the impact of international financial reporting standards...
TRANSCRIPT
The Impact of International Financial Reporting
Standards on Comparability:
A Test Using IPO Underpricing
Masako Darrough
Jangwon Suh
Donal Byard
The Tel Aviv International Conference on Accounting
June 21, 2015
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Motivation • Many countries have adopted IFRS
• The uniform set of accounting standards – decreases information
asymmetry
• The global capital markets have been affected by having the same
accounting standards
• Accounting quality is higher?
Our Main Question: Does IFRS increase comparability?
Does IFRS reduce the IPO underpricing?
• Mandatory adoption
• Voluntary adoption
2
Roadmap
Background
Research Questions
• IFRSIPO
• IPO Underpricing
• Challenges
Hypotheses and Research Design
• Hypotheses
• Tests
• Results
Conclusions
3
Background: Policy Debates
Areas where academic literature follows policy debates
• 1980s – Papers about different GAAPs
• German GAAP is different from UK GAAP
• Late 1990s – Development of IAS
• Germany + more allow voluntary IAS adoption
• IAS become IFRS
• 2005 – Mandatory IFRS adoption (EU etc.)
• More comprehensive standards – increased reporting quality
• Increased comparability
• 2007- Should US adopt IFRS?
• Only increased comparability possible?
4
Academic Debate
Standards vs. Institutions
• Early 2000s
• Importance of reporting incentives
• Institutions shape firms’ reporting incentives
• Ball et al. (JAE 2000, 2003), Burgstahler, Hail & Leuz (TAR 2006),
Leuz et al. (JFE 2003)
• Mandatory IFRS Adoption Experiment
• Uniform set of Accounting Standards
• Higher quality of financial reporting?
• Enhanced comparability?
• # listed firms using IFRS: 9.0% in 2004 → 30% in 2006
• Who benefits?
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IFRS Mandatory Adoption
Reporting quality
• IFRS > domestic GAAP (Barth et al. 2008)
• IFRS ≈ domestic GAAP (Ahmed et al. 2010)
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Comparability
• IFRS ≈ domestic GAAP on average (Lang et al. 2010)
• DeFond et al. (JAE 2011), Brochet et al. (CAR 2013),
Wang (JAR 2015), Yip and Young (TAR 2012),
Cascino and Gassen (RAST 2014)
The Effects of IFRS
• Benefits
• Daske et al.(JAR 2008): IFRS increases market liquidity, reduces cost of capital and Tobin’s Q ?
• DeFond et al. (JAE 2011): enhanced comparability increases foreign mutual fund ownership
• Byard, et al. (JAR 2011): improves financial analysts’ information environment: forecast errors, forecast dispersion
• Important: enforcement
• Christensen et al. (JAE 2013)
• Ball (ABR 2006)
• Daske et al. (JAR 2008)
• Byard et al. (JAR 2011)
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Our Research Questions in IPO
1. Whether investors benefit from enhanced comparability under
IFRS compared to domestic GAAP
2. Whether all of the potentially comparable firms available
under IFRS actually contribute to providing enhanced
comparability.
Potentially comparable firms (peer firms)
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comparability
Comparability and IPO Underpricing
IPO setting – IPO underpricing
Comparability:
• is the “quality of information that enables users to identify
similarities in and differences between two sets of economic
phenomena” (Financial Accounting Standards Board, 1980).
2 Tests
• Mandatory IFRS adoption test (pre vs. post 2005)
• “Voluntary” IFRS adoption test (pre 2005)
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IPO Underpricing
• First day return
• Worldwide phenomenon
• Money on the table • Asymmetric information
• Rock (JFE 1986),
• Beatty and Ritter (JFE 1986)
• Benveniste and Spindt (JFE 1989)
• Underpricing is less
• Leone and Rock (JAR 2007): “intended use of proceeds”
• Schrand and Verrecchia (2005): greater disclosure frequency in the pre-IPO period
• Boulton et al. (TAR 2011): country-level earnings quality
• Hong et al. (TAR 2014): IFRS
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IPO Underpricing
Sample size Period Av. Underpricing
Australia 1,562 1976-2011 21.80%
China 2,512 1990-2013 118.40%
France 697 1983-2010 10.50%
Germany 736 1978-2011 24.20%
Greece 373 1976-2013 50.80%
Hong 1,486 1980-2013 15.80%
Italy 312 1985-2013 15.20%
Japan 3,236 1970-2013 41.70%
Norway 209 1984-2013 8.10%
Philippines 155 1987-2013 18.10%
Poland 309 1991-2014 12.70%
Portugal 32 1992-2013 11.90%
Singapore 609 1973-2013 25.80%
Sweden 374 1980-2011 27.20%
UK 4,932 1959-2012 16.00%
US 12,702 1960-2014 16.90%
Source: Loughran, Ritter, and Rydqvist 2015 “Initial Public
Offerings: International Insights”
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21.80%
118.40%
10.50%
24.20%
50.80%
15.80%
15.20%
41.70%
8.10%
18.10%
12.70%
11.90%
25.80%
27.20%
16.00%
16.90%
IFRS and IPO Underpricing
• Boulton et al. (TAR 2011): EQ underpricing
• Hong et al. (TAR 2014): AQ underpricing proceeds
• Challenges in research
• Firms go IPO once
• Mandatory IFRS – all IPOs use IFRS
• Institutional differences across countries
• Other concurrent changes (e.g. EU Directives)
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Hypotheses
H1: Following mandatory IFRS adoption, enhanced overall
comparability under IFRS will reduce IPO underpricing
relative to that under domestic GAAP.
