FASB. This indicates a certain degree of opportunism by management, who clearly keep one eye constantly on the cost-benefit trade-off.

The Regulatory Framework for Financial Reporting and Auditing in the United Kingdom: The Present Position and Impending Changes
by Stella Fearnley and Tony Hines

Comparative International Accounting
by Ana Zorio

Regulation of Corporate Accounting and Reporting in India
by Dr. Mahbub Zaman

Volume 38 Number 3  2003

ARTICLES

Earnings Management and Initial Public Offerings: Evidence from the Netherlands
by Peter Roosenboom, Tjalling van der Goot and Gerard Mertens

Key Words: Initial Public Offering; Earnings management; Financial reporting

JEL codes:            G14, G32, M41

 

Abstract: This paper presents one of the first studies of earnings management by IPO firms in a European country. Using a sample of 64 Dutch IPOs we investigate the pattern of discretionary current accruals over time. We find that managers manage their company’s earnings in the first year as a public company but not in the years before the IPO. We also examine the impact of earnings management on the long-run stock price performance of IPOs. We find a negative relation between the size of the discretionary current accrual in the first year as a public company and long-run stock price performance over the next three years. A number of additional tests support these findings.

Using Client Performance Measures to Identify Pre-Engagement Factors Associated with Qualified Audit Reports in Greece
by Charalambos Spathis, Michael Doumpos and Constantin Zopounidis

Key Words:  Qualified audit report; Financial statements; Multicriteria decision aid; Performance measures; Greece.

 

Abstract: The purpose of this paper is to test the extent to which client (corporate) performance measures can be used to enhance the ability to discriminate between the choice of a qualified or unqualified (clean) audit report. Audit firms face the risk of losing the client if they issue a qualification. On the other hand, failing to qualify exposes the auditor to potential lawsuits and loss of reputation. We examined the financial statements, auditors’ opinions, and financial statements notes for companies in Greece that received a qualified audit report and for those that received an unqualified audit report. We modeled the auditor’s qualification using a multicriteria decision aid classification method (UTADIS–UTilités Additives Discriminates) and compared it with other multivariate statistical techniques such as discriminant and logit analysis. The qualification decision is explained by financial ratios and by non-financial information such as the client litigation. The developed models are accurate in classifying the total sample correctly with rates of almost eighty percent.

International Income-Shifting Regulations: Empirical Evidence from Australia and Canada

by Leslie Eldenburg, Joane Pickering and Wayne W. Yu

Abstract: This study examines market reactions to two different approaches to reduce income shifting in an international setting.  The two methods are described and event studies are performed using stock market data from Canada and Australia.  Samples of companies from both countries are partitioned into firms predicted to be affected versus unaffected by each country’s event. Australia’s regulation taxes profits arising in low-tax subsidiaries at Australian rates. Canada’s method defines acceptable transfer prices (arm’s-length transactions), and describes enforcement and audit policies.  We find evidence of stock market reactions on some of the event dates for Australian and Canadian firms affected by these two approaches. 

The Effects of Legal Regime on the Patterns of Stock Returns Surrounding ADR Earnings Announcements

by Tony Kang

Key Words: ADR (American Depositary Receipt), Cross Listing, Earnings Announcement, Code Law, and Common Law

 

Abstract: This study examines the effects of legal regime on the patterns of stock returns surrounding the earnings announcements of American Depositary Receipt (ADR) programs. My results indicate that the properties of accounting earnings associated with the local legal regime of an ADR program spill over to U.S. GAAP reconciled earnings. In particular, I find that the market reacts significantly to the earnings announcements of the ADR programs from common law countries whose accounting earnings are known to be more conservative and timely, but not to those of the ADR programs from code law countries where the earnings are known to be less conservative and timely.

The Quality of Neuer Markt Quarterly Reports—An Empirical Investigation

by Anne D’Arcy and Sonja Grabensberger

Abstract: When compared to its prior performance, the year 2001 is not one of the best years for the Neuer Markt.  The Neuer Markt’s reputation has been marred by the practice of several companies on the exchange that have published misleading information in the form of incomplete annual and quarterly data. In this study, we examine the quality of Neuer Markt quarterly reports by concentrating on the disclosure level of 47 Neuer Markt companies‘ reports for the third quarter of 1999, 2000, and 2001. To enable making comparisons, we have established four disclosure indexes that measure each report’s compliance with the Neuer Markt Rules and Regulations, as well as with IAS and US GAAP interim reporting standards. We then attempt to find typical attributes of Neuer Markt enterprises that provide high - or low-level of disclosure accounting information in their quarterly reports. The results demonstrate that the level of disclosure has increased over time, partly in response to additional enforcement. In this regard, the quarterly reports standardization project of Deutsche Boerse AG is an important landmark in satisfying investors’ information needs.

