Does New York Stock Exchange appreciate IFRS more than European stock markets?
Evidences from Cross Listed Companies
Maurizio Ricciardi
FH Kufstein
A-6330 Kufstein, Tirol, Österreich
[email protected]
1
Does New York Stock Exchange appreciate IFRS more than European stock markets?
Evidences from Cross Listed Companies
Abstract
This paper aims at analysing the value relevance of accounting information prepared following
IFRS in United States, compared to value relevance in the “domestic” market. Since a large
number of studies addresses the question of confronting IFRS, U.S. GAAP and other domestic
accounting standards, but there are no evidence of how much a foreign market evaluates IFRS,
this paper tries to fill this gap.
By analysing the value relevance of European cross listed companies in the U.S., which prepare
their annual reports following IFRS, I find that the variability of the stock prices at New York
Stock Exchange (NYSE) are better explained than European (in particular, German and Italian)
stock prices, by the same accounting data.
Furthermore, I find a lower value relevance of annual reports prepared under U.S. GAAP than
IFRS, at NYSE.
Keywords: IFRS, U.S. GAAP, cross listed, value relevance.
JEL classification: M41.
2
1. Introduction.
The discussion on the benefit of the harmonization of accounting standards around the world
arises in particular in recent years of wide open markets, as also showed by the recent (January
2012) attempt of IASB and FASB in order to reduce differences in classification and
measurement of financial instruments.
The scientific community is still searching for evidences on difference in informativeness, or in
the quality of reported earnings, under IFRS compared to other sets of accounting standards.
Atwood et al. (2011) show that there is no difference in persistence of reported positive earnings
under IFRS and U.S. GAAP, but losses reported under IFRS are less persistent than losses
reported under U.S. GAAP; furthermore, they find that earnings reported under IFRS are less
associated to future cash flows, than earnings reported under U.S. GAAP, suggesting a
superiority of U.S. GAAP, even if only related to this particular field.
Although, IAS/IFRS are in literature often referred to as high quality – high value relevant
standards (Barth et al. 2008, Daske et al. 2008, Chen et al., 2010), there is no univocally
evidence of a superiority of IFRS on other standards, due to geographical, economic, political,
cultural and industrial differences too (Cascino, Gassen, 2010).
Since high quality and more comparable reporting and disclosure can have economy-wide
benefits and positive externalities, (Hail et al., 2010, a), but changes in accounting policies are
not costless and do not directly and immediately lead to those benefits, the question of usefulness
and relevance of IFRS still matters and it seems not fully addressed.
To date, to the best of my knowledge, there are no empirical evidences of the relevance of IFRS
3
reporting in the U.S.A., compared to a mandatory IFRS adoption environment, with the same set
of accounting data, and this paper aims to fill this gap by analysing the value relevance of cross
listed european firms, which are allowed to present their annual report following IFRS also by
the American Security and Exchange Commission.
The reminder of the paper is the following: in Section 2 the research question is formulated,
Section 3 presents the strategy of the analysis and the empirical results, and Section 4 concludes.
2. Cross listed companies, accounting standards and value relevance.
A very large number of papers reports evidences on comparison of different accounting standards
in the same market, for the same firms, or for different sets of firms, and the question of the
international accounting harmonization is still persistent among researchers and standard setters.
Hail et al. (2010, b) hypothesize different scenarios on a potential IFRS adoption by the U.S.,
pointing out the potential effect of a standard setting monopolization. Considering the existence
of a positive relationship between reporting quality and capital market effects (Botosan, 1997,
Francis et al., 2004, Hail, Leuz, 2006), in this study I observe some capital market evidences
from cross listed companies.
The benefits of IFRS adoption on financial and capital market were investigated with different
perspectives and techniques and some evidences show an increased market liquidity and a
decline in cost of capital for IFRS adopters, which have specific characteristics (Daske et al.
2011). In this paper I try to change the perspective, by analysing the impact of the same set of
accounting principles in different market, and European cross listed firms allow me to investigate
4
this field.
