Opacity of financial information, adoption of international standards and legal origins

Abstract

Purpose -The goal of this study was to investigate the relationship between the level of Earnings Opacity and a company's informational environment, specifically considering accounting standards and the legal origins of the system. Findings -The assessment of the informational environment measures' behavior in emerging countries revealed that these measures were correlated, suggesting that, despite different behaviors, opacity proxies share information. The fact that earnings opacity was lower in countries that had already adopted international standards during the analyzed period was also observed. In the same sense, a higher level of income smoothing was detected in countries of French code law origins.Originality/value -This article contributes to the understanding of the relationship between the characteristics of an accounting informational environment and the levels of opacity of the information emitted by accounting. Thus, this article has helped managers, investors and regulators to understand users' needs and how country-specific characteristics change their perspectives.

Value relevance da contabilidade e das previsões dos analistas: o ambiente de informação do país emergente é importante?

“…Therefore, we assume that these characteristics can impact the quality of forecasts, increasing or decreasing the degree of uncertainty (Karamanou, 2012), especially in emerging markets, where there is a greater degree of information asymmetry and weak protection for investors. This asymmetry can affect the level and quality of information disclosure by firms, due to country-specific factors (Takamatsu & Fávero, 2017). Based on this context, the last hypothesis is presented.…”

“…For Ramnath, Rock, and Shane (2008), when the environment in which companies compete is considered efficient from an informational point of view, accounting or economic information can change the market's perception of firms and, consequently, stock prices. However, the different specific characteristics of each country have different influences on the firm's accounting data, especially due to their interactions with countries' legal origins and enforcement (Bhattacharya, Daouk, & Welker, 2003;Takamatsu & Fávero, 2017). Bhattacharya et al (2013) report that in markets with weak informational environments there is a low quality of earnings and high levels of information asymmetry, differently from developed countries.…”

“…Bhattacharya et al (2013) report that in markets with weak informational environments there is a low quality of earnings and high levels of information asymmetry, differently from developed countries. Takamatsu and Fávero (2017) highlight that high-quality accounting standards have a greater influence on prices, especially in countries where there are stronger legal environments, with emerging countries being characterized by greater problems of information asymmetry concerning developed countries. This leaves the accounting information opaquer since the emerging ones also have low investor protection, which results in a reduction in the effectiveness of the disclosure of high-quality information and, with this, negatively influences the perception of its users due to the greater propensity of manipulation in financial reports (Takamatsu & Fávero, 2017).…”

“…Despite this, it is possible to observe, on average, substantial growth in these markets, without the equivalent attention devoted to examining such information environments (Ghysels, Plazzi, & Valkanov, 2016). As these markets are known for poor investor protection, in addition to financial reporting subject to a greater degree of manipulation due to lesser legal enforcement (Fatma & Abdelwahed, 2010, Takamatsu & Fávero, 2017, there is a natural demand from investors for complementary information to those released by companies, such as analysts' forecasts (Yu, 2011). There is little empirical evidence that addresses this problem in emerging countries.…”

IFRS adoption and firms’ opacity around the world: what factors affect this relationship?

“…This IFRS adoption and firm's opacity occurs in those countries where COML exists, as in the UK. Takamatsu and Favero (2017) pointed out that in countries with a French legal system (civil law) it is possible to detect a higher level of earnings smoothing. So, we derive the following hypothesis:…”