Accounting Behavior of German Firms After an ADR Issuance

by Gilles Hilary

Abstract:  This paper presents preliminary evidence on whether German corporations that issue American Depositary Receipts experience a change in the level of garbling in earnings as expressed under German Generally Accepted Accounting Principles.  In a shareholder regime, a manager’s objective is to maximize the company’s stock price.  Past literature suggests that this will lead managers to follow a policy of more disclosure.  In other stakeholder regimes, managers have an ill-defined objective function and their compensation is not typically sensitive to the price of the stock.  This literature suggests that managers in stakeholder regimes will manipulate earnings to satisfy the various constituents of the firm.  By issuing an ADR, a company changes its regime: shareholders become relatively more important to the manager.  To maximize the stock price, managers should minimize the overall noise in accounting numbers, even under local GAAP.  The empirical results are generally consistent with this hypothesis, but a small sample size prevents drawing definitive conclusions.

Volume 38 Number 4    2003

ARTICLES

Contracts Vaulation Assessment Noise and Cross-Border Listing of Equities on U.S. and U.K. Stock Markets
by Gordian A. Ndubizu and R.S. Olusegun Wallace

Key Words: Local GAAP-based contracts; Investors’ assessment noise; Quality of investor protection in each country; and Cross-border listing of equities.

 

Abstract: This study develops and tests the hypothesis that firms in the home country have capital- market incentives to cross-border list on foreign stock exchanges that have similar financial reporting with local GAAP (Generally Accepted Accounting Principles).  Non-U.S. firms’ contracts and the underlying GAAP are based on the home-country culture and institutional climates.  This connection with culture and institution makes the local GAAP’s assessment of the contracts less spurious relative to foreign GAAP.  Ball et al. (2000) note that contracting with stakeholders in the home markets is based on local GAAP’s numbers, while cross-border listing provides settings in which the value relevance of local GAAP-based contracts is assessed based on foreign GAAP.  Therefore, foreign investors’ assessment of the contracts using foreign stock exchange GAAP or mindset of foreign GAAP is likely to result in an assessment noise, which is value irrelevant.  The level of assessment noise depends on the differences between foreign and local GAAP.  Because of the valuation implications of the assessment noise, we expect cross-border listing to diminish as the likelihood of assessment noise increases.

As predicted, we find that assessment noise undermines cross-border listing on U.S. stock exchanges.  Because U.S. and local GAAPs are based on different cultural and institutional environments, assessment noise arises if U.S. investors use the mindset of U.S. GAAP financial reports to assess local GAAP-based contracts of cross-border firms.  The results are robust in the London Stock Exchange in which assessment noise is induced by interpreting local GAAP contracts as if they were based on U.K. GAAP.  As expected, the influences of assessment noise on cross-border listings are more robust in the United States than in the United Kingdom.  Our results suggest that harmonization of financial reporting is critical in attenuating the influences of assessment noise on global capital-market developments.

Pricing and Supplier Concentration in the Private Client Segment of the Audit Market: Market Power or Competition?
by Marleen Willekens and Christina Achmadi

Key Words:  Competition; Audit pricing; Market concentration; Private companies.

 

Abstract: This study differs from prior audit-pricing studies as 1) it focuses on the issue of price competition in the (small) private-client segment of the audit market, and 2) addresses the questions of whether and how the audit-pricing model changed in that market between 1989-1997. Given the significant increases in market concentration and two big audit-firm mergers in that period, we try to assess whether price competition (market power) has increased (decreased) or decreased (increased). We use Belgian data on privately owned companies from 1989 and 1997 for our analyses. We find that audit fees are significantly associated with the incumbent auditor’s market share both in 1989 and 1997. Our results are in line with prior studies on public client samples and hence do not support prior assumptions that there are no price premia charged by large auditors in the small-client segment of the audit market. As to the evolution of audit pricing in the private client segment of the Belgian audit market between 1989 and 1997, we find that the impact of various audit-fee determinants changed significantly and report evidence supportive of increased price competition.

International Comparative Analysis of the Association Between Board Structure and the Efficiency of Value Added by a Firm from its Physical Capital and Intellectual Capital Resources
by Carol-Anne Ho and S. Mitchell Williams

Key Words:  Efficiency value added; Board structure; Intellectual capital; Physical capital; Corporate governance.

Abstract: This study investigates the link between corporate board features and corporate performance for a sample of 286 publicly traded firms from South Africa (84 firms), Sweden (94 firms) and the United Kingdom (108 firms).  Corporate board features considered are board composition, inside director ownership, duality and board size.  In contrast to prior literature, performance is defined as the efficiency of value added (VA) rather than in financial terms. Further, the analysis examines the association between board features and efficiency of VA and each of the firm’s physical capital (PC) and intellectual capital (IC) respectively. Finally, the present study analyzes the association between board features and corporate performance conjointly.  Comparable to general findings from studies using United States data, the empirical analysis as a whole did not discern consistent significant link between the four board features and corporate performance across the three nations. However, individual board features are found to influence corporate performance in isolated cases. Overall, results provide evidence that even under different socio-political and economic conditions, governance needs vary across firms. Consequently, these findings do not lend support to the notion that uniform board structures should be mandated.

On the Myth of “Anglo-Saxon” Financial Accounting: A Response to Nobes
by David Alexander and Simon Archer

We welcome Nobes’ comment (2003) as a significant contribution both to knowledge and understanding, and to the debate itself.  We accept the evidential points that he makes, without departing from our original prognostication regarding future developments.  Readers, and eventually history, will reach their own conclusions.