H2: Following mandatory IFRS adoption, only those listed
industry peers domiciled in high quality enforcement
jurisdictions have an effect in reducing IPO underpricing.
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enhanced overall comparability
enforcement
Overview of Research Questions
Example: Two hypothetical Dutch mining IPOs
• Reporting quality & comparability
• The role of enforcement environment
IPO in 2003
• Reporting quality under
Dutch GAAP
• Comparability
• Few but homogeneous
industry peers using
Dutch GAAP
IPO in 2006
• Reporting quality under
IFRS
• Comparability
• 100+ industry peers
using IFRS
• Heterogeneous industry
peers
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Mandatory Adoption Sample Selection: Matched Pair Design & DID
2005 Mandatory IFRS
Adoption
Test Sample
Countries
That Mandated
IFRS Adoption in
2005
Control Sample
Countries That
Did Not Mandate
Adoption of
IFRS
2003 - 2004 2006 - 2007
IFRS IPO
Dutch Mining Co.
Domestic GAAP IPO
Dutch Mining Co.
COMPARE
WITH
All Dutch Listed Mining Cos
Using Dutch GAAP
COMPARE
WITH
All Global Listed Mining Cos
Using IFRS
Domestic GAAP IPO
Brazilian Mining Co.
Domestic GAAP IPO
Brazilian Mining Co.
Treatment Benchmark
Change Model
DID
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TABLE 4
Comparability and IPO Underpricing: Mandatory IFRS Adoption
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H1: (-)
H2: (-)
IniRet = X’β + β1 IFRS + β2 log(1+Comp) + β3 IFRS×log(1+Comp)
+ Controls + υ (1a)
IniRet = X’β + β1 IFRS + β4 log(1+CompWeak) + β5 log(1+CompStrong / (1+CompWeak ))
+ β6 IFRS×log(1+CompWeak) + β7 IFRS×log(1+CompStrong / (1+CompWeak ))
+ Controls + υ (1b)
CompStrong
CompWeak
log(1+Comp) = log(1+CompWeak+CompStrong )
=log(1+CompWeak ) (1+CompStrong /(1+CompWeak))
= log(1+CompWeak )+log (1+CompWeak/ (1+CompWeak))
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Voluntary Adoption
A number of countries allowed early adoption
• Netherlands, Belgium, Denmark, Finland, Austria, Germany
• Additional IPOs that used IFRS as a second set of fin. Statements
Issues
• Self selection
• IPO underpricing
• 34 voluntary IPOs
Reporting Incentives
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TABLE 7
Comparability and IPO Underpricing: Voluntary IFRS Adoption
Prob(IFRS) = Z’γ + ε; (2a)
IniRet = θ1 IFRS + θ2 log(1+Comp) + θ3 IFRS× log(1+Comp) + δ IMR
+ Controls + υ. (2b)
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(-)
Our Sample Countries
Law Enforcement
Strong Weak
IFRSdif
High
Sweden, France,
Japan,
Germany, Italy, France
Greece, Philippines,
Brazil,
China, Poland
Low
Australia, Hong Kong,
New Zealand, Norway, UK,
US, South Korea, Taiwan,
Greece, Singapore,Sweden
India, Indonesia,
Malaysia, Thailand
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Panel A: Mandatory IFRS Adopter Sample
Description # of observations
IPO firms issuing ordinary common shares around the world during 2006-2007 3,380
Various deletions … 2,883
IFRS-reporting IPOs in 2006 and 2007 from Countries that Mandated the Adoption of
IFRS in 2005 with available Benchmark Domestic GAAP Reporting IPO firms 493
Matched (Benchmark) Domestic GAAP-reporting IPOs in 2003 and 2004 in the Same
Industries and the Same Countries 493
Mandatory Adoption Test Sample: 493 IFRS reporting IPOs from 2006-2007, with 493
