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The post-adoption effects of the implementation of International Financial Reporting Standards in Greece
Journal of International Accounting, Auditing and Taxation 19 (2010) 55–65
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Journal of International Accounting, Auditing and Taxation
The post-adoption effects of the implementation of International Financial Reporting Standards in Greece George Iatridis a,∗ , Sotiris Rouvolis b a b
University of Thessaly, Department of Economics, 43 Korai street, 38 333 Volos, Greece Eurovoli AEED, Greece
a r t i c l e
i n f o
Keywords: International Financial Reporting Standards Greek GAAP Financial statement effects Voluntary IFRS disclosures Earnings management Value relevance
a b s t r a c t This study investigates the effects of the transition from Greek GAAP to IFRS on the financial results of Greek listed firms. The study also examines the factors associated with the provision of voluntary IFRS disclosures before the official period of adoption, the degree of earnings management under IFRS, and the value relevance of IFRS-based accounting numbers. The findings show that the implementation of IFRS has introduced volatility in key income statement and balance sheet measures of Greek firms. Although the effects of IFRS adoption in the first year of adoption appear to be unfavourable, perhaps due to the IFRS transition costs, firms’ financial measures improved significantly in the subsequent period. This result explains why in the official adoption period there is some evidence of earnings management, which is reduced in the subsequent period. The factors associated with providing voluntary IFRS disclosures before the official period of adoption include firm size and debt and equity financing needs. The study provides evidence that IFRS adoption leads to more value relevant accounting measures. © 2009 Elsevier Inc. All rights reserved.
1. Introduction The globalisation of international financial markets has increased the need for world-wide comparable accounting standards and regulation (Zarzeski, 1996). The required implementation of International Financial Reporting Standards (IFRS) by listed firms that operate in member-states of the European Union, as of January 1, 2005, should assist investors in their decision-making and enhance stock market efficiency (Botosan & Plumlee, 2002; Healy & Palepu, 2001; Leuz, 2003). At the same time, the world-wide acceptance of IFRS may indicate their high quality (Tendeloo & Vanstraelen, 2005). Compliance with IFRS is compulsory for listed firms in Greece. Firms listed on the Athens Stock Exchange have been using IFRS since January 2005. Firms that are not listed use Greek GAAP. The transition from Greek GAAP to international accounting standards may have an effect on firms’ financial results. This outcome may motivate firms to develop adjustment mechanisms to overcome potential adverse consequences of IFRS implementation (Tarca, 2004) and could lead to behaviour aimed at improving certain accounting variables, such as profitability and compensation, avoiding debt covenant violation, and reinforcing firm financial position (Weil, Fung, Graham, & Fagotto, 2006). This study examines the impact of the adoption of IFRS on the financial performance of firms listed on the Athens Stock Exchange. This study also seeks to identify the financial attributes of firms that voluntarily abided by the requirements of IFRS before the mandated adoption date. Finally, the paper investigates whether IFRS adoption reduces the level of earnings management and enhances the value relevance of IFRS-based accounting numbers.
∗ Corresponding author. Tel.: +30 24210 44810; fax: +30 24210 74772. E-mail address: [email protected] (G. Iatridis). 1061-9518/$ – see front matter © 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.intaccaudtax.2009.12.004
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The study examines the periods before and after the official adoption of IFRS. The focus of the study is on firms that adopted IFRS after 2005 (mandatory IFRS adopters) and on firms that provided voluntary IFRS disclosures before the official implementation of IFRS (voluntary IFRS disclosers). Before 2005, firms had to abide by the Greek GAAP. There was no option to voluntarily adopt IFRS before 2005. Thus, voluntary IFRS disclosers are firms that prior to 2005 used the Greek GAAP and simultaneously provided disclosures on IFRS in a voluntary manner. The study shows that in the year of first adoption, 2005, firms tended to exhibit lower key accounting measures, such as profitability, liquidity and growth, most likely due to the fair value orientation of IFRS and the associated transition costs. In the subsequent year, firms displayed improved financial measures. The provision of voluntary IFRS disclosures before the official adoption period is associated with large size and strong debt and equity financing needs. The scope for earnings management is significantly reduced in the post-adoption period while in their first adoption year, firms tended to manage their accounting numbers in an effort to mitigate adverse results from the adoption of IFRS. The findings also show that the use of IFRS appeared to lead to accounting measures with higher value relevancy. The remainder of the study is organised as follows. Section 2 presents the background of the study. Section 3 discusses the research hypotheses. Section 4 describes the data while Section 5 discusses the results, and Section 6 presents the conclusions. 