JAE最新文献:采用通用会计准则前后的企业价值与市场流动性关系研究

发布时间:2018-11-27 14:38

Firm Value and Market Liquidity around the Adoption of Common Accounting Standards

Author links open overlay panelPingyangGaoaXuJiangbGaoqingZhangc

  • Booth School of Business, The University of Chicago, USA

  • Fuqua School of Business, Duke University, Durham

  • Carlson School of Management, University of Minnesota, USA


Received 20 December 2017, Revised 23 October 2018, Accepted 14 November 2018, Available online 22 November 2018.


***************

Abstract

The adoption of common accounting standards generates both a precision effect and a network effect. When firms use common standards, investors can leverage their knowledge about the standards to process more financial reports. Embedding both effects into the economic framework of Baiman and Verrecchia (1995, 1996), we study the adoption’s effects on reporting precision, firm value, and liquidity of both the switcher and the early adopter. The model helps address the identification challenge and reconcile some existing results in the empirical literature on IFRS adoption. It also generates implications for standardizing disclosure and accounting methods.

*****************

1 Introduction In 2002 the European Union (EU) mandated International Financial Reporting Standards (IFRS) for all companies listed on the major European stock exchanges in 2005. Since then hundreds of thousands of firms in over 100 countries have switched to IFRS, and yet many are still contemplating (De George et al. (2016)). This common switch to IFRS is possibly the largest regime change in accounting history to date. A vast empirical literature has followed to examine how IFRS adoption is associated with various capital market outcomes.1 The empirical literature has informally relied on two mechanisms to predict the economic consequences of IFRS adoption. First, IFRS adoption can either increase or decrease the precision of a firm’s financial reports. Second, the adoption generates a network effect. It is costly to process financial reports (e.g., Kim and Verrecchia (1994, 1997), hereafter KV) and one part of the cost is to learn about accounting standards. The adoption of IFRS means that more firms from different countries prepare their financial reports under the same standards. This increases their comparability and lowers the cost for investors to process the financial reports. How do we link the precision and network effects to the various capital market outcomes documented in the empirical literature? The theoretical endeavor on the economic consequences of IFRS adoption has been sparse, which is perhaps surprising especially in light of the vast empirical literature and the obvious importance of the topic. This paper intends to fill in this void by incorporating both the precision effect and the network effect into a model that links financial reporting to its economic consequences. KV is a seminal contribution in understanding how a firm’s financial reporting affects both the public and private information of investors due to their differential abilities to process financial reports. While all investors receive financial reports, it could be costly to better analyze financial reports. We extend KV to a multi-standard setting in which the adoption of common standards generates both the precision effect and the network effect. Specifically, in the model, there are two economies represented by two firms, labeled as the early adopter and the switcher, respectively. The early adopter has already been using the common accounting standards, while the switcher is switching from its local standards to the common standards. Adapting KV to the common financial reporting setting, an information processor can incur a cost to develop standard-specific information processing ability that enables her to glean superior information from financial reports prepared under the corresponding standards. To link accounting information to firm value and liquidity, we introduce market liquidity and the monitoring role of stock prices by adapting the economic framework of Baiman and Verrecchia (1995, 1996) (hereafter BV). In each economy, an entrepreneur makes an unobservable investment, issues an accounting report, and then for life-cycle reasons sells his equity stake in an imperfectly competitive market a la Kyle (1985). The market maker, who receives the public information and observes the aggregate order flow from both information processors and liquidity investors but cannot distinguish between the two, sets the stock price equal to the expected firm value. A fraction of information processors’ superior information is impounded into the stock price through the trading process. By affecting the stock price informativeness, the accounting standards choice is linked to the firm value and the liquidity. We obtain two main results. First, the effect of adopting common accounting standards on firm value and liquidity is ambiguous. The adoption can lead to a higher firm value and liquidity even if it reduces the switcher’s reporting quality. Second, the switcher’s adoption of the common standards generates an unambiguously positive externality for the early adopter that increases both of its firm value and liquidity. The economic intuition behind our results lies in the two effects of the common standards adoption: the precision effect and the network effect. First, the precision of common standards directly affects the information quality of the switcher’s report when the switcher adopts common standards. A key assumption in our model is that switching to common standards could result in the precision of the switcher’s report being either higher or lower. In defense of higher precision, Leuz and Verrecchia (2000) state that “German accounting standards and disclosure practices are commonly criticized in the Anglo-American financial press and investors’ community. The main complaints are: too much discretion in German standards allows firms to manage income using large ‘silent reserves’; German reporting is too heavily influenced by tax avoidance strategies; and, German standards lack detailed disclosures designed to satisfy the information needs of investors and financial analysts.” Barth et al. (2008) find that reporting quality (proxied by earnings management, timely loss recognition and value relevance) becomes higher after firms voluntarily adopt IAS relative to firms using non-U.S. local GAAPs (see also Chalmers et al. (2011)). In defense of lower precision, Capkun et al. (2016) show that IFRS adoption increases earnings management and they attribute this adverse effect to the flexibility of IFRS, which is necessary for accommodating a wide array of heterogeneous countries (see also Leuz (2003) and Christensen et al. (2015)). Further evidence of the ambiguous nature of the precision of common standards comes from De George et al. (2016). After reviewing the literature, they conclude that studies on mandatory IFRS adoption provide “at best, mixed evidence that adoption improves the quality of accounting reports.”2 Second, the adoption also generates a network effect. After the adoption, the switcher uses the same common standards as the early adopter. Information processors versed in the early adopter’s standards can leverage their information processing ability to trade in the switcher’s stock. The increased