domestic GAAP-reporting IPOs from 2003-2004, matched by country and industry 986
Control Sample: 628 IPOs from the period 2003-2004 with 628 matched IPOs from the
period 2006-2007, matched by country and industry. These IPOs are from countries that
did not mandate IFRS over our sample period, so all 1,256 IPOs report in domestic GAAP 1,256
Panel B: Voluntary IFRS Adoption Sample
IPO firms issuing ordinary common shares around the world in 2003-2004 2,316
(First trading-day return data are unavailable) (376)
(Accounting standards data are unavailable) (132)
(Other control variables are unavailable) (148)
(Listings in countries that did not mandate IFRS in 2005) (1,089)
Listings in countries that allowed multiple accounting standards over this period 244
(Listings in countries that have no IPO firms that report in IFRS) (224)
Voluntary Adoption Sample 591
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Sample Selection Procedures
TABLE 2: Composition of Samples by Country
Panel A: Mandatory IFRS Adoption Test and Control Samples
IniRet
Test/Control Sample # of observations Domestic GAAP-reporting IPO
firms
IFRS-reporting
IPO firms
Australia Test 672 21.1% 27.3%
France Test 32 6.8% 3.4%
Greece Test 2 42.5% 23.5%
Hong Kong Test 44 10.9% 33.0%
New Zealand Test 6 5.9% 9.2%
Norway Test 24 10.5% 5.0%
Philippines Test 8 1.9% 9.2%
Sweden Test 2 -24.8% 13.7%
United Kingdom Test 196 23.6% 17.3%
Brazil Control 2 0.5% -6.7%
India Control 2 24.0% 88.4%
Indonesia Control 4 12.9% 56.8%
Japan Control 392 52.4% 35.3%
Malaysia Control 74 42.0% 17.9%
South Korea Control 162 34.0% 42.8%
Taiwan Control 122 3.4% 55.2%
Thailand Control 22 26.6% 16.1%
United States Control 476 11.7% 10.8%
Total 2,242
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TABLE 2: Composition of Sample by Country (Cont’d)
Voluntary IFRS adoption
Panel B
# Domestic
GAAP IPOs
#IFRS
IPOs
Domestic GAAP-reporting
IPO firms
IFRS-reporting
IPO firms
China 150 2 14.6% 15.4%
France 20 1 4.3% 0.8%
Germany 1 3 3.6% 5.8%
Greece 6 2 6.9% 0.8%
Hong Kong 65 2 5.3% 11.4%
Italy 1 4 0.8% 5.8%
Poland 3 2 12.8% 14.9%
Singapore 79 9 10.0% 10.6%
Sweden 2 1 0.8% 7.2%
UK 230 8 9.0% 11.6%
Total 557 34 10.0% 9.5%
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TABLE 3: Descriptive Statistics
Panel A: IFRS-Reporting IPOs (N=493)
Mean Min. Q1 Median Q3 Max.
IniRet 23.9% -26.7% 1.1% 12.1% 31.8% 207.3%
Comp 182.8 2 52 142 263 564
CompStrong 146.8 0 25 116 225 522
CompWeak 36.6 0 17 29 45 112
Proceeds 54.0 1.2 2.7 5.6 31.1 56.1
Partial Adjustment 0.2% -3.8% 0 0 0 5.4%
Cross Listing 13.2% 0 0 0 0 1
Market Return 9.0% -31.3% -1.9% 9.0% 21.5% 56.4%
Market Volatility 85.6% 36.1% 64.0% 78.3% 104.8% 188.6%
#IPO 12.5 0 8 12 17 30
Secondary Market 15.4% 0 0 0 0 1
Panel B: Domestic GAAP-Reporting IPOs (N=493)
IniRet 20.1% -26.7% -2.0% 5.0% 22.8% 207.3%
Comp 32.3 0 1 6 62 159
CompStrong 32.0 0 1 6 62 159
CompWeak 0.2 0 0 0 0 32
Proceeds 36.5 1.2 2.6 5.3 31.9 656.1
Partial Adjustment 0.0% -3.8% 0 0 0 5.4%
Cross Listing 1.0% 0 0 0 0 1
Market Return 11.7% -31.3% 3.4% 12.6% 20.7% 56.4%
Market Volatility 57.3% 26.5% 37.3% 47.1% 65.0% 188.6%
#IPO 8.5 0 4 8 11 30
Secondary Market 1.6% 0 0 0 0 1
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T4 Comparability and IPO Underpricing: Mandatory IFRS Adoption
Panel A: Regression Results
Equation (1a) Equation (1b)
Predict Coeff. z-stat. Predict Coeff. z-stat.