2. Background Studies have shown that the factors that influence the decision to provide voluntary IFRS-based disclosures include size, profitability and leverage, which are larger for voluntary IFRS disclosers (Dumontier & Raffournier, 1998; Glaum, 2000; Tarca, 2004), and international exposure and dispersion of ownership (Gassen & Sellhorn, 2006). Prior research has also shown that the use of IFRS enhances comparability and quality of accounting information, and leads to accounting harmonisation, investment growth and lower cost of capital (Barth, Landsman, & Lang 2005). Renders and Gaeremynck (2007) report that IFRS implementation is accompanied by less earnings management. The transition to IFRS presents firms with difficulties including technical differences, the cost of change and adjustment, the time factor, and the insufficient experience and knowledge (Brown & Tarca, 2005; Gassen & Sellhorn, 2006). In addition, the fair value orientation of IFRS is likely to introduce volatility in book values and reported earnings (Andrews, 2005; Barth et al., 2005; Goodwin & Ahmed, 2006; Hung & Subramanyam, 2007), and consequently, distort the financial profile of adopting firms. These considerations may influence the financial behaviours of firms and may motivate them to redefine their strategies and decision-making processes in order to mitigate the adverse impact of adoption on their accounting numbers (Jermakowicz & Gornik-Tomaszewski, 2006). Financial reporting under IFRS appears to provide more information about company performance (Adams, Weetman, & Gray, 1993). Countries with strong investor-protection mechanisms and regulation in place are likely to experience lower IFRS transition costs (Capkun, Cazavan-Jeny, Jeanjean, & Weiss, 2007; Lantto, 2005; Renders & Gaeremynck, 2007). Hence, the institutional background of a country may influence the effects of IFRS adoption. The main differences between Greek GAAP and IFRS (see Grant Thornton, 2007) relate to the presentation of financial results, the readjustment of value of real estates, the accounting treatment and depreciation of certain tangible and intangible fixed assets, research and development expenditure and capitalisation criteria, pricing and evaluation of securities and financial instruments, deferred taxation, distinction between operating and financial leasing, post-employment employee benefits, provisions, consolidation criteria and methods, and accounting for goodwill and goodwill amortisation. 3. Research hypotheses 3.1. IFRS transition and financial statement effects The study examines the impact of the transition from Greek GAAP to IFRS on the financial performance of Greek listed firms. As noted in Section 2, the implementation of IFRS would be expected to have a favourable impact on firms’ financial performance and financial reporting quality. Given that the differences between the two financial reporting regimes may be substantial in terms of measurement, recognition and disclosure, the impact of IFRS adoption is likely to be significant. Also, the fair value orientation of IFRS would be expected to introduce volatility in the IFRS-based accounting numbers. The hypothesis that is tested is as follows: H1 .
The financial results reported under the Greek GAAP are significantly different than those reported under IFRS.
To test H1 , the study compares the financial results of firms that adopted IFRS in 2005 with the 2004 IFRS comparative figures that were previously Greek GAAP-based and that accompany the 2005 IFRS disclosures. The study also compares the IFRS-based financial results reported in 2005 with those reported in the post-official adoption period, 2006. This set of analyses investigates how firms have been affected by IFRS and how they have adjusted over time. The logistic regression models used are as follows. RRi,t = a0 + a1 Sizei,t + a2 Dividendi,t + a3 Growthi,t + a4 Profitabilityi,t + a5 Liquidityi,t + a6 Leveragei,t + ei,t
(1)
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PAi,t = a0 + a1 Sizei,t + a2 Dividendi,t + a3 Growthi,t + a4 Profitabilityi,t + a5 Liquidityi,t + a6 Leveragei,t + ei,t
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(2)
where RRi,t is a dummy variable indicating the regulatory regime. RRi,t = 1 for financial numbers reported under IFRS and RRi,t = 0 for financial numbers reported under the Greek GAAP; PAi,t is a dummy variable indicating the post-adoption effects. PAi,t = 1 for financial numbers reported under IFRS in 2006 and PAi,tt = 0 for financial numbers reported under IFRS in 2005; Profitabilityi,t , Growthi,t , Leveragei,t , Liquidityi,t , Sizei,t , and Dividendi,t are proxies used to control for firm profitability, growth, leverage, liquidity, size and dividend respectively (see Appendix B); and ei,t is the error term. 3.2. Voluntary IFRS disclosure in the pre-official adoption period The adoption of IFRS enhances transparency, disclosure and comparability (Biddle & Saudagaran, 1989). The implementation of IFRS leads to lower cost of capital and transaction costs, higher market value and better reputation (Leuz & Verrecchia, 2000). The higher disclosure requirements and financial reporting quality that stem from adopting IFRS should reduce information asymmetry and give a positive signal to investors (Tarca, 2004). Thus, in the period prior to the official IFRS adoption, firms may be motivated to provide voluntary IFRS-based accounting disclosures in order to impress market participants and improve their financial profile and/or obtain debt and equity capital (see El-Gazzar, Finn, & Jacob, 1999). In Greece, there was no option of adopting IFRS before the official adoption date. Greek GAAP was in force prior to 2005. Firms, however, could provide voluntary IFRS disclosures in the pre-adoption period. This study compares the financial attributes of firms that voluntarily provided IFRS disclosures to those firms that did not provide voluntary IFRS disclosures in the pre-adoption period of 2004 (see also Iatridis, 2008a). The hypothesis that is tested is: H2 . Firms that provided voluntary IFRS disclosures are significantly different than firms that did not provide voluntary IFRS disclosures. The study uses the following regression model: VDi,t = a0 + a1 Sizei,t + a2 Dividendi,t + a3 Growthi,t + a4 Profitabilityi,t + a5 Liquidityi,t + a6 Leveragei,t +a7 CSi,t + a8 DEBTi,t + ei,t
