Agency Cost Reduction Associated with EU Financial Reporting Reform

Abstract

We predict and find that regulations expected to harmonize and strengthen firms' financial reporting in the European Union (EU) in the early 2000s increase Tobin's Q ratios of firms with high agency costs due to (1) concentration of control (entrenchment) and (2) an excess of the largest shareholder's voting rights over cash flow rights. These results are consistent with stronger reporting standards enhancing firm value by mitigating incentives for controlling shareholders to expropriate minority shareholders. Increases in Tobin's Q associated with financial reporting reform are concentrated in EU firms that (1) are not cross-listed in the U.S., (2) have families as their largest shareholders, or (3) have a largest shareholder who holds 20 percent or more of the firm's cash flow rights. These results suggest that minority shareholders of firms with the most severe perceived information asymmetries are among the major beneficiaries of EU financial reporting reform.

Market Reaction to the Adoption of IFRS in Europe

“…for efficient cross-border investment both within and beyond the EU. EFRAG further noted that the IASB is reviewing several standards with the objective of making some improvements to them; EFRAG will consider those changes and make its recommendation on them after the IASB 7 Prior research finds little (Comprix et al 2003) or limited (Pae et al 2007) evidence of a market reaction to IFRS adoption events before March 12, 2002. These findings suggest that investors' IFRS adoption expectations were not affected by events prior to the March 12, 2002 resolution, the studied events were not those that affected investors' expectations, or the event windows were too narrow to capture the market reaction to the events.…”

“…9 Similarly, Ashbaugh and Pincus (2001) finds that previous convergence efforts relating to IAS resulted in reductions in analyst forecasts errors. Pae et al (2007) finds that firm values, reflected in 9 Barth et al (1999) shows that the net market effect of convergence is a function of two effects. The first is the direct informational effect, i.e., whether convergence increases or decreases accounting quality.…”

The effect of corporate governance and investor protection environments on the value relevance of new accounting standards: the case of IFRS 9 and IAS 39

“…Among the supporters, Pae et al (2008) claim that the introduction of IAS/ IFRS in Europe has increased firm value because of the intrinsic characteristics of accounting standards, thanks to the greater ability of the new principles compared to the local GAAPs, to mitigate incentives for controlling shareholders to expropriate the minority ones. Similarly, focusing on the Chinese market, Liu et al (2011) find a general improvement in accounting quality and, in particular, an increase in the value relevance of reported earnings.…”

Earnings Quality at the IPOS: The Influence of Opportunistic Behaviour and Ownership Control Mechanisms

“…Other than that, Ballwieser (2009) stated IFRS provides more informative financial statement, incorporate economic gain and losses on timely basis, and also pursue the goal to reflect economic substance rather than legal firm. In order to lower down the information asymmetries between small and large shareholders, IFRS provides comprehensive and timely financial statements (Pae et al, 2008).…”