Ivana Raonic

Ownership, Investor Protection and Earnings Expectations

This study examines the interactive influence of corporate ownership, corporate governance and investor protection on the incorporation of current value shocks in the accounting earnings of European companies. This influence is investigated not only by means of the association between current news and current earnings but also with respect to the association of the same news with expected future earnings, and its persistence. Consistent with the contractual explanation of accounting conservatism, it is shown that the accounting behaviour examined is a function of the demand created by shareholders, and that the institutional arrangements in force are of lesser significance in the presence of widely held ownership. On the other hand, greater separation between supervision and management and stronger investor protection are seen to be influential under close ownership, as these are shown to curb aggressive accounting in the form of a persistently lower recognition of bad news in earnings. Evidence is also provided that stricter corporate governance practices in Europe can substitute for weaknesses in investor protection provisions in law.

US Institutional Investors Response to the News Flow of Intangibles Intensive European Stocks: A Study of European BioTech and Pharma Stocks

Earlier research on non-US companies has documented that listing an American Depositary Receipt results in an increase in US institutional investor holdings. It is suggested that this result arises because US cross listing, with the related US GAAP financial reporting reconciliation requirements, improves the monitoring of management in the principal agent relationship with US investors. However, for companies in some industries, greater attention to financial reporting is of limited value since market value is highly dependent upon intangibles. Non-financial performance indicators, not covered by US GAAP, are critical for valuation when intangibles make up a significant part of economic firm value. This research restricts attention to the BioTech-Pharma sector and tests to see whether US institutional investors accept enhanced disclosure of key non-financial performance indicators, as a partial substitute for non-adoption of US financial reporting standards. Specifically, tests are conducted to see whether US institutional investors are more or less sensitive to the non-financial disclosures of non-adopters. Results from the econometric analysis provide support for the hypothesis that US institutional investors respond more to the non-financial disclosures of non-adopters suggesting that US institutional investors do see enhanced disclosure of non-financial performance indicators in an intangibles intensive industry as a partial substitute for full compliance with US financial reporting standards.