Paquita Y. Davis-Friday

Equity Valuation and Current Cost Disclosures: the Case of Mexico

This study uses an accounting-based valuation model to investigate the relation between the market value of publicly traded Mexican firms and their disclosures of price-level adjusted accounting information. The model is estimated on a sample of Mexican companies during 1987–1990, when annual inflation rates in Mexico decreased from 130 per cent to 20 per cent. The results indicate that general price level-adjusted and current cost disclosures explain a significant portion of the cross-sectional variation in the market-to-book ratios of the sample firms. Further, the explanatory power of holding gains is robust to decreases in the general level of inflation, which suggests that current cost and constant peso disclosures are relevant for determining firm value over a wide range of inflation rates. These results are particularly important now since the Mexican Institute of CPAs has proposed eliminating the measurement of holding gains in order to make Mexican financial statements more comparable to US and Canadian GAAP.

The Effect of Macroeconomic Changes on the Value Relevance of Accounting Information: The Case of Mexico and the 1995 Financial Crisis

Lev and Zarowin (1999) argue that the there has been a decline in the usefulness of financial information in the U.S. resulting from the inability of the current financial reporting system to contemporaneously capture changes in firms operations and economic conditions. As a result, it appears that accounting information in the U.S. is not as timely as it could be. Francis and Schipper (1999) suggest that the emphasis on objectivity and verifiability, which constrains the early recognition of certain future economic benefits, is one reason U.S. financial statements lack timeliness. The purpose of this research is to examine the value relevance of accounting information in a setting where changes in general price levels and specific asset prices are recognized periodically in the financial statements. Essentially, we investigate whether accounting is more value relevant when it includes more relevant information. Additionally, we examine whether the markets valuation of earnings and book values in this setting is affected by an economic shock since continuous improvement of historical financial data (i.e., restatement) should improve investors decisions (Lev and Zarowin 1999). Using a sample of Mexican firms traded on the Mexican Stock Exchange (Bolsa) during the period 1992-1997, we investigate the relation between the firms stock prices and their book values, earnings, and cash flows, taking into account the effect of the 1995 Mexican financial crisis. In pooled cross-sectional tests, we find that book values retain their significance and explanatory power during the crisis while earnings do not. Additionally, the value relevance of book values does not significantly change during the crisis period while the value relevance and the explanatory power of earnings decline during the crisis period. The decline in the valuation of earnings and its explanatory power, however, is attributable to the presence of negative earnings. We attribute the lack of significant changes in the value relevance and explanatory power of book values to the use of replacement costs and price level accounting in Mexico. Finally, in additional analyses we find that the incremental value relevance of two components of Mexican earnings, monetary gains and losses and exchange gains and losses, does not change during the crisis implying that these features of Mexican accounting contribute to its continued relevance during the crisis.

M&A Decisions and US Firms’ Voluntary Adoption of Clawback Provisions in Executive Compensation Contracts: M&A DECISIONS AND CLAWBACK PROVISIONS

We examine whether US firms’ M&A decisions influence the likelihood of voluntary adoption of clawback provisions in executive compensation contracts and whether clawback adoption improves subsequent M&A decisions. Because prior research finds that poor M&A decisions are associated with future earnings restatements, we predict that clawback adoption is more likely after these transactions. We further conjecture that M&A decisions will improve after clawback adoption, as its presence reduces executives’ willingness to manipulate post�?acquisition earnings. Consistent with our expectations, we find that (1) firms with more negative M&A announcement returns are more likely to adopt clawbacks; (2) firms that acquire targets with relatively poor accounting quality are more likely to adopt clawbacks; (3) clawbacks improve investor perception of M&A quality; and (4) executives are more responsive to the market when completing M&A deals if their compensation contracts include clawbacks. These results suggest that boards take a pro�?active approach and consider factors that may lead to restatements when adopting clawbacks. Our results have implications for US policymakers, as the Dodd�?Frank Act of 2010 requires mandatory adoption of clawbacks. Our results also suggest that non�?US firms can reduce managerial incentives to manipulate post�?takeover earnings by using clawbacks.

An analysis of the implications of the IASC comparability project for IAS adopters in the US

Abstract A group of foreign issuers adopted IAS for reporting in the US capital market at about the time that the IASC Comparability Project commenced. This study examines the IAS-US GAAP adjustments for net income and equity reported in their SEC Form 20-F reconciliations with special emphasis on the degree of flexibility of the related IAS. We then consider the reporting implications of these IAS-US GAAP differences before and after the IASC Comparability Project. The results indicate that the adjustments are associated with flexibility in IAS and that the Project reduced the amount of flexibility in IAS provisions. This should prove of interest to standard setters at this time when a set of international accounting standards is being considered for global acceptability.