By analysing the cross-listing literature, Hail et al. (2010, a) find no clear evidences that a
strongest reporting requirements affect the U.S. capital market; furthermore, firms often go cross
listed in the U.S. just for the regulation (in particular they refer to Reese and Weisbach, 2002,
Doidge, 2004, Doidge et al., 2004, Hail and Leuz, 2009). Other evidences show that European
companies are more likely to cross-list in more liquid and larger markets, and in countries with
higher investor protection, more efficient court and burocracy, but not with more stringent
accounting standards (Pagano et al., 2001).
Hail et al. (2010, a) argue that the benefits of IFRS adoption in the U.S. are not evident, in the
perspective of the attractiveness of the U.S. stock market for foreign companies. By this point of
view, I find that information produced by foreign companies is very appreciated by the U.S.
stock market, even if filed under IFRS.
Cross listed firms present different characteristics, if compared with non cross listed firms, such
as a higher association of stock prices and accounting data (Lang, Smith Ready, Yeatman, 2003),
higher growth prospect and the willingness to face higher regulatory requirements and to
renounce some private benefits of control, to get equity finance (Coffee, 2002).
Lang et al., (2003) find that cross listed firms in the U.S. present an improvement in information
environment and this improvement is positively valued by the market, but their results are more
relevant for firms that reconcile earnings with U.S. GAAP. However, Lang, Lins and Miller
(2003) focus mainly on analyst coverage; Leuz (2003, a), in discussing these results, points out
that the sources of informational effects are not obvious and it is difficult to disentangle the
different cross-listing effects.
5
Hope et al. (2011) find that cross listed firms in the U.S. exhibit less frequent and lower quality
management earnings guidance, than comparable U.S. firms, and point out that firms from
common law countries disclose more than firms from code law countries.
Henry et al (2009) find significant differences between income and shareholders equity,
reconciled from IFRS to U.S. GAAP, from 2004 to 2006, of the cross listed companies in the
U.S.
For IFRS filers at NYSE, Kang et al. (2012) conclude that there is a not uniform impact of the
country reporting environment on the information quality (in particular, on the effect of the
elimination of the reconciliation IFRS-U.S. GAAP after the year 2007), and firms from a weaker
investor protection country have a greater incentive to signal a high quality disclosure.
Considering the positive effects of an increased disclosure (Leuz and Verrecchia, 2000), in this
paper I analyse firms from code law countries, in order to mitigate the influence of the legal
origin, which could directly increase the value relevance of accounting data.
In the proceedings, I assume the information environment as constant and I investigate the effect
on two different stock markets.
Out of the cross listed environment, Shima and Gordon (2011) find an association between U.S.
investments and IFRS, when combined with a strong enforcement regime, by observing U.S.
foreign investors.
Leuz (2003), finds no great differences between U.S. GAAP and IAS, as well as Barth et al.
(2011) find that U.S. firms' accounting data are more value relevant than IFRS firms, but IFRS
are generally comparable to U.S. GAAP, in particular for firms from common law countries and
6
high enforcement; Ball et al. (2000) show that common law accounting income exhibit greater
timeliness, than code law accounting income. To add further evidences, I focus on code law legal
origin countries.
By the perspective of earnings quality, there is no clear evidence of a limitation of earnings
management related to a company's reliance on international capital markets (Maijoor and
Vanstraelen, 2006).
Prather-Kinsey and Waller Shelton (2005) find that discretionary accrual of U.S. firms, that
utilize U.S. GAAP, are lower than those South African firms utilizing IAS, but higher than those
of U.K. firms reporting under IAS.
Finally, Tarca (2004) finds, a greater use of U.S. GAAP than IAS, by foreign firms listed in U.S.
market, but her analysis is conducted before mandatory European IFRS adoption; furthermore,
she calls for research on the level of acceptance of IAS by market participants.
In order to provide further evidences on the topic of accounting harmonization and the
opportunity of a wide adoption of IFRS, the question addressed in this paper is: “How IFRS are
appreciated by U.S. stock market?”, assuming that a higher value relevance is desirable both for
standard setter and market participants. To cover my research question, I focus on German and
Italian industrial companies, whose shares (or American Depositary Shares) are listed at NYSE.
