Leonidas C. Doukakis

The persistence of earnings and earnings components after the adoption of IFRS

Purpose – This paper seeks to examine the persistence of earnings and earnings components after the adoption of International Financial Reporting Standards (IFRS).Design/methodology/approach – The study analyses two years before and two years after the adoption of IFRS in order to examine whether the adoption of IFRS materially affects the persistence, as well as the explanatory power of earnings and earnings components.Findings – The results confirm that disaggregating reported earnings into operating income, non‐operating income and extraordinary charge and credit, captures differences in the information content of the underlying events. Consequently, earnings disaggregation can be used to improve prediction of future profitability. The results suggest that IFRS measurement and reporting guidelines do not seem to improve the persistence of earnings and earnings components.Originality/value – This is the first study that examines whether the mandatory adoption of IFRS has an impact on the information con...

Do Goodwill Impairments by European Firms Provide Useful Information to Investors

Abstract In 2004, the IASB adopted the mandatory annual impairment-test-only of goodwill (IAS 36) instead of amortization of goodwill. We present and discuss the academic literature regarding the association between the goodwill impairment, under this new standard, and the revision of investors’ expectations about a company’s future cash flows. The academic literature highlights that, in some specific cases, IAS 36 may help investors to revise their expectations. More precisely, goodwill impairment seems relevant when: (a) there is strong asymmetry of information between managers and investors, (b) managers disclose detailed information in the notes regarding their own assumptions about future cash flows, and (c) managers do not manage earnings and provide reliable information to investors. In many cases, goodwill impairment is probably useless for investors because they are able to revise their expectations based on public information, or because they cannot trust the accounting numbers and additional information in the notes about the impairment test, which are provided by (undisciplined) managers. More research is, however, needed to understand in which circumstances impairment-test-only is more useful, as well in which cases it is less adequate. Our analysis relates to the current post-implementation review and should be useful to standard-setters. Before any modification, we argue that standard-setters should carefully consider the economic and the institutional contexts when issuing a new accounting standard.

The Effect of IFRS on Investment Decisions: European Evidence during Crisis and Non Crisis Economic Conditions

This study investigates the effect of a change in financial reporting regulation, the adoption of International Financial Reporting Standards (IFRS), on investment decisions in Europe. It further investigates whether capital investment decisions were influenced by the adverse macroeconomic conditions that took place during the crisis period in the Eurozone in years 2008-2010. Moreover, we control for the fact that the impact of the IFRS adoption may differ depending on a) the timing of the adoption i.e. voluntary versus mandatory adopters and b) the legal enforcement and corruption levels. We provide evidence that financial reporting practices of mandatory versus voluntary adopters cause significant differences in (a) the cost of equity capital, (b) the level of capital investments and (c) the return on invested capital. Our evidence suggest that mandatory adopters improved the level of capital investments and the return on invested capital in the post IFRS period and that the cost of equity capital was reduced. These evidence are more pronounced under the strong legal enforcement environment. For the group of voluntary adopters, we verify also a significant reduction in the cost of equity capital in the post IFRS adoption period. Regarding their investment practices, we document higher level of capital investment relative to mandatory adopters in both the pre and post IFRS period and even after controlling for the legal enforcement environment. We provide evidence that during the crisis period the cost of equity capital was increased for both groups. Nevertheless, our results suggest that both groups keep their investment policy unchanged by not reducing the level of capital investments.

The Informativeness of Micro and Macro Information During Economic Crisis and Non-Crisis Periods: Evidence from Europe

We investigate whether and how the information content of reported profitability and macroeconomic expectations changes when the state of the economy changes from non-crisis to crisis conditions. For this, we analyze data from sixteen European countries over the period 2005-2015. We find macroeconomic expectations to be useful in predicting future profitability only during non-crisis periods and mainly for firms facing elastic demand for their products and services and firms without sequential losses. Current profitability as well as its cash flow and accruals components are much more informative predictors of future profitability than macroeconomic expectations in both non-crisis and crisis periods. Market pricing tests suggest that macroeconomic expectations are not informative and thus not priced by market participants during crisis periods and support efficient pricing of current profitability under both non-crisis and crisis periods. However, it is the cash flow component of profitability that is efficiently priced under both economic conditions, while the accrual component of profitability is mispriced during crisis periods. Overall, we provide evidence that reported accounting information is much more useful to stock market investors than macroeconomic expectations in both non-crisis and crisis economic periods.