new york august 1-5, 2009 s. cascino aaa 2009 annual meeting new york august 1-5, 2009 do harmonized...

New York August 1-5, 2009 S. Cascino

AAA 2009 Annual Meeting

New York August 1-5, 2009

Do harmonized accounting standards lead to harmonized accounting?German-Italian Evidence

Stefano CascinoUniversity of Naples Federico II

Joachim GassenHumboldt-Universität zu Berlin

2

Motivation

Regulation (EC) No. 1606/2002, Art. 1



33

Motivation



44

Motivation



55

Motivation



66

Motivation



77

Motivation



88

Motivation


99

The quasi-experimental setting: Infrastructure (some stats)

Statistic Germany Italy

Market capitalization / GDP 63% 51%

Turnover / Market capitalization 205% 216%

% of market widely owned 50% 20%

% of market family owned 10% 15%

% of market state owned 25% 40%

% of market owned by financial institutions 15% 10%

Corruption Perception Index 7.8 (17/179) 5.2 (41/179)

Legal Right Index 8/10 5/10

Sources: See paper


1010

Conceptual Research Question

Does the adoption of IFRS lead to harmonized accounting information across Germany and Italy?

...or do incentives prevail regardless of harmonized accounting standards?


1111

Main Findings

‘Traditional’ earnings attributes metrics are inappropriate and lack power for testing

for economically significant differences in our setting

Differences in intangible assets recognition between German and Italian firms

mitigated by IFRS adoption

Significant differences in IFRS measurement and even more disclosure compliance

between German and Italian firms as well as between German late and early

adopters persist

These differences can be linked to firm-, region-, and country-level incentives


1212

Some Recent Literature

Beuselink/Joos/van der Meulen (WP, 2007): Investigate earnings comparability

across EU from 1990-2005 using Ball/Shivakumar type accrual cash flow relation,

show increasing trend over time

Bradshaw/Miller (WP, 2007): Look at increased comparability of non-US firms cross-

listing in the U.S. investigating accounting choices (as provided by Worldscope) and

asymmetric timeliness as well as accrual/cash flow relations

De Franco/Kothari/Verdi (WP, 2008): construct a firm-specific measure of

accounting comparability using cross-industry earnings returns and earnings-other

earnings relations estimated on firm-specific time series. Show that this metric is

related to analyst forecast quality (precision, dispersion and bias)


1313

Test Design

Investigate earnings attributes across Germany and Italy pre and post IFRS adoption

─ asymmetric timeliness

─ earnings smoothness

Study differences in intangible assets recognition across Germany and Italy pre and post IFRS

adoption

─ goodwill

─ other intangible assets

Study differences in 2006 IFRS compliance across Germany and Italy

─ measurement

─ disclosure

Test for compliance determinants


1414

Data Background

Earnings attributes and levels of intangibles recognition are estimated for a

sample of 3,730 Italian and German public firm years over the 1998 to

2006 time period

─ Accounting data from Worldscope

─ Capital market data from Datastream

─ Propensity score matching used to match German on Italian firms

Compliance data has been hand-collected from the 2006 annual reports

─ 153 public Italian firms (full population)

─ 135 German late adopters (full population)

─ 117 German early adopters (matched on Italian firms)


1515

The Problem of Earnings Attributes: Asymmetric Timeliness

Full SampleMatched Sample

Local GAAP IFRS Local GAAP IFRS

Parameter Estimate t Value Estimate t Value Estimate t Value Estimate t Value

Intercept 0.033 3.18*** 0.026 3.26*** 0.055 4.48*** 0.045 3.15***

ITALY 0.001 0.09 -0.003 -0.22 -0.021 -1.38 -0.023 -1.16

NEG 0.009 0.78 -0.010 -0.77 -0.007 -0.54 -0.011 -0.47

ITALY*NEG -0.022 -1.36 -0.009 -0.37 -0.006 -0.35 -0.007 -0.24

RETURN 0.020 1.00 0.011 0.69 0.018 0.78 -0.029 -0.85

ITALY*RETURN 0.015 0.53 0.024 0.61 0.017 0.58 0.064 1.29

NEG*RETURN 0.324 9.24*** 0.282 7.98*** 0.231 5.23*** 0.269 3.09***

ITALY*NEG*RETURN

-0.109 -2.15** -0.032 -0.31 -0.016 -0.29 -0.019 -0.14

n 3,056 2,030 2,004 708

Adj. R² 0.176 0.136 0.175 0.135


1616

The Problem of Earnings Attributes: Earnings Smoothness

0

0.5

1

1.5

2

2.5

3

1998 1999 2000 2001 2002 2003 2004 2005 2006

GER GAAP

GER IFRS

ITA GAAP

ITA IFRS

SMOOTH: std(CFO)/std(NIBE)

SM

OO

TH

YEAR


1717

Results: Intangibles Recognition local GAAP

Germany Matched Sample (n=846)