3. The comparison of value relevance, among NYSE, Italian and German stock markets.
European companies prepare their financial statements under IAS/IFRS since 2005, and this is
the first year I consider in my analysis, because previous adoption of IFRS is voluntary and it
7
could influence the results, because of firm's specific characteristics (Daske et al. 2011). At the
time of writing, the last available year is 2010.
I found eight industrial (say, not operating in the financial sector) companies (four German and
four Italian) listed at NYSE; seven of them are listed on domestic capital market also. Not all of
the firms adopt IFRS to prepare their annual report on form 20-F; in particular, two firms always
adopted IFRS, three firms adopted IFRS only in the last 1 – 3 years, and adopted U.S. GAAP
before; two firms always adopted U.S. GAAP and one firm always adopted its domestic local
GAAP. This set of firm allows me to compare both the value relevance of IFRS on domestic
(German or Italian stock market) and foreign (NYSE) market, and the value relevance of U.S.
GAAP for foreign firms listed on NYSE. Table 1 summarizes the characteristics of the set of
firms analysed.
[Insert table 1 about here]
To compare the value relevance of IFRS accounting numbers on European and United States
stock markets, I estimate the «more heuristic 1»version of the model suggested by Easton et al.
(1993). The underlying ratio is that «the assets of a firm may be divided into those for which
[…] book value is valuation sufficient and those for which earnings are valuation sufficient.
Since most firms have assets of both types, the value of the firm may be expressed as a weighted
function of earnings and book value2».
To the purpose of this paper, I consider the relation between the value of the firm, given by its
1
2
Easton et al. 1993, p. 17.
Ibid.
8
stock price, book value per share and earnings per share, which are expressed by accounting
numbers: the more the variability of the stock price is explained by accounting information, the
higher the value relevance of accounting number. That is:
p
i, j, t+4
=α
i,t
+ β BVPS + β EPS + ε
1
i,t
2
i,t i,t
(1)
where
p
i, j, t+4
= the stock price of the firm i, on the j stock market, four months after the end of its
reporting period (identified by the index “t”);
BVPS = the book value per share of the firm i at the time t;
i,t
EPS
i,t
= the earning per share of the firm i at the time t;
t = 2005, 2006, 2007, 2008, 2009, 2010, and identifies each year of analysis;
j = NYSE, domestic market.
I choose the stock price four months after the end of the reporting period because it is
approximatively the date when the annual reports are available, so I have the earliest market
reaction to accounting numbers 3.
Differently from the model presented in Easton et al. (1993, p. 18), I add the intercept α , for the
i,t
statistical reason of comparing the R2 of two model (in order to correctly interpret R2 as a ratio of
3
Data sources: in this paper, stock prices are obtained by finance.yahoo.com, BVPS and EPS are obtained by
Thomson Reuters Datastream© and information on accounting standards by Form 20-F.
9
variances). By an economic point of view, the intercept could be interpreted as the mean of
average effect of all the variables omitted in the model, on the dependent variable; but, while it
could be theoretically possible to find a value of EPS = 0, it would be improbable to have the
same condition for the BVPS, due to a violation of the going concern principle.
The results of equation (1), using as dependent variables first the NYSE stock prices, then the
domestic stock prices are presented, respectively, in table 2 and table 3.
[Insert table 2 about here]
[Insert table 3 about here]
Comparing the results of (1) estimated for each of the two different dependent variables, BVPS
and EPS explain (more than) 91 per cent (0.899, for adjusted R2) of the variability of the stock
price on NYSE, and (more than) 85 per cent of the variability of the stock price on the domestic
stock market. It is important to point out that BVPS and EPS are the same for both the equation
estimated and are calculated using annual report prepared with IFRS. Therefore, ceteris paribus,
IFRS are more value relevant in United States than in Europe, notwithstanding they are
mandatory in Europe. However, Armstrong et al. (2010) find a positive (negative for code law
countries) European stock market reaction to IFRS adoption.