(3)
where VDi,t is a dummy variable indicating voluntary IFRS disclosure. VDi,t = 1 for voluntary IFRS disclosers and VDi,t = 0 for non-voluntary IFRS disclosers; CSi,t is a dummy variable indicating the equity financing needs of firms. CSi,t = 1 for firms that raised capital during the period under investigation and CSi,t = 0 otherwise; and DEBTi,t is a dummy variable indicating the debt financing needs of firms. DEBTi,t = 1 for firms that issued debt during the period under investigation and DEBTi,t = 0 otherwise. All other variables are defined as in Eqs. (1) and (2). 3.3. IFRS and earnings management The study investigates whether the transition to IFRS reduces earnings management. IFRS require firms to provide informative accounting disclosures and enhance the investor-protection mechanisms that are in place, thereby improving the quality of financial reporting. Hence, the adoption of IFRS would be expected to lead to lower opportunism and earnings management (Leuz, 2003). The hypothesis tested is as follows: H3 .
IFRS adoption reduces earnings management.
The first earnings management test involves examining the volatility of the change in net profit scaled by total assets, NP, and the volatility of the change in net profit, NP, to the change in operating cash flows, CF. Less volatile figures provide evidence of earnings management. The investigation focuses on normal adopters and compares the accounting numbers reported in the official adoption period with those reported in the pre-official adoption period. The second earnings management test examines the association between accruals and cash flows. The study first evaluates the Pearson correlation between accruals and cash flows separately in the pre-official, official and post-official adoption periods. A negative correlation is an indication of earnings management, since firms tend to influence their accruals upwards when cash flows appear to be lower (Land & Lang, 2002; Myers & Skinner, 2002). The study then uses an Ordinary Least Square (OLS) regression to investigate the association between accruals and cash flows, profitability, leverage and size. This analysis focuses on normal adopters using accounting numbers based on the Greek GAAP for the pre-official adoption period and accounting numbers based on IFRS for the official and post-official adoption periods, respectively. The regression model that is used is as follows (see Tendeloo & Vanstraelen, 2005; Iatridis, 2008b): ACCRi,t = a0 + a1 FRSi,t + a2 FRSOCFi,t + a3 FRSLNMVi,t + a4 FRSOPMi,t + a5 FRSTLSFUi,t + ei,t
(4)
where ACCRi,t is accruals scaled by total assets. As in Barth, Cram, and Nelson (2001), Barth et al. (2005) and Dechow and Ge (2006), accruals equal earnings less cash flows from operating activities; FRSi,t is a dummy variable indicating the financial reporting system in use. FRSi,t = 1 for firms reporting under IFRS in 2005 and FRSi,t = 0 for firms reporting under the Greek GAAP in 2004; FRSOCFi,t is a variable used to examine the impact of IFRS on the association between accruals and cash flows. It is the multiplication of FRS and operating cash flows (OCF); FRSLNMVi,t is a variable used to examine the impact of IFRS on
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the association between accruals and size. It is the multiplication of FRS and the natural logarithm of market value (LNMV); FRSOPMi,t is a variable used to examine the impact of IFRS on the association between accruals and profitability. It is the multiplication of FRS and operating profit margin (OPM); FRSTLSFUi,t is a variable used to examine the impact of IFRS on the association between accruals and leverage. It is the multiplication of FRS and total liabilities to shareholders’ funds (TLSFU); and ei,t is the error term. The third earnings management test examines whether firms attempt to report small positive profits rather than losses or influence the timing of losses (see Burgstahler & Dichev, 1997; Leuz, Nanda, & Wysocki, 2003). Studies suggest that in the presence of earnings management, large losses tend not to be frequent (Ball, Kothari, & Robin, 2000; Lang, Raedy, & Wilson, 2005). The analysis focuses on normal adopters and compares the accounting numbers reported under IFRS with those reported under the Greek GAAP, using the logit model below (see also Iatridis, 2008b): RRi,t = a0 + a1 Profitabilityi,t + a2 Growthi,t + a3 Leveragei,t + a4 Liquidityi,t + a5 Sizei,t + a6 Dividendi,t + a7 SPi,t + a8 LLi,t + ei,t
(5)
where SPi,t is a dummy variable indicating a measure of small positive profits. SPi,t = 1 if net profit scaled by total assets is between 0 and 0.01 (see Lang, Lins, & Miller, 2003; Barth et al., 2005) and SPi,t = 0 otherwise; and LLi,t is a dummy variable indicating a measure of timely loss recognition. LLi,t = 1 if net profit scaled by total assets is less than −0.20 (see Lang, Lins, et al., 2003; Lang, Raedy, et al., 2005) and LLi,t = 0 otherwise. All other variables are defined as in Eqs. (1) and (2). 3.4. Value relevance and IFRS Prior research indicates that the IFRS-based accounting numbers tend to exhibit higher quality and value relevance (Barth, Cram, et al., 2001; Barth, Landsman, et al., 2005). To determine if that is the case in Greece, the following hypothesis is tested: H4 .
