Joachim Gassen

Does Stock Price Synchronicity Represent Firm-Specific Information? The International Evidence

Note: This paper has been superseded by Gassen, LaFond, Skaife and Veenman: Illiquidity and Stock Price Synchronicity, http://ssrn.com/abstract=2405465. Much of prior international accounting research implicitly assumes that stock prices capture similar amounts of firm-specific information across countries. Recent research asserts that stock price synchronicity, defined as the R2 from asset pricing regressions, is a useful measure of the amount of firm-specific information impounded in stock prices in international markets. However, the results of our empirical tests provide little support for using stock price synchronicity as a measure of firm-specific information internationally. We develop an alternative measure of firm-specific information impounded in stock price based on the percentage of zero-return days, i.e., the zero-return metric, and repeat the analyses. Overall, our results suggest that the zero-return metric is a better measure of firm-specific information impounded into share prices than the synchronicity measure internationally.

Comparability Effects of Mandatory IFRS Adoption

The mandatory adoption of IFRS by many countries worldwide fuels the expectation that financial accounting information might become more comparable across countries. This expectation is opposed to an alternative view that stresses the importance of incentives in shaping accounting information. We provide early evidence on this debate by investigating the effects of mandatory IFRS adoption on the comparability of financial accounting information around the world. Using two comparability proxies based on De Franco et al. [2011], our results suggest that the overall comparability effect of mandatory IFRS adoption is marginal at best. To investigate the reasons for this finding, we first hand-collect data on IFRS compliance for a sample of German and Italian firms and find that firm-, region-, and country-level incentives systematically shape accounting compliance. We then use the identified compliance incentives to explain the variance in the comparability effect of mandatory IFRS adoption and find it to vary systematically with firm-level incentives, suggesting that only firms with high compliance incentives experience substantial increases in comparability.

The Decision Usefulness of Financial Accounting Measurement Concepts: Evidence from an Online Survey of Professional Investors and Their Advisors

In their current framework project, the IASB and the FASB identify decision usefulness as the objective of financial reporting. Unfortunately, accounting research has neither yet come up with an undisputed measure of decision usefulness, nor with a satisfying method to rank competing measurement concepts, such as fair value or historical cost, with regard to their relative decision usefulness. Thus, assessing the decision usefulness of different accounting measurement concepts ultimately poses an empirical question. We provide evidence to this question by surveying an important user group, namely professional investors and their advisors, about their opinions on the decision usefulness of different accounting measurement concepts. We find that our respondents clearly differentiate between mark-to-market and mark-to-model fair values. While they consistently rank mark-to-market fair values as most decision-useful, they generally rank mark-to-model fair values as least decision-useful. In addition, the ranking differs across asset classes.

Can Audit Reforms Affect the Information Role of Audits? Evidence from the German Market

We investigate whether audit reforms affect the information role of audits in a country where the audit traditionally serves a statutory reporting function. Specifically, we investigate the audit market effects of audit reforms mandated by the German government in the Act on Control and Transparency of Enterprises. We test for differences in the types of audit reports issued, the information content of first time going-concern audit opinions, and the demand for dominant audit suppliers pre and post the implementation of the Act to draw inferences on whether the audit reforms enhanced the information role of German audits. We find an increase in the frequency of modified audit opinions after the audit objective changed from verifying assets in place to identifying and reporting concern uncertainties and non-compliant financial reporting practices. We also find an increase in the information content of first time going-concern audit reports issued after the audit reforms are implemented. In addition, the results also indicate an increase in the demand for dominant audit suppliers in the post-reform years. Moreover, we document a significant increase in the number of auditor lawsuits after the audit reforms went into effect. Collectively, our results suggest that the audit reforms improved the information role of German audits and that German firms responded to the improvement in audit reporting by increasing their demand for dominant audit suppliers.

Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers

Abstract We review the academic literature on the use of financial reporting information by capital providers. We classify our findings by investor type and by information objective. While most capital providers use accounting information, our survey indicates that they do so in a variety of ways with financial reporting information competing with other sources of information. We also find that information intermediaries are influential in both credit and equity markets, making the identification of a typical target ‘user’ inherently difficult. Our main findings question the underlying objective of the Conceptual Framework to guide the development of standards for general-purpose financial statements to provide a typical knowledgeable investor with a true and fair view about the reporting entity. Finally, we identify gaps in the literature and suggest areas where future research can help inform important academic and policy debates.

Mandatory IFRS adoption and accounting comparability

The adoption of IFRS by many countries worldwide fuels the expectation that financial accounting might become more comparable across countries. This expectation is opposed to an alternative view that stresses the importance of incentives in shaping accounting information. We provide early evidence on this debate by investigating the effects of mandatory IFRS adoption on the comparability of financial accounting information around the world. Our results suggest that while mandatory adoption of IFRS increases the comparability of some prominent balance sheet line items across countries, it has no clear effect on the cross-country comparability of earnings attributes. To provide a rationale for these mixed findings, we investigate the IFRS measurement and disclosure compliance choices for a hand-collected sample of German and Italian firms. We find that predictable country-, region-, and firm-level incentives continue to shape the outcome of the financial reporting process and thus limit the crosssectional comparability of financial accounting information. Overall, our results suggest that the mandatory adoption of IFRS has a limited impact on accounting comparability and that accounting information continues to be shaped by both reporting standards and incentives.

Does Stock Price Synchronicity Reflect Information or Noise? The International Evidence

Prior research asserts that stock price synchronicity, defined as the R2 from asset pricing regressions, is a useful measure of the relative amount of firm-specific information reflected in stock prices. This paper investigates the validity of the information-based interpretation of stock price synchronicity in international markets. The results of our analyses provide little support for using stock price synchronicity as a measure of firm-specific information internationally. We develop an alternative measure of firm-specific information based on the percentage of zero return weeks, and repeat the analyses. The results suggest that the zero-return metric better captures differences in the amount of firm-specific information reflected in stock prices in international markets.

The effect of IFRS for SMEs on the financial reporting environment of private firms: an exploratory interview study

I investigate how the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) contributes to the development of private firm financial reporting. I interview a sample of leading accounting experts from 24 jurisdictions around the globe to understand the role of private firm financial reporting and financial transparency in their jurisdiction as well as the importance of IFRS for SMEs. I find significant variation across jurisdictions in my sample and document that IFRS for SMEs predominantly influenced private firm financial reporting and transparency by serving as a blueprint for national regulatory reforms. In some jurisdictions, IFRS for SMEs has also been adopted as an optional reporting framework. Direct firm-level adoption of IFRS for SMEs has been low in these jurisdictions with the exception of South Africa where it seems to be used relatively widely. Based on my response data, I suggest some potential rationales for my findings and discuss potential reasons for the observed cross-jurisdiction variation in private firm financial transparency and IFRS for SMEs adoption.

Who Benefits from Voluntary Disclosure? Evidence from Italian Market Microstructure Data

Using proprietary market microstructure data of Milan Stock Exchange and strategic plan presentations of Italian firms as disclosure events we explore the distributional effects of voluntary disclosure. We document systematic trading patterns around our disclosure events that on average generate two-month positive abnormal returns of 5.9% for investors trading large shares, while investors trading small shares experience negative abnormal returns of 5.3%. This economically large wealth distribution effect is triggered by large investors increasing their stakes in disclosing firms prior to news arrival irrespective of the nature of the news. Around news arrival, they sell their inventory to small investors in case of bad news. Our findings are particularly pronounced for smaller firms with event-related media coverage, and are consistent with sophisticated investors systematically exploiting attention-based trading behavior of unsophisticated investors triggered by the public dissemination of voluntary disclosure information in the Italian market.