Further considerations on the results are that BVPS seems to be more value relevant in Europe
than in the U.S. (this could depend on different accounting “traditions”); a unitary variation of
EPS has a greater impact on NYSE stock price than on European stock market, in other words
10
NYSE stock price seems to be more sensible to earnings variability than European stock price.
Finally at NYSE there is a statistically significant effect of the mean of average effect of other
variables omitted in the model, but not in Europe.
For each model I tested for normality of residuals, heteroscedasticity and multicollinearity
(results not showed): the null hypothesis of normality of residuals can not be rejected, and there
is no heteroscedasticity and multicollinearity.
4. Concluding remarks.
The presented results can be valued in the cost-benefit debate on the global accounting standards
harmonization (Hail et al., 2010 a), in particular they support the benefit of accounting
harmonization. Both direct and indirect costs of disclosure are mitigated for those, which adopt
IFRS on mandatory basis, or adopt them anyway. The result support the policy of harmonization,
but it is important to point out that the harmonization of accounting regulation does not lead
immediately to “economic” harmonization, because there are other factors (i.e. political, cultural,
environmental, etc.) to take into account.
Some potential concerns of these analysis should be found in the set of firms analysed. Lang et
al. (2003) conclude that cross listed firm are a “peculiar” set of firms, but their analysis relies on
different pillars and aims at different goals. In this paper, cross listed companies don't bias the
results.
To look for evidences, which confirm that IFRS are highly appreciated in the U.S., I test the
value relevance for the companies which file annula report under U.S. GAAP and I, surprisingly,
11
find that this standard are less value relevant than IFRS in the U.S., in the case of foreign firm
(the results are showed in Appendix).
A possible explanation of the results could be found in the “grade of maturity” of the financial
market, hypothesising that NYSE is a “more developed” financial market, than its European
correspondents: to address this point I use the grade of interrelation between the return of the
stock price and the return of a market index as proxy of market development, and I find that the
return of the stock prices of the sets of firm analysed are correlated with the return of the NYSE
stock market, but not with the return of the European stock market (the results of the estimation
of the market model are showed in Appendix).
A limitation of this work is the little dimension of the sample, but, in further research this
restriction can be removed.
The result is also interesting for firms, not cross listed, which are evaluating benefits and costs of
a cross listing, but also for non cross listed firm, which are interested in dealing with other
stakeholders (other than stock market investors), because, following the IASB framework (IFRS
Foundation, 2010), if IFRS are very useful for stock market, then it could be supposed that they
are useful for other users.
12
Appendix.
The high level of quality of the U.S. GAAP is often compared to the quality of IFRS, concluding
that both sets are high quality standards (Hail el al. 2010, a). As additional test, I analyse the
value relevance of the set of companies selected in this paper, which reported under U.S. GAAP.
In other words, with the same method adopted for IFRS filling, by estimating equation (1), I
replicate the analysis for the firms in the last column of Table 1.
The results of the test are showed in table 4.
[Insert table 4 about here]
It could be noted that, when a cross listed firm chooses to report under U.S. GAAP, the
variability of the stock price on NYSE is worst explained than reporting under IFRS, by the used
linear model. Furthermore both the coefficient of BVPS and EPS are not statistically different
from zero.
To analyse the grade of relationship between the stock prices and the stock market, I estimate the
following equation4.
R
i,m
=γ +δ R +μ
i
i m
i
(2)
where
R
4
i,m
= the stock return of the firm i on stock market m;
In this equation I use daily returns computed as the log-difference of stock prices at market closing time.
13
R
m
= the return of a stock market index, where the firms of the set are included as constituent, in
particular NYSE Composite, for the American stock market, FTSE S&P-MIB, for the Italian
stock market, DAX, for the German stock market;
m = the stock market (NYSE, Italian or German).
The results of equation (2) are presented in table 5.
[Insert table 5 about here]
As it could be noted, the stock price return of the firms analysed are much better correlated to the
stock market return in the United States, than in Europe. This characteristic could contribute to
explain the strongest relationship found in the value relevance of IFRS reporting in the U.S. than
in Europe, since if the market is better related with the returns of the firms listed, then it would
better appreciate the information provided by them.