Accounting measures reported under IFRS exhibit higher value relevance.
The first value relevance test is an OLS regression of share price on book value per share and net profit per share. The analysis focuses on normal adopters and compares their IFRS-based financial numbers reported in 2005 with their Greek GAAP-based financial numbers reported in 2004. A similar comparison is then drawn between 2005 and 2006. The model is as follows (see Barth et al., 2005; Hung & Subramanyam, 2007; Iatridis, 2008b): Pi,t = a0 + a1 BVPSi,t + a2 NPPSi,t + ei,t
(6)
where Pi,t is total market value of equity at year-end deflated by number of shares outstanding; BVPSi,t is total book value of equity deflated by number of shares outstanding; NPPSi,t is total net profit deflated by number of shares outstanding; and ei,t is the error term. The second value relevance test is an OLS regression of profits on stock returns using the same sample considerations as above. High quality profits would be expected to exhibit higher association with stock returns. The model is presented below (see Barth et al., 2005; Lang et al., 2005; Iatridis, 2008b): NPPi,t = a0 + a1 ARi,t + ei,t
(7)
where NPPi,t is net profit divided by beginning of year share price; ARi,t is the annual stock return at year-end. ARi,t is calculated as follows: (Pit + Dit − Pit−1 /Pit−1 ), where Pit is the price of security i at the end of period t, Dit is the dividend paid for security i in period t and Dit is the price of security i at the end of period t − 1; and ei,t is the error term. The third value relevance test examines the association between IFRS-based book value and net profit figures and stock returns. The study focuses on normal adopters using financial measures reported in the official adoption period. The OLS regression model used is as follows (see Hung & Subramanyam, 2007; Iatridis, 2008b): ARi,t = a0 + a1 BVPSi,t + a2 BVCHAi,t + a3 NPPSi,t + a4 NPCHAi,t + ei,t
(8)
where ARi,t is the annual stock return at year-end; BVPSi,t is total book value of equity under IFRS deflated by number of shares outstanding; BVCHAi,t is a variable indicating the change in firm book value following the transition from the Greek GAAP to IFRS. BVCHAi,t is calculated as follows: [total book value of equity under IFRS (using 2005 financial measures) − total book value of equity under the Greek GAAP (using 2004 financial measures)] divided by total book value of equity under the Greek GAAP (using 2004 financial measures); NPPSi,t is net profit under IFRS deflated by number of shares outstanding; NPCHAi,t is a variable indicating the change in firm net profits following the transition from the Greek GAAP to IFRS. NPCHAi,t is calculated as follows: [net profit under IFRS (using 2005 financial measures) − net profit under the Greek GAAP (using 2004 financial measures)] divided by net profit under the Greek GAAP (using 2004 financial measures); and ei,t is the error term. 4. Data and empirical methods The sample consists of 254 firms that are listed on the Athens Stock Exchange. The study excluded banks, insurance, pension and brokerage firms since their accounting measures are not always comparable with those of industrial firms.