IFRS β1 0.236 (1.53) 0.071 (0.49)
log(1+Comp) β2 -0.025** (-2.01)
IFRS×log(1+Comp) β3 ( - ) -0.009 (-0.25)
log(1+CompWeak) β4 -0.023 (-0.63)
log(1+ CompStrong / (1+CompWeak)) β5 -0.020* (-1.81)
IFRS×log(1+CompWeak) β6 0.078** (2.14)
IFRS×log(1+CompStrong /(1+CompWeak)) β7 ( - ) -0.094*** (-5.06)
Control Variables:
log(1+Proceeds) β8 -0.075 (-1.18) -0.086 (-1.34)
Partial Adjustment β9 -0.016 (-0.01) -0.096 (-0.05)
Cross Listing β10 0.211 (0.87) 0.194 (0.79)
Market Return β11 0.171 (1.16) 0.175 (1.02)
Market Volatility β12 -0.021 (-0.17) 0.003 (0.03)
log(1+#IPO) β13 -0.107 (-1.46) -0.120 (-1.62)
Secondary Market β14 -0.350 (-1.61) -0.390* (-1.92)
R2 50.8% 51.8%
Adjusted Clustered standard errors Yes Yes
# of fixed effects for matched pairs 493 493
# of observations 986 986
Panel B: Linear Combination Tests
Equation (1a) Equation (1b)
Predict Coeff. t-stat. Coeff. t-stat.
β2+ β3 ( - ) -0.035 (-1.24)
β4+ β6 0.055 (1.29)
β5+ β7 ( - ) -0.114*** (-9.38)
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TABLE 5
Comparability and IPO Underpricing: DID Results for Mandatory IFRS Adoption
Test Sample Control Sample Difference
Predict’n Coeff. t-stat. Coeff. t-stat. Predict’n Coeff. t-stat.
IFRS β1 0.236 (1.53) 0.145 (1.04) 0.091 (0.91)
log(1+Comp) β2 -0.025** (-2.01) -0.051* (-1.81) 0.026 (1.63)
IFRS×log(1+Comp)1 β3 (-) -0.009 (-0.25) -0.030 (-0.97) (-) 0.021 (1.25)
R2 50.8% 61.2%
Adjusted standard errors Yes Yes
# of fixed effects for matched pairs 493 628
# of observations 986 1,256
Panel A: Re-Estimation of Equation (1a) using Difference-in-Difference Specification
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Table 5: DID (cont’d)
Panel B: Re-Estimation of Equation (1b) using Difference-in-Difference Specification
Test Sample Control Sample Difference
Predict’n Coeff. t-stat. Coeff. t-stat. Predict’n Coeff. t-stat.
IFRS β1 0.071 (0.49) 0.281*** (3.09) -0.210* (-1.95)
log(1+CompWeak) β4 -0.023 (-0.63) 0.161 (0.52) -0.184*** (-4.36)
log(1+ CompStrong / (1+CompWeak)) β5 -0.020* (-1.81) -0.030 (-0.91) 0.010 (0.56)
IFRS×log(1+CompWeak)1 β6 0.078** (2.14) -0.182*** (-4.69) 0.260*** (6.72)
IFRS×log(1+ CompStrong /
(1+CompWeak))1
β7 (-) -0.094*** (-5.06) -0.057*** (-2.98) (-) -0.037** (-1.82)
R2 51.8% 62.3%
Adjusted standard errors Yes Yes
# of fixed effects for matched pairs 493 628
# of observations 986 1,256
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TABLE 6
Descriptive Statistics: Voluntary IFRS Adoption Sample
Panel A: IFRS-Reporting IPOs (N=34)
Mean Min. Q1 Median Q3 Max.