14
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15
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16
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17
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18
Table 1. The characteristics of the set of firms analysed.
Year
Number of cross
Number of cross listed
Number of cross listed
listed firms
firms, which prepare Form
firms, which prepare
20-F using IFRS
Form 20-F using U.S.
GAAP
2010
7
5
2
2009
6
4
2
2008
6
3
3
2007
6
3
3
2006
6
2
4
2005
6
2
4
37
19
18
Total number of
observations
Table 2. OLS estimation of equation (1), for accounting data reported under IFRS, with dependent variable
the stock price of the firms at NYSE, four months after the end of the reporting period 5.
Coefficient
Std. Error
t-ratio
p-value
const
BVPS
EPS
13.4475
0.507655
21.1295
4.06475
0.427265
3.55917
3.3083
1.1881
5.9366
0.00444
0.25211
0.00002
R2
0.910458
Adjusted R2
0.899266
F(2, 16)
81.34391
P-value(F)
4.13e-09
Number of observation
5
***
***
19
In the present table and in the following tables, where showed, some notations are reported with the symbol “*”,
that codifies the p-value for two-tailed. In particular, a p-value below 0.01 indicates statistical significance at the
1 percent level and is marked with ***. ** indicates significance between 1 and 5 percent and * indicates
significance between the 5 and 10 percent levels.
19
Table 3. OLS estimation of equation (1), for accounting data reported under IFRS, with dependent variable
the stock price of the firms at their own European stock exchange, four months after the end of the reporting
period.
const
BVPS
EPS
Coefficient
-3.02967
1.32077
9.21388
Std. Error
4.23011
0.444647
3.70396
t-ratio
-0.7162
2.9704
2.4876
R2
0.851762
Adjusted R2
F(2, 16)
45.96734
Number of observation
P-value(F)
p-value
0.48418
0.00902
0.02427
***
**
0.833232
2.33e-07
19
Table 4. OLS estimation of equation (1), for accounting data reported under U.S. GAAP, with dependent
variable the stock price of the firms at NYSE, four months after the end of the reporting period.
Coefficient
Std. Error
t-ratio
p-value
const
BVPS
EPS
17.5219
1.63431
6.38315
10.6569
1.27182
13.0642
1.6442
1.2850
0.4886
0.12093
0.21828
0.63219
R2
0.606895
Adjusted R2
0.554480
F(2, 15)
11.57885
P-value(F)
0.000910
Number of observation
18
20
Table 5. Relationship between stock price returns and stock market returns, for each firm in both NYSE and
domestic market, by estimating equation (2). Standard errors of the coefficients in bracket.
Heteroscedasticity-robust standard errors.
NYSE
N. of
obs.
γi
Domestic market
δi
Adj. R2
N. of
obs.
γi
δi
Adj. R2
Firm 1
3986
6.01437e-05 0.970206***
0.423353
(0.000232) (0.023504)
2241
0.000110828
(0.000355)
0.0728348 *
0.010474
(0.037499)
Firm 2
5564
−4.2017e-05
(0.000450)
0.68698***
0.053998
(0.055892)
2241
0.000405984
(0.000389)
0.0379087
0.002050
(0.028812)
Firm 3
2214
−0.00054
(0.00036)
1.09934***
0.476824
(0.04426)
2241
−0.00100011
(0.000999)
0.0529563
0.000288
(0.036741)
Firm 4
3885
0.000215794 0.50542***
0.091087
(0.000333) (0.034710)
2371
0.000584443*
(0.000305)
0.00075873
(0.026692)
0
Firm 5
3412
−5.4463e-05
(0.000463)
0.165268
2360
0.000425339
(0.000371)
−0.0082550
(0.047432)
0
Firm 6
2759
−0.00015046 1.20788***
0.396969
(0.000395) (0.043867)
3163
−0.000158848
(0.000482)
0.0179723
(0.041960)
0
0.891***
(0.037292)
21