Variable Mean SD 25 % 50 % 75 % t-value Z-Score

INTASS 0.081 0.120 0.006 0.026 0.109 -5.91*** -9.03***

GOODWILL 0.040 0.083 0.000 0.000 0.042 -5.56*** -10.16***

OTHER_INTASS 0.040 0.087 0.003 0.008 0.030 -2.82*** -8.80***

Italy (n=906)

Variable Mean SD 25 % 50 % 75 %

INTASS 0.117 0.137 0.019 0.068 0.164

GOODWILL 0.064 0.097 0.000 0.023 0.085

OTHER_INTASS 0.053 0.096 0.008 0.019 0.052


1818

Results: Intangibles Recognition IFRS

Germany Matched Sample (n=350)

Variable Mean SD 25 % 50 % 75 % t-value Z-score

INTASS 0.151 0.158 0.029 0.097 0.231 -0.27 0.07

GOODWILL 0.095 0.122 0.002 0.042 0.154 0.05 -0.37

OTHER_INTASS 0.056 0.107 0.007 0.018 0.053 -0.49 0.45

Italy (n=354)

Variable Mean SD 25 % 50 % 75 %

INTASS 0.155 0.164 0.025 0.092 0.232

GOODWILL 0.094 0.130 0.006 0.040 0.121

OTHER_INTASS 0.060 0.100 0.004 0.018 0.076


1919

Results: Intangibles Recognition Multivariate Analysis

***/**/* marks two-sided significance for the interacted version of the model at the 1/5/10% level

Pre IFRS Post IFRS

Parameter Sign Estimate Pr > |t| Estimate Pr > |t|

LOG(MKTCAP) + 0.018 0.000 0.016 0.000

ROA +/- -0.114 0.007 -0.052 0.447

MTB + 0.000 0.944 0.004*** 0.003

LEVERAGE +/- 0.102 0.000 0.189** 0.000

FREQ_LOSSES + 0.016 0.225 0.028 0.211

ITALY +/- 0.013 0.019 -0.005* 0.700

Industry fixed effects Yes Yes

Year fixed effects Yes Yes

n (R²) 1,758 (0.494) 705 (0.570)


2020

Results: 2006 IFRS Measurement Compliance Matched Sample

Germany Matched Italy

Standard n Mean SD n Mean SD t-value Z-score

IFRS 2 51 1.000 0.000 67 0.925 0.265 2.01** 1.98**

IAS 11 29 1.000 0.000 48 1.000 0.000 - 0.00

IAS 17 90 1.000 0.000 125 0.992 0.089 0.85 0.84

IAS 19 110 0.991 0.095 153 0.967 0.178 1.26 1.26

IAS 36 140 0.979 0.118 153 0.964 0.153 0.90 0.92

IAS 38 151 0.950 0.161 152 0.974 0.138 -1.36 -1.83*

IAS 39 121 0.936 0.149 132 0.978 0.100 -2.61*** -2.70***


2121

Results: 2006 IFRS Disclosure Compliance Matched Sample

Germany Matched Italy


IFRS 2 57 0.681 0.360 66 0.828 0.327 -2.37** -2.66***

IAS 11 29 0.874 0.226 49 0.673 0.357 2.71*** 2.62***

IAS 17 137 0.815 0.308 125 0.613 0.370 4.81*** 4.83***

IAS 19 117 0.686 0.296 153 0.673 0.320 0.76 0.51

IAS 33 153 0.887 0.209 153 0.840 0.273 1.71* 0.76

IAS 36 125 0.517 0.418 152 0.471 0.403 0.93 0.81

IAS 38 151 0.929 0.183 153 0.741 0.332 6.13*** 5.60***

IAS 39 122 0.633 0.351 131 0.691 0.384 -1.26 -1.73*


2222

Results: Disclosure Compliance Determinants

Germany Italy (-***)

Parameter Sign Estimate Pr > |t| Estimate Pr > |t|

LOG(TOTASS) + 0.027 0.000 0.056** 0.000ROA +/- 0.005 0.955 0.801** 0.005

MTB + -0.001 0.601 0.008* 0.127FREQ_LOSSES + 0.053 0.156 0.090 0.115INDEP_BOARD_D + 0.052 0.010 0.083 0.011INSTOWN +/- -0.014 0.544 0.015 0.659GOVOWN +/- -0.041 0.414 -0.055 0.350FAMBUS - -0.034 0.219 0.007 0.859BIG4 + 0.047 0.035 0.140* 0.003LD_REGION - 0.018 0.653 -0.278*** 0.001EARLY + 0.104 0.000 Industry fixed effects Yes Yes

n (R²) 252 (0.350) 153 (0.466)

***/**/* marks two-sided significance for the interacted version of the model at the 1/5/10% level


2323

Some limitations

Internal Validity

─ Quasi-experimental setting:

• Treatments country and accounting regime are not random

• Propensity score matching does not fully address this concern

─ Suitable proxies for comparability of accounting information

─ Limited sample of IFRS firm-years

─ Tests rely on models capturing economic reality

• Omitted variables?

• Endogeneity concerns?

External Validity

─ Private firms

─ Other (non-European) countries?