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Table 1 Descriptive statistics. Panel A
Panel B
Panel C
Pre-official adoption period, Greek GAAP: 2004
Official adoption period, IFRS: 2005
Pair-wise t-tests for equality of means, Greek GAAP vs. IFRS
Pair-wise F-test for equality of variances, Greek GAAP vs. IFRS
Mean
Std deviation
Mean
Std deviation
2004 vs. 2005
2004 vs. 2005
−0.4544 2.004 899 0.0432 1.5032 0.2416 0.4394 3.0944 0.0364 0.2513
12.7292 15.332 4.407 0.2767 5.4518 3.6756 2.0512 4.9936 0.1878 0.4348
−0.6618 2.944 345 −0.1719 1.1978 −1.0141 0.1643 3.45 0.0287 0.1
13.43 22.574 6.502 2.4367 3.276 6.5695 0.8386 5.1033 0.1673 0.3008
0.0742 16.874 4.4241
0.212 20.0692 5.3097
0.1042 21.1119 1.6555
0.2879 28.6238 4.7223
6.0609
8.503
1.4251
Profitability PLOWB NPM OPM EPS ROCE
−0.4679 −0.3714 −0.3144 0.2857 0.1159
9.941 6.8918 6.8664 1.2526 0.4156
2.2307 −0.1049 −0.0494 0.1637 −0.1028
16.045 2.0176 2.0723 0.8369 3.1125
Liquidity OCF CUR QUI CFM WCR
4.947 2.886 1.9846 0.0296 2.2721
18.448 7.7602 5.826 3.1262 13.3273
4.134 2.0598 1.5888 −0.4079 2.3313
17.974 2.5577 2.2348 4.6567 14.1885
Leverage DEBT TLSFU CGEAR INTCOV DEBTE DSFU
2.843 0.6302 0.4537 12.2979 0.2278 0.2582
3.5658 2.4104 0.3245 49.1163 0.4252 0.3534
3.0986 1.325 0.7138 10.7945 1.2402 0.4687
5.4077 1.8246 1.0972 41.8915 1.8934 1.0747
Test variables NP/OCF ACCR NPP BVCHA BVPS NPCHA NPPS PRICE LL SP Dividend DIVSH DIVYI DIVCOV Growth MVBV
* ** ***
*** *
***
* *** ***
***
8.0718 *
***
*
*
** **
*
***
***
** *
***
***
**
***
Statistically significant factor at 10%. Statistically significant factor at 5%. Statistically significant factor at 1%.
Accounting and financial data were collected from DataStream. Information about firms’ accounting choices and policies was collected from the Financial Times Annual Report Service. The empirical analysis concentrates on the official adoption period of IFRS, 2005, as well as on the pre- and post-official adoption periods, 2004 and 2006, respectively. Appendix A presents the industrial sector structure of the sample firms. Appendix B shows the explanatory variables that are employed in the empirical analysis. The research hypotheses are tested using the binary logistic regression analysis and the OLS regression analysis. The logistic regression is useful in analysing categorical data, where the dependent variable is dichotomous and takes only two values, 0 and 1. The parameters of the logistic regression are estimated based on the maximum likelihood method, while the hypothesis testing is based on the Wald statistic. The study accounts for heteroscedasticity, autocorrelation, departure from normality and multicollinearity, where appropriate. 5. Results 5.1. Descriptive statistics The descriptive statistics in Table 1 present the comparison between financial numbers of normal adopters reported under Greek GAAP and IFRS. Panel B shows that under IFRS, firms exhibit lower profitability figures (NPCHA and NPPS), while they
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Table 2 Financial statement effects of IFRS implementation. Panel A IFRS vs. Greek GAAP, 2005 vs. 2004-IFRS adjusted
Panel B IFRS regime, 2005 vs. 2006
Variables
Coefficients
Variables
Coefficients
DSFU QUI NPM MVBV NAVSH Constant
0.0160** (0.008) −2.6270* (1.506) −0.3800* (0.202) 0.093*** (0.037) 0.2780* (0.162) −1.722 (1.958)
MVBV CGEAR TLSFU QUI EPS Constant
2.9819** (1.39) 1.6320** (0.689) 1.0880*** (0.24) −1.8109*** (0.678) 0.19* (0.133) −7.096 (1.294)
Model 2 % correctly classified Sample size
16.274** 88.135*** N0 = 254, N1 = 254
153.855*** 54.752*** N0 = 254, N1 = 254
All the explanatory variables were entered/removed from the logistic regression using a step-wise procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used to test the null hypothesis that each coefficient is zero. * Statistical significance at 10% level (two-tailed). ** Statistical significance at 5% level (two-tailed). *** Statistical significance at the 1% level (two-tailed).
