We test the ability of analyst characteristics to explain relative forecast accuracy across legal origins (common law versus civil law). Common‐law countries generally have more effective corporate governance mechanisms, including stronger investor protection laws and inputs provided through higher‐quality financial reporting systems. In this type of environment, we predict that analysts with superior ability and resources in common‐law countries will more consistently outperform their peers because appropriate market‐based incentives exist. In civil‐law countries, where the demand for earnings information is reduced because of weaker corporate governance mechanisms and lower‐quality financial reporting, we predict that analysts with superior ability will less consistently provide superior forecasts. Results are consistent with our expectations and suggest an association between legal and financial reporting environments and analysts' forecast behavior.
Motivated by the European Union (EU) decision to mandate application of the International Financial Reporting Standards (IFRS) to the consolidated financial statements of all EU listed firms (Regulation (EC) 1606/2002), starting in December 2005, we compare the value relevance of accounting information in 14 European countries in the year prior to and the year of the mandatory adoption of the IFRS. We focus on three accounting information items for which measurements under IFRS are likely to differ considerably from measurements under domestic accounting practices across the EU countries prior to the introduction of the international standards: goodwill, research and development expenses (R&D), and asset revaluation. These three items, selected on an a priori basis, have been shown in previous research to differ in the effect of uncertainty on their future benefits. We use valuation models that include these three variables and in addition the book value of equity and earnings. Overall, our study suggests that the adoption of the IFRS has increased the value relevance of the three accounting numbers for investors in equity securities in the EU. Association tests support our two hypotheses: (1) in the year prior to the mandatory adoption of the IFRS, the incremental value relevance to investors of the three domestic GAAP-based accounting items was greater in countries where the respective domestic standards were more compatible with the IFRS; and (2) the higher the deviation of the three domestic GAAP-based accounting items from their corresponding IFRS values, the greater the incremental value relevance to investors from the switch to IFRS. These associations prevail when considering cross-country differences in the institutional environments, which tend to provide complementary effects.
This study examines classification and prediction of the bankruptcy resolution event. Filing of bankruptcy is resolved through one of three alternative resolutions: acquisition, emergence or liquidation. Predicting the final bankruptcy resolution has not been examined in the prior accounting and finance literature. This post-bankruptcy classification and prediction of the final resolution is harder than discriminating between healthy and bankrupt firms because all filing firms are already in financial distress. Motivation for predicting the final resolution is developed and enhanced. A sample of 237 firms filing for bankruptcy is used. Classification and prediction accuracies are determined using a logit model. A ten-variable, three-group resolution logit model, which includes five accounting and five non-accounting variables is developed. The model correctly classifies 62 percent of the firms, significantly better than a random classification. We conclude that non-accounting data add relevant information to financial accounting data for predicting post bankruptcy resolution. Further, public policy implications for investors, researchers, bankruptcy judges, claimants and other stakeholders are discussed. Copyright Blackwell Publishers Ltd 2002.
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