Does mandatory IFRS adoption result in harmonization of accounting practices? The role of foreign shareholders.

1. Does mandatory IFRS adoption result in harmonization of accounting practices? The role of foreign shareholders. March 2010, Varna Christof Beuselinck Belen Blanco Juan Manuel Garcia Lara

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4. Motivation (I) • Adoption of IFRS leads to a harmonization in accounting numbers? (Ball 2006, Barth, Landsman and Lang, 2007; Christensen, Lee and Walker, 2008; Barth, Landsman, Lang and Williams, 2009). • IFRS reduce the information processing costs for foreign investors (they will have lower information asymmetries) IFRS lead to a reduction in home bias among foreign investors (Bradshaw, Bushee and Miller, 2004; Covrig, DeFond and Hung, 2007; Leuz, Lins and Warnock, 2007; Florou and Pope, 2009). …role of foreign investors in the harmonization of accounting practices?

5. Motivation (II) • level of enforcement of the origin country of foreign investors affects to the discretion of manager decisions?

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7. Hypotheses: IFRS, harmonization in accounting practices? A single set of Accounting Standards…

8. Hypotheses development • Accounting standards implementation can differ across countries • IFRS home bias • foreign shareholders after adoption of IFRS firms need to prepare financial statements also according to foreign investors needs. the institutional quality of foreign investor’s home country will affect to the quality of financial reporting H1 H2

9. Hypothesis 1: The role of foreign investors in the harmonization of accounting practices Increase after adoption of IFRS increase monitoring over manager… Institutional quality of foreign investor’s home country? H1a: Differences in discretionary accruals across countries will decrease after the adoption of IFRS. H1b: Differences in discretionary accruals across countries will not decrease after the adoption of IFRS.

10. Hypothesis 2: The effect of the enforcement of foreign investors Monitoring over manager decisions… managerial discretion over accruals will be reduced managerial discretion over accruals will not be reduced IFRS, under high enforcement level, leads to higher accounting quality (Ball, 2001; Francis, Khurana and Pereira, 2003; Leuz, Lins and Wanocket, 2005; Daske, Hail, Leuz and Verdi, 2007, 2008; Francis, Khurana, Martin, and Pereira, 2008). IFRS increase managerial flexibility, which could turn in higher discretion under weak enforcement level (Ball, Robin and Wu, 2003, Leuz, 2003; Daske et al., 2008, Barth et al., 2008)

11. Hypothesis 2: The effect of the enforcement of foreign investors H2a: Discretionary accruals will be lower post-IFRS when high enforcement level of foreign investors’ home country. H2b: Discretionary accruals will not be lower post-IFRS when weak enforcement level of foreign investors’ home country.

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13. Research design: Countries of reference • To study harmonization in accrual process… • Country to compare with • Enforcement level is higher. Leuz, Nanda and Wysocki (2003), Hope (2003) and La Porta, Lopez-de- Silanes, Sheifer and Vishny, (2006) UK and US

14. Research design: Propensity-score matching Propensity-score matching to select groups of comparable firms across countries. P(AccrualProcSim) =α+β1Sizej,t +β2Growthj,t+ β3OperCyclej,t+ β4Leveragej,t + β5NegEarnj,t+ β6σ(CFO)j,t+ β7σ(Sales)j,t+ β8epsj,t+ β9roaj,t+ εj,t Matched pairs: Nearest neighbors matching.

15. Research design: Measurement of accounting practices harmonization • Step 1: Regress model for group of comparable firms • Step 2: Apply estimated coefficients to firm under analysis Jones (1991) model Modified Jones model (Dechow et al., 1995)

16. Research design: Measurement of accounting practices harmonization • Step 3: Calculate differences in DACC at firm-level • 3.1Diff_J: |DACCJ| (UK/US) - |DACCJ | (other country) • 3.2Diff_JM: |DACCJM| (UK/US) - |DACCJM| (other country)

17. Research design: Measurement of Foreign Shareholders • Foreign Shareholders: % shares foreign shareholders. • 3 groups of foreign shareholders based on level of enforcement of foreign country. • HighEnfFS: % shares high enforcement foreign shareholders. • MedEnfFS: % shares medium enforcement foreign shareholders. • WeakEnfFS: % shares weak enforcement foreign shareholders.

18. Testing H1 and H2 • To test H1: Diff_Jj,t= α+β1IFRSj,t + β2ForeignShareholdersj,t + + β3IFRSj,t *ForeignShareholdersj,t+ εj,t Diff_JMj,t= α+β1IFRSj,t + β2ForeignShareholdersj,t + + β3IFRSj,t *ForeignShareholdersj,t+ εj,t • To test H2: DACCJj,t= α+β1IFRSj,t + β2HighEnfFSj,t +β3IFRSj,t *HighEnfFSj,t+ +β4MedEnfFSj,t +β5IFRSj,t *MedEnfFSj,t+ εj,t DACCJMj,t= α+β1IFRSj,t + β2HighEnfFSj,t +β3IFRSj,t *HighEnfFSj,t+ +β4MedEnfFSj,t +β5IFRSj,t *MedEnfFSj,t+ εj,t • Later: causality and different type of foreign investors

19. Sample selection • UE-15 firms and US firms. • Period 2000 to 2008. • Enforcement scores: Worldwide Governance Indicators of Kaufmann, Kraay and Mastruzzi. • Foreign shareholders from Amadeus. • We exclude year 2004. • We exclude voluntary adopters countries. • We require a constant sample across years

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21. Discussion • We study whether foreign investors help in the harmonization of accruals process after adoption of IFRS, and whether they help in reducing managerial discretion. • We expect that foreign investors coming from home country with high enforcement will lead to a harmonization of accruals process, while at the same time, will lead to lower discretionary accruals, whilst foreign investor coming from a country with weak enforcement level, will neither lead to a harmonization in accrual process nor to lower discretionary accruals.

22. Thank you!