retain more (PLOWB) for reinvestment and other purposes, e.g. IFRS transition. The new financial reporting regime may influence firms’ profitability due to the fair value orientation, which is likely to introduce volatility in reported figures. This effect is evident in Panel C, which shows that the volatility of profitability measures (PLOWB and ROCE) tends to rise in 2005. Panel B also shows that under IFRS, firms display small profits (SP) less frequently, possibly indicating less earnings management. In 2005, firms also report higher leverage measures (DEBT, CGEAR, DEBTE and DSFU). The higher leverage led to lower liquidity (CUR) and dividend cover (DIVCOV). Firms’ profitability may be lower in 2005 because of the higher leverage and the resulting higher interest expenses that are reported for that year. Panel C indicates that under IFRS, firms display more volatile dividend (DIVSH and DIVYI), leverage (DEBT, CGEAR, DEBTE and DSFU) and liquidity (CFM and WCR) measures, while they exhibit lower volatility in growth (MVBV). Despite the lower profitability and the higher volatility in financial measures that are generally reported under IFRS, the interest coverage ratio (INTCOV) displays lower volatility in 2005. 5.2. IFRS transition and financial statement effects Table 2 compares the 2005 IFRS-based financial numbers with the 2004 IFRS-adjusted comparative financial numbers and investigates the impact of IFRS implementation on firm financial performance. The findings show that the 2005 IFRS-based numbers are significantly different than the 2004 Greek GAAP-IFRS-adjusted numbers. Hence, H1 holds. Panel A shows that under IFRS, firms display higher leverage (DSFU). The higher financial reporting quality of IFRS would enhance the credibility of reported financial numbers and, consequently, reinforce the creditability of firms, thereby leading to higher leverage. The higher leverage and the resulting financial obligations as well as the IFRS transition and adjustment costs are likely to negatively affect firm profitability (NPM) and liquidity (QUI), which were generally lower in 2005. The fair value orientation of IFRS also led to higher net asset value per share (NAVSH) and market to book value (MVBV). Panel B compares the IFRS-based financial numbers reported in 2006 with those reported in 2005, and presents firms’ IFRS adjustment process over time. The results show that firms’ financial numbers improved in 2006. In 2006, firms continue to display higher leverage (CGEAR and TLSFU) and lower liquidity (QUI). However, the negative coefficient of liquidity obtained for 2006 appears to be smaller compared to 2005. Panel B also shows that, in 2006, firms exhibit higher profitability (EPS) and growth (MVBV) measures. This result would indicate that in 2006, firms have overcome some of the difficulties and costs of IFRS transition that they encountered in 2005 and started to reap some benefits of IFRS in terms of comparability, disclosure and financial reporting quality. 5.3. Voluntary IFRS disclosure in the pre-official adoption period Table 3 shows that firms that provided voluntary IFRS disclosures in the pre-official adoption period displayed higher profitability (EPS and NPM) and size (NAVSH). Voluntary IFRS disclosers also exhibited higher leverage (DEBT) and equity financing needs (CS). It appears that in their effort to attract capital in stock and money markets, firms may have provided voluntary IFRS disclosures in order to give lenders and investors assurance about the credibility and quality of the reported financial numbers as well as evidence of superior and high quality managerial ability. Firms may also have provided voluntary IFRS disclosures because they were large and visible in the stock market, and wanted to influence investors’ perceptions about their financial performance and prospects. Alternatively, it may be that firms were profitable and exhibited an overall favourable financial profile, so they were inclined to provide voluntary accounting disclosures, including IFRS-related accounting information. The findings indicate, therefore, that the voluntary IFRS disclosure decision is related to the need to raise funds. The results also indicate that voluntary IFRS disclosers are significantly different than non-voluntary IFRS disclosers.
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Table 3 Voluntary IFRS disclosure. Variables
Coefficients
Voluntary vs. non-voluntary disclosers EPS NPM NAVSH DEBT CS Constant
1.0334** (0.447) 6.4739* (3.494) 0.2222** (0.103) 0.3354** (0.134) 3.9966* (2.392) −7.032 (1.567)
Model 2 % correctly classified Sample size
25.736*** 97.058*** N0 = 206, N1 = 48
All the explanatory variables were entered/removed from the logistic regression using a step-wise procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used to test the null hypothesis that each coefficient is zero. * Statistical significance at 10% level (two-tailed). ** Statistical significance at the 5% level (two-tailed). *** Statistical significance at the 1% level (two-tailed).
5.4. IFRS and earnings management The findings presented in Table 4 indicate that, in general, the implementation of IFRS has reduced the level of earnings management as compared to what occurred under Greek GAAP. Therefore, H3 holds. The first earnings management test in Panel A shows that under IFRS, firms exhibit higher volatility in the change in net profit (NP) and in the change in net profit to the change in operating cash flows (NP/CF). This result suggests that the reported profitability figures are less smooth under IFRS than under Greek GAAP. The second earnings management test in Panel B shows that the correlation between accruals and cash flows in 2004 is negative, suggesting that under Greek GAAP there was greater earnings management. Panel B indicates, however, that earnings management still occurred in 2005 under IFRS, where the correlation coefficient is also negative and a bit larger (−0.527 in 2005 as opposed to −0.517 in 2004). This result indicates that in the first year of IFRS implementation, firms may Table 4 Earnings management: Greek GAAP vs. IFRS.