IniRet 25.5% -20.3% 1.3% 11.4% 43.4% 215.6%
Comp 31.6 2 11 22.5 45 99
Proceeds 124.3 0.2 5.9 16.0 135.6 569.3
Partial Adjustment 0.00 -0.03 0.00 0.00 0.00 0.03
Cross Listing 41.2% 0 0 0 1 1
Market Return 6.8% -58.6% -8.5% 4.1% 21.1% 67.7%
Market Volatility 84.9% 44.1% 58.0% 79.6% 105.0% 191.1%
#IPO 4.91 0 0 3 7 22
Secondary Market 29.4% 0 0 0 1 1
Common 55.9% 0 0 1 1 1
CompDomestic 10.6 0 2 3.5 13 54
IFRSdiff 25.6% 0.0% 0.0% 9.5% 57.1% 57.1%
Leverage 0.340 0.012 0.193 0.305 0.502 0.684
ROA 7.8% -36.6% 0.5% 8.2% 17.6% 30.4%
Multiple Acct Stds 47.1% 0 0 0 1 1
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Table 6 (cont’d)
Panel B: Domestic GAAP-Reporting IPOs (N=557)
IniRet 32.9% -20.3% 3.2% 14.2% 46.3% 215.6%
Comp 25.0 1 6 15 40 99
Proceeds 43.4 0.2 5.0 17.1 38.5 569.3
Partial Adjustment 0.00 -0.03 0.00 0.00 0.00 0.03
Cross Listing 7.7% 0 0 0 0 1
Market Return 5.3% -58.6% -9.9% 4.9% 22.0% 67.7%
Market Volatility 89.0% 40.5% 59.7% 84.9% 113.4% 191.1%
#IPO 8.59 0 3 6 13 27
Secondary Market 45.1% 0 0 0 1 1
Common 67.1% 0 0 1 1 1
CompDomestic 24.9 0 6 15 39 95
IFRSdiff 18.5% 0.0% 4.8% 4.8% 42.9% 57.1%
Leverage 0.317 0.012 0.185 0.308 0.445 0.689
ROA 1.3% -83.4% -1.3% 6.2% 11.3% 30.4%
Multiple Acct Stds 41.8% 0 0 0 1 1
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Table 7: Panel A: Endogenous Treatment Model Results
Equation (2a)
Dep. Var. = Prob(IFRS)
Equation (2b)
Dep. Var. = IniRet
Coeff. z-stat. Predict Coeff. z-stat.
IFRS θ1 0.350 (0.98)
log(1+Comp) θ2 0.010 (0.54)
IFRS×log(1+Comp) θ3 ( - ) -0.143** (-1.69)
Control Variables:
log(1+Proceeds) 0.055 (0.76) -0.064*** (-4.49)
Partial Adjustment 0.557 (0.20)
Cross Listing 1.382*** (5.36) -0.008 (0.10)
Market Return 0.063 (0.90)
Market Volatility 0.254*** (4.45)
log(1+#IPO) 0.094*** (3.47)
IFRSdiff
Secondary Market 0.287 (0.90) -0.179*** (-3.78)
Common -0.281*** (-5.26)
log(1+CompDomestic) -0.377*** (-4.24)
IFRSdiff 1.737*** (2.96)
log(1+Leverage) 0.196 (0.32)
ROA 0.703 (1.07)
Multiple Acct Stds 0.074 (0.30)
Inverse Mills Ratio δ 0.046 (0.34)1
Year fixed-effects Yes Yes
# of observations 591 591
Panel B: Linear Combination Test (Eq. (2b)
(θ2 + θ3) = 0 -0.132* (-1.60)
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Additional Analyses
1. Prospectus Directives
2. Exclusion of Australian IPOs
3. Including IFRSdif
4. US as potential comparable firms
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Summary of Key Findings
IPO underpricing ↓ • If IPO firms use IFRS instead of domestic GAAP
• As # comparable firms in high enforcement countries ↑
• US firms are not perfect substitutes for IFRS reporting comparable firms.
• Voluntary Adoption
• More likely for firms with fewer domestic comparable firms
• IPO underpricing is reduced by IFRS
32
Current Questions/Issues
• Our result = only comparable firms in high Enforcement jurisdictions matter
• Claims of enhanced comparability under IFRS are over-stated
• Q: What is “enforcement”?
• Q: Develop good measures of comparability • De Franco et al. measure (2011)
• Barth et al. (2012)
• Information Transfer
• Ours: Number of industry peers
• Q: Is there is a limit to comparability? • What about investor attention?
• What about differences across industries?
• Q: Would the US really benefit from enhanced comparability under IFRS?
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Thank you!
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IPO Underpricing: US
Mean First Day Return
Year # IPOs EW
Proceeds-
Weighted
Amount left
on the table
Aggregate
proceeds
1980-1989 2,044 7.20% 6.10% $3.27 billion $53.46 billion
1990-1998 3,612 14.80% 13.30% $30.10 billion $226.35 billion
1999-2000 858 64.50% 51.60% $66.94 billion $129.81 billion
2001-2014 1,546 13.60% 12.30% $49.50 billion $805.77 billion
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