Presented By:Ambu GyawaliAnita K. Luitel
Ayush NepalBarsha Shrestha
Bidur Koirala
IFRS Introduction, Corporate Governance and Firm Performance:
Evidence from Portugal
The case studies not only public firms but also the largest private firms of Portugal.
The study tries clarifying the conflicting results reported earlier by two research papers that studied the value relevance. 1st Paper - Finds increase in earning quality but decrease in value
relevance of accounting information. 2nd Paper- Analyzes the value relevance in European Listed firms
and finds that firms from Portugal experienced greater increase in the value relevance of accounting after adopting IASB standards.
The study mainly focuses on: Whether IFRS is positively associated with the CGI Whether CGI is positively related with an improvement in the
form performance
Introduction
Bauer et al. (2004) states that Deminor Corporate Governance Ratings for companies included in the FTSE-Eurotop 300 index have higher ratings and are associated with higher common stock returns and enhanced firm value.
(Curto and Morais, 2008) finds an improvement in earnings quality but a decrease in the value relevance of accounting information in Portugal, after IFRS adoption.
(Curto and Morais, 2009) analyzes value relevance in European listed firms and finds that firms from Portugal (among others) experienced a greater increase in the value relevance of accounting information with the adoption of IASB (International Accounting Standards Board) standards.
Ball, et al. (2003) argues that adopting high quality standards might be a necessary condition for high quality information, but not necessarily a sufficient one.
Bai, et al.(2004), found that Chinese listed companies received a premium for good corporate governance, concluding that their CGI has a statistically and economically significant effect on market valuation.
Literature Review
To assess the relationship between the application of the IFRS, Corporate Governance and Firm Performance in Portugal.
Study is in the area of interest to management accountantsCGI is created to measure the compliance with the
CMVM recommendations.Study reveals:
How the Portuguese companies following CMVM recommendations have a higher level of firm performance.
How the IFRS adoption is not associated with a higher level of Corporate Governance.
Purpose of the Study
Study reveals how the association between good corporate practices and performance, which has been identified for public firms, persists in private firms.
First study that documents the association of better corporate practices and firm performance in Portugal.
Study uses samples that, although small by conventional terms, is the largest one ever analyzed in an Empirical Corporate Governance study in Portugal.
Significance of the Study
This paper describes the Portuguese setting.250 top Non-Financial Portuguese firms, identified via the 2006 ranking of
Exame, plus the Euronext PSI-Geral listed companies that were not in the Exame ranking and were listed at least in 2005.
Financial institutions were excluded, as these tend to operate under different regulations and have specific practices.
Researchers then eliminate companies that do not have their annual reports publicly available on their websites for the three years of sample period (2003, 2004 and 2005).
Some firms operate in Portugal but are subsidiaries of international companies. In these cases, information was not found to be disclosed by the Portuguese unit, thus are excluded from the sample.
Thus, Final Sample = 80 firms. Period covered = 2003 to 2005
Study Methodology
Study is broadly divided into :Section1- Focuses on the association between good corporate
practices and performance. Section 2 - Focuses on the Empirical Findings as it is one of the
very few researches including empirical study. Section 3 - Focuses on previous literatures and develops the
research questions. Section 4 - Describes the sample data and their collection. Section 5 - Outlines the research design and presents the results
of the paper Section 6 - Concludes
Contd..
In Portugal, firm’s official structure of governance can follow only one of the alternatives described in the corporate law.
The recommendations about good governance practices are made public by the CMVM.
CMVM 1st recommendations in 1999 brought significant changes in National CG settings which after various amendments is broadly classified as:General Shareholder’s MeetingsBoards and CommitteesInformation & Auditing
The Portugese Setting
H1: The application of IFRS is positively associated with good corporate practices.
H2: Good corporate practices are positively associated with firm performance.