Panel A earnings volatility Volatility of NP Volatility of NP/CF
Greek GAAP: 2004 Std deviation
IFRS: 2005 Std deviation
F-Test
3.6717 12.7292
6.3894 13.43
**
Greek GAAP: 2004 Correlation coefficient Panel B correlation between accruals and cash flows Correlation of ACCR and OCF −0.517 Greek GAAP vs. IFRS, 2004 vs. 2005 Variables
Coefficients
0.886 N0 = 254, N1 = 254
Greek GAAP vs. IFRS: 2004 vs. 2005 Variables
Coefficients
Panel D Logistic regression extract: small profits and large losses SP −1.022** (0.345) LL 2.529* (1.488) * **
IFRS: 2005 Correlation coefficient
IFRS: 2006 Correlation coefficient
Significance
−0.527
−0.344
**
IFRS regime, 2005 vs. 2006
Panel C OLS regression of accruals on firm financial measures FRSOCF −1.05** (0.049) FRSLNMV −0.003** (0.001) FRSOPM 0.414** (0.039) FRSTLSFU −0.214** (0.034) Constant 0.026 (0.018) R2 adj. Sample size
**
Statistical significance at 10% level (two-tailed). Statistical significance at 10% level (two-tailed).
Variables
Coefficients
FRSOCF FRSLNMV FRSOPM Constant
−0.976** (0.044) −0.001* (0.001) 0.126** (0.03) 0.009 (0.017) 0.880 N0 = 254, N1 = 254
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Table 5 Value relevance: Greek GAAP vs. IFRS. Greek GAAP: 2004 Variables
IFRS: 2005 Coefficients
IFRS: 2006
Variables
Coefficients
Panel A OLS regression of price on book value per share and net profit per share NPPS 3.064** (0.254) NPPS 3.053** (0.173) BVPS 0.636** (0.183) BVPS 0.328** (0.068) Constant 1.957 (0.232) Constant 2.064 (0.264) R2 adj. Sample size
0.5669 N = 254 IFRS: 2005 Coefficients
Variables
Panel B OLS regression of net profit deflated by price on stock returns AR AR 2995.419** (693.553) Constant 1381.831 (324.704) Constant R2 adj. Sample size
0.073 N = 254
* **
3.231** (0.682) 1.426** (0.124) 4.072 (0.560) 0.811 N = 254
Coefficients
Variables
Coefficients
3221.090** (1081.532) 1241.2630 (551.765)
AR Constant
3881.493* (2218.499) 39.6690 (8.444)
0.0873 N = 254
0.0889 N = 254 IFRS: 2006
Coefficients
Panel C OLS regression of stock returns on book value and net profit change BVPS 0.047 (0.862) BVCHA 0.305** (0.030) NPPS 0.032 (0.048) NPCHA 0.001 (0.006) Constant 0.502 (0.053) R2 adj. Sample size
NPPS BVPS Constant
IFRS: 2006
IFRS: 2005 Variables
Coefficients
0.635 N = 254
Greek GAAP: 2004 Variables
Variables
0.298 N = 254
Variables
Coefficients
BVPS BVCHA NPPS NPCHA Constant
0.018 (0.013) 0.25* (0.136) 0.007 (0.005) 1.592** (0.554) 0.016 (0.098) 0.225 N = 254
Statistical significance at 10% level (two-tailed). Statistical significance at the 1% level (two-tailed).
have used earnings management techniques to improve their financial numbers and/or smooth potential adverse adoption consequences. In 2006, firms are in the second year of IFRS implementation and are more familiar with the international accounting requirements. Panel B shows that in 2006, the correlation between accruals and cash flows is still negative, but the correlation coefficient is much smaller at −0.344. It is noteworthy that in all the three periods, the correlation coefficient is negative, but very close to zero. The second earnings management test in Panel C is the OLS regression of accruals on cash flows, profitability, leverage and size. The findings show that the association between accruals and cash flows (FRSOCF) is significantly negative, implying that in 2005, firms with low cash flows tended to use accrual-increasing accounting policies or earnings management. This association remains negative in 2006 but appears to be smaller and closer to zero, as expressed by the respective regression coefficient. The results are similar to those reported above in Panel B. The association between accruals and size (FRSLNMV) is negative for both 2005 and 2006, suggesting that large firms were not inclined to adopt accrual-increasing accounting policies. Likewise, the association between accruals and leverage (FRSTLSFU) is negative, indicating that, under IFRS, firms with high leverage tend not to increase their accruals. The association between accruals and profitability (FRSOPM) is positive for both years, implying that firms with low profitability would tend not to adopt accrual-increasing accounting policies. The third earnings management test in Panel D investigates whether firms manage their accounting numbers to report small profits (SP) rather than losses, and/or to delay the recognition of large losses (LL) in the income statement. The findings indicate that under IFRS, SP is significantly negative, implying that firms tend to report small profits less frequently. In addition, under IFRS, firms exhibit a significantly positive coefficient for LL, indicating that they do recognise large losses when they occur. 5.5. Value relevance and IFRS Table 5 shows that the IFRS-based accounting numbers exhibit higher value relevance than these determined under Greek GAAP, suggesting that H4 holds. The first value relevance test presented in Panel A shows that the coefficients of net profit per share (NPPS) and book value of equity per share (BVPS) are significantly positive and larger for the official period of adoption. IFRS-based financial numbers also have higher R2 , indicating that they are more value relevant than those reported under Greek GAAP. Similar results for the second value relevance test are shown in Panel B, where the annual stock returns (AR) have a significantly positive and larger coefficient as well as higher R2 under IFRS. The figures exhibit even higher
