Does following International Accounting Standards reduce firm’s financial constraints ?

1. Does following International Accounting Standards reduce firm’s financial constraints ? Steven Vanhaverbeke Benjamin Balsmeier KU LEUVEN

2. Overview • Literature review & Hypotheses • Why do financial constraints matter ? • What is IFRS ? • How Local GAAP differs from IFRS • High Quality Financial Reporting • Methodology • Sample • Model • Results • OLS • Matching • Discussion

3. Why do financial constraints matter? • Financing activities externally may be costly due to outcome uncertainty, asymmetric information and incomplete appropriability of returns. • Firms may prefer to exploit internally available funds to finance their R&D investment as much as possible. However, internal funds may be limited as well. • Financiallyconstrained firms may have to conduct their activities at a sub-optimal level, abandon certain projects or may not be able to operate at all. - Fazzari et al. (1988) - Bond et al. (2006) - Czarnitzki et al. (2009)

4. IFRS • International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent organization called the International Accounting Standards Board (IASB) • The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. • Advantages ? • A business can present its financial statements on the same basis as its foreign competitors, making comparison easier. • Companies may also benefit using IFRS if they wish to raise capital abroad • Companies with subsidiaries may be able to use one accounting language company-wide.

5. IFRS vs. Local GAAP

7. Literature review Advantages of disclosing high quality financial information - Internal: • High-quality financial reporting helps business managers to identify good projects and increase investment efficiency (Chen, Hope, Li & Wang, 2011, McNicholas & Stubben, 2008) - External: • Disclosure allows providers of capital to better assess the firm’s investment opportunities and monitor managerial actions(Diamond & Verrechia, 1991; Fama & Jensen, 1983) • Listed firms that adopt IFRS have liquidity improvements and a lower cost of capital (Daske, Hail and Leuz, 2008; Li, 2010) => High-Quality financial reporting should ease external financing constraints by reducing the adverse selection or moral hazard costs associated with information asymmetry H1: Following IFRS will reduce financial constraints

8. Literature review • Foreign lenders are more familiar with IFRS than local accounting standards => IFRS-based reporting makes it relatively easier for borrowers to communicate their financial results and credit quality. • IFRS adopters attract more foreign lenders participating in loan syndicates than non- adopters (Kim, Tsui& Yi, 2011). => IFRS-based reporting makes it less costly for foreign lenders to assess borrowers’ credit risk ex ante, to monitor credit quality ex post, and to renegotiate contractual terms subsequent to credit quality changes. H2: IFRS will increase the propensity to raise foreign capital

9. Methodology: Data Business Environment and Enterprise Performance Survey (BEEPS) of 2004 & 2005 • 14,107 firms across 34 countries, which answered over 75 questions about their business environment, infrastructure services, competition, finance and performance • Random sample of Central- and East European countries. • CORE QUESTIONS: • IFRS: • “Does your firm use international accounting standards (IAS) as provided by the International Accounting Standards Board ?” • FINANCIAL CONSTRAINTS: • “Can you tell me how problematic is access to financing (e.g., colleratal required or financing not available from banks) for the operation and growth of your business ?” (Scale 1 to 4) • FOREIGN LOANS: • “What proportion of your firm’s working capital and new fixed investment has been financed from borrowing from foreign banks, over the last 12 months?”

10. Controls

11. Countries and industries

12. Descriptive Statistics

13. Results

14. MATCHING • Potential Endogeneity issues: • Selection Bias: Best performing companies use IFRS. They already have less financial constraints => Potential Solutions: Difference in Difference, Regression discontinuity design and Matching • Since we have a cross section we will use propensity score matching approach.

15. Descriptive Statistics

16. Differences before and after matching

17. Financial Constraints

18. Financial constraints (HIGH)

19. Foreign Loans Assets

20. Foreign Loans Assets

21. Conclusions and Future Research • We have shown that following IFRS reduces financial constraints and increases the possibility to have foreign loans. • We contribute to the literature on the role of financial information, firm characteristics, and country-level institutions for an important and interesting group of firms. • Future developments: • Restrict Matching procedure within countries and industries • Use of Subsample: • Differences between Local GAAP; • Differences between innovating firms • Differences between other Institutional factors