Hypothesis
CGIi,t = β0 + β1 Y_2004 + β2 Y_2005 + β3 PRIVi,t + β4 GROWTHi,t + β5 SIZEi,t + β6 CAP_STi,t + β7 BIG_4i,t + β8
LISTEDi,t + β9 IFRSi,t + Σ17j=1 β9+j SECTORi,t + ηi + εi,t
Where,IFRS = Main variable of interest equation 1 if companies have adopted IFRS otherwise
0Y_2004 = 1 when annual report is from 2004 else 0Y_2005 = 1 when annual report is from 2005 else 0
PRIV = 1 if firm has private shareholder control else 0GROWTH = Control variable representing sales variation, compared to the previous fiscal
yearSIZE = Firm’s total assets measured in Euros at the end of the fiscal year
BIG_4 = Quality of accounting earningsLISTED = 1 if firm is listed else 0CAP_ST = Total Debt/Total AssetsSECTOR = 1 if firm operates in specific sector else 0
η i / ε i,t = Unobservable variable and random shock respectively
ROAi,t = β0 + β1 Y_2004 + β2 Y_2005 + β3 PRIVi,t + β4 GROWTHi,t + β5 EQUITYi,t + β6 CAP_STi,t + β7 CGIi,t + β8
BIG_4i,t + β9 LISTEDi,t + β10 IFRSi,t + Σ17j=1 β10+j
SECTORi,t + ηi + εi,t
Where,
Here, SIZE is replaced by EQUITY because of the high correlation that would exist between it and ROA.
ROA = Ratio between Net Income and Total AssetsEQUITY = Ln (Total Equity); EQUITY is included as a replacement for SIZE
Recommendation 1 - The Company must ensure that it has permanent contact with the market that the principle of equality among shareholders is upheld and that uneven access of investors to information is prevented. To these ends, companies should set up an investor support office.
Recommendation 2 - The active exercising of voting rights, whether directly, by post or by proxy should not be restricted.
Recommendation 3 - It is recommended that companies establish an internal control system, for the efficient detection of risks linked to their activity, as a means of safeguarding their assets and enhancing the transparency of their corporate governance practices.
Recommendation 4 - Measures adopted to prevent the success of takeover bids should respect the interests of the company and its shareholders.
Recommendation 5 - The board should be composed of a number of members who provide effective guidance for the management of the company and the persons responsible for said management.
CMVM Recommendations
Contd.. Recommendation 5A - The board of directors should include a sufficient
number of non-executive directors, whose role it is to continuously monitor and assess the management of the company by the executive members of the board.
Recommendation 6 - The non-executive members of the board of directors must include a sufficient number of independent members. When there is only one non-executive director, he/she must also be independent.
Recommendation 7 - The board of directors should create internal audit committees, with the power to assess the corporate structure and its governance.
Recommendation 8 - The remuneration of members of the board of directors should be structured in such a way as to permit the interests of board members to be in line with those of the company, and should be disclosed annually in individual terms
Contd.. Recommendation 8A - A declaration on the policy for remunerating
members of a company’s corporate bodies should be submitted to the attention of shareholders at the annual general meeting.
Recommendation 9 - Members of the remuneration committee or equivalent should be independent as regards the members of the board of directors.
Recommendation 10 - A proposal containing all the necessary information should be submitted to the general meeting with regard to the approval of plans for the allotment of shares, and/or options to purchase shares or based on variations in share prices, to members of the board of directors and/or employees.
Recommendation 10A - The company should adopt a policy whereby alleged irregularities occurring within the company are reported, containing all the required information.
Research studies the association between the adoption of IFRS and CG
Also the researchers examine the relationship between CG and Firm Performance which is an important link between Financial and Managerial Accounting.
The data show that the level of compliance with the recommendations is still low. For example: Only 5.8% of the annual reports analyzed
disclose administrators’ individual remuneration.
Conclusion
Study is conducted in the Portuguese stock market which is very small and on 1st of January 2005; it included only 45 non-financial firms.
The research has been conducted in very short period of time (only 3 years).
The study is conducted in a country where firms in need of financing use banking much more than capital markets. Thus, introduction of the IFRS in Portugal in 2005 did not impact most of the firms.
Limitations
The research talks about the introduction of IFRS, corporate governance and firm performance in Portuguese scenario and how introduction of IFRS has brought change in the Portuguese market.
Study was very significant in the Portuguese market and this research has showed up as the milestone in for other researchers, researching about the Portuguese market.
It will help business men, upcoming entrepreneurs and financial institutions to take necessary investment decisions in similar markets.
Critical Appreciation / Future Scope