profitability from understanding the common standards attracts more investors to analyze the switcher’s reports and the increased competition among them impounds more information into the stock price. Moreover, the network effect becomes even stronger for the switcher as the early adopter’s relative size increases. The interaction between the precision effect and the network effect ultimately determines the overall economic consequences of adopting the common accounting standards. When only the precision effect is present, a necessary condition for the adoption to improve firm value and liquidity is that the common standards are more precise than the local standards. Adopting more precise common accounting standards improves the stock price informativeness and mitigates the information asymmetry between the market maker and the information processors. These two informational effects lead to higher firm value and liquidity, respectively. However, in the presence of both the precision effect and the network effect, the adoption can still lead to a higher firm value and liquidity even if the accounting standards precision decreases after the adoption. As the adoption’s network effect expands the base of information processors, the resulting higher stock price informativeness always improves the switcher’s firm value and liquidity. This benefit from the network effect partly compensates for the cost from adopting less precise common standards, making the measurement error in the common standards more tolerable. This explains our first result on the adoption’s ambiguous effect on the switcher. As for the early adopter, the adoption does not directly affect the reporting precision but instead, through its network effect, expands the base of information processors in the common standards. Therefore, while the information processors’ information precision is the same, a larger fraction of that information is impounded in the stock price. The improvement in the stock price informativeness in turn increases both firm value and liquidity of the early adopter. This explains our second result. Our analyses provide some implications for the empirical literature on IFRS adoption. A chief implication is that, in the presence of both the precision effect and the network effect, the economic consequence of adopting common accounting standards on switching firms is ambiguous. The network effect improves the switcher’s liquidity and firm value. Even if IFRS does not result in an improvement in reporting precision over local GAAP, we would still expect to observe an increase in liquidity and firm value (as long as IFRS does not decrease reporting precision by a lot). In other words, the empirical findings that IFRS improves liquidity and firm value do not necessarily support the superiority of IFRS. This result may help reconcile the empirical findings of both lower financial reporting quality and improved capital market outcomes associated with IFRS adoption (e.g., Ahmed et al. (2013), Barth et al. (2012), De George et al. (2016)). Another empirical implication is that the common accounting standards adoption generates a positive externality for the early adopter and improves its firm value and liquidity unambiguously. Furthermore, the magnitude of this externality is strictly decreasing in the relative size of the early adopter to the switcher.3 Finally, our results also have implications for the identification challenge in the IFRS literature, which we will elaborate in Section 5. A key identification difficulty is that IFRS adoption often occurs at the same time as other regulatory changes that also affect the quality of financial reporting. To the extent that the network effect is a more salient feature of IFRS adoption than of other confounding changes, the difference between the precision effect and the network effect that our model explicates may present researchers an opportunity to better identify the economic consequences of IFRS adoption. While we use the adoption of IFRS as our primary motivating setting, the insights of our model can be applied to other settings of adopting common accounting methods and standardizing disclosure regulation. Such applications may be also relevant. Although many countries have adopted IFRS, the standardization of mandatory disclosures across countries or across firms within a country is still a long way off. For example, executive compensation and governance disclosures still vary widely across countries. For another example, accounting standards often offer firms a choice between alternative accounting methods and the SEC often permits firms to choose from alternative disclosure formats. A similar trade-off between the precision effect and the network effect arises in these settings when firms/countries start to converge on common disclosure requirements and accounting methods. While there may not be a single “most precise” accounting method or disclosure requirement, the convergence to a common regime might still generate capital market benefits because of the network effect. We contribute to the literature on global financial reporting. While this literature is vast, theoretical analysis has been sparse. Ours is closely related to Barth et al. (1999) who extend KV to study the economic consequences of harmonizing domestic GAAP with foreign GAAP. Using a variant of the model in Grossman and Stiglitz (1980), Barth et al. (1999) study investors’ information acquisition and trading decisions and the effects of accounting standards harmonization on various price efficiency measures. Like Barth et al. (1999), we also exploit the observation that harmonization (adoption) reduces investors’ cost of processing financial reports. Our paper complements Barth et al. (1999) in three ways. The first two follow the suggestions in Verrecchia (1999) who discusses Barth et al. (1999). First, we use a model with imperfect competition to study the effects of the adoption on liquidity. Second, we adapt the economic framework in BV to link accounting information to both firm value and liquidity, two major variables of empirical interest. Finally, even though there are two countries in their model, Barth et al. (1999) only analyze investors’ trading decisions on domestic firms, making it effectively a single-country setting. In contrast, we explicitly study investors’ trading in both countries. Another paper on IFRS adoption is Ray (2012) who builds a model of neoclassical production to draw implications for IFRS adoption. Common standards lower investors’ cost of accessing the capital market, increase the total capital supply, and lower the cost of capital. The downside of common standards is that it increases firms’ compliance costs. The trade-off leads to ambiguous net welfare. Ray (2012) incorporates neither information-based capital market trading nor the explicit use of information in monitoring managerial actions. The paper proceeds as follows. Section 2 articulates the model setup. Section 3 solves the equilibrium. Section 4 explicates the network effect and the precision effect and examines the economic consequences of the switcher’s adoption of the common accounting standards. We focus on firm value and liquidity for both the switcher and the early adopter. In Section 5 we elaborate our model’s empirical implications. Section 6 concludes.


powered by 玮宁文学 © 2017 WwW.wn-steel.com