2424

Conclusions

Stressing the importance of the limitations discussed above:

─ Earnings attributes are too noisy to document the impact of accounting rule

changes over short time horizons

─ We are able to document increased comparability after IFRS adoption

─ Nevertheless, differences in measurement and – more pronounced –

disclosure compliance remain and can be linked to country-, region- and

firm-level determinants

─ “It’s the standards and the incentives, stupid!”


2525

AAA 2009 Annual Meeting

New York August 1-5, 2009

[email protected]

Thanks for Your Attention!


2626

Motivation… Part two

Bushman/Piotroski, JAE 2006, p.145


2727

Bushman/Piotroski, JAE 2006, p.145

Motivation… Part two


2828

Test design: Address self-selection

Quasi-experimental design: The subjects are treated non-randomly

- Decision to IFRS differs across Germany and Italy

- Decision to go public differs across Germany and Italy

Propensity score matching technique is applied to match Italian firms

with German firms

Separately for local GAAP and IFRS firms the following logit model is

estimated

))(()1( ,4,3,2,1

9

1, itititit

jijit CFORETURNROAMKTCAPLOGINDDUMMYpITALYp


2929

The quasi-experimental setting: IFRS adoption over time

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1998 1999 2000 2001 2002 2003 2004 2005 2006

GermanyItaly

% o

f IF

RS

YEAR


3030

Test design: Address self-selection

Germany Full Sample

Germany Matched Sample Italy

Industry (first-digit SIC-Code) Frequency Percent Frequency Percent Frequency Percent

0 11 0.29 8 0.59 9 0.66

1 112 3.00 60 4.42 46 3.39

2 629 16.86 273 20.13 269 19.84

3 1309 35.09 487 35.91 451 33.26

4 317 8.50 243 17.92 298 21.98

5 478 12.82 79 5.83 91 6.71

7 698 18.71 184 13.57 179 13.20

8 168 4.50 16 1.18 13 0.96

9 8 0.21 6 0.44 0 0.00

Total 3,730 1,356 1,356


3131

Results: Asymmetric Timeliness Full Sample

Local GAAP IFRS

Parameter Estimate t Value Estimate t Value

Intercept 0.033 3.18*** 0.026 3.26***

ITALY 0.001 0.09 -0.003 -0.22

NEG 0.009 0.78 -0.010 -0.77

ITALY*NEG -0.022 -1.36 -0.009 -0.37

RETURN 0.020 1.00 0.011 0.69

ITALY*RETURN 0.015 0.53 0.024 0.61

NEG*RETURN 0.324 9.24*** 0.282 7.98***

ITALY*NEG*RETURN -0.109 -2.15** -0.032 -0.31

n 3,056 2,030

Adj. R² 0.176 0.136


3232

Results: Asymmetric Timeliness Matched Sample

Local GAAP IFRS

Parameter Estimate t Value Estimate t Value

Intercept 0.055 4.48*** 0.045 3.15***

ITALY -0.021 -1.38 -0.023 -1.16

NEG -0.007 -0.54 -0.011 -0.47

ITALY*NEG -0.006 -0.35 -0.007 -0.24

RETURN 0.018 0.78 -0.029 -0.85

ITALY*RETURN 0.017 0.58 0.064 1.29

NEG*RETURN 0.231 5.23*** 0.269 3.09***

ITALY*NEG*RETURN -0.016 -0.29 -0.019 -0.14

n 2,004 708

Adj. R² 0.175 0.135


3333

Results: 2006 IFRS Measurement Compliance Late Adopters

Germany Late Italy


IFRS 2 15 1.000 0.000 67 0.925 0.265 1.09 1.07

IAS 11 20 1.000 0.000 48 1.000 0.000 n/a n/a

IAS 17 75 0.987 0.115 125 0.992 0.089 -0.37 -0.36

IAS 19 111 0.991 0.095 153 0.967 0.178 1.27 1.27

IAS 36 120 0.950 0.176 153 0.964 0.153 -0.70 -0.78

IAS 38 135 0.930 0.185 152 0.974 0.138 -2.30** -2.81***

IAS 39 107 0.898 0.217 132 0.978 0.100 -3.77*** -3.90***


3434

Results: 2006 IFRS Disclosure Compliance Late Adopters

Germany Late Italy


IFRS 2 17 0.559 0.328 66 0.828 0.327 -3.03*** -3.23***

IAS 11 21 0.810 0.249 49 0.673 0.357 1.59 1.38

IAS 17 120 0.772 0.343 125 0.613 0.370 3.48*** 3.67***

IAS 19 121 0.607 0.318 153 0.673 0.320 -1.27 -1.49

IAS 33 136 0.827 0.231 153 0.840 0.273 -0.42 -1.77*

IAS 36 105 0.324 0.334 152 0.471 0.403 -3.09*** -2.88***

IAS 38 135 0.877 0.240 153 0.741 0.332 3.93*** 3.58***

IAS 39 107 0.460 0.305 131 0.691 0.384 -5.06*** -5.35***


new york august 1-5, 2009 s. cascino aaa 2009 annual meeting new york august 1-5, 2009 do harmonized...

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