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values in 2006 compared to 2005 and 2004. The results of the third value relevance test, presented in Panel C, show that the change in firm book value (BVCHA) following the transition to IFRS is significantly positive. This result can be explained by the fair value orientation of IFRS. The change in net profits (NPCHA), however, appears to be positive but not statistically significant. In the second year of IFRS implementation, 2006, both the change in firm book value and the change in net profits display a statistically significant positive coefficient. The findings show that throughout the period under investigation, the IFRS-based accounting measures provide evidence of value relevancy, which becomes more apparent in the second year of IFRS implementation. 6. Conclusions This study investigates the effects of the change from Greek GAAP to IFRS on the financial results of firms listed on the Athens Stock Exchange. The findings show that the IFRS implementation effects in the official adoption period, 2005, were unfavourable in terms of profitability and liquidity. In 2006, firms reported better financial performance measures in terms of profitability and future growth prospects, perhaps because they became more familiar with and adjusted to IFRS. The study shows that a number of firms provided voluntary IFRS disclosures before the official adoption period. The factors associated with voluntarily providing IFRS-based accounting information include large size and strong debt and equity financing needs. In their search for capital, voluntary IFRS disclosers may have believed they were providing lenders and investors evidence of credibility and quality in their reported financial numbers. The study also finds that in the official adoption period, there is some evidence of earnings management. It is possible that in light of significant IFRS transition costs, firms may manage their accounting numbers in order to mitigate potential adverse effects of IFRS adoption. In the subsequent period, however, the level of earnings management is significantly reduced. Finally, the implementation of IFRS provides more value relevant accounting measures in the second year of adoption compared to the official adoption year. In the second year of adoption, the nature and requirements of IFRS would be clearer, the process of implementing IFRS would be more familiar to users, while the impact of IFRS on firm accounting numbers would be displayed in a more evident and visible manner. This study examines how firms that operate in a non-common-law country, Greece, which is stakeholder-based, respond to IFRS adoption as compared to shareholder-based systems. The literature reports that shareholder-based systems tend to exhibit similarities with IFRS and higher value relevance than stakeholder-based systems (Ali & Hwang, 2000; Ball et al., 2000). Hence, firms that operate in shareholder-based systems are more familiar with IFRS requirements and would subsequently experience less transition costs. Future research should compare the Greek IFRS experience with common-law countries and/or other non-common-law countries. The study is useful for accounting standard setters, especially when they prepare or review a change in accounting regulation. The findings would shed some light on the effects of IFRS adoption on Greek firms and enable accounting regulators to set accounting rules that ease the transition to IFRS and reduce information asymmetry and earnings management. The study would also benefit investors inside Greece when they assess the impact of IFRS on Greek accounts and review their investment strategy, as well as investors outside Greece when they compare the Greek experience with that of other countries or when they consider entering into capital markets that are to adopt IFRS. The main limitation of the study relates to the consideration that the behaviour and choices of managers may not always be observable. For example, it may be difficult to determine whether firms influence their financial results for opportunistic purposes or to smooth their transition to IFRS. Thus, the measures that are employed in the analysis should only be considered as proxies for the attributes that are examined in the study. The effects of IFRS adoption would vary from country to country, depending on the accounting system in use, the corporate culture and practice, and the legal and economic environment. Acknowledgements The authors would like to thank the Editor of the Journal of International Accounting, Auditing and Taxation, Professor Kathleen Sinning, and two anonymous referees for their consideration, effort and valuable comments. Appendix A. Sample industrial sectors. Industry Chemicals Construction and building materials Industrial goods and services Food and beverage Retail Health care Basic resources Travel and leisure Media and entertainment Oil and gas
Number of Firms 11 39 25 34 16 7 17 18 15 4
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Appendix A ( Continued ) Industry
Number of Firms
Personal care and household products Technology Telecommunications Utilities Total
41 22 2 3 254
Appendix B. Accounting measures used as explanatory variables. Size NAVSH RESSFU
Net asset value per share Reserves to shareholders’ funds
Dividend DIVCOV DIVSH DIVYI
Dividend cover Dividend per share Dividend yield
Growth MVBV
Market value to book value
Profitability EPS NPM PLOWB ROCE
Earnings per share Net profit margin Plowback (retention) ratio Return on capital employed
Liquidity CFM CUR OCF QUI WCR
Cash flow margin Current ratio Operating cash flows scaled by total assets Quick ratio Working capital ratio
Leverage DEBTE DSFU INTCOV CGEAR TLSFU
Debt to equity Debt to shareholders’ funds Interest cover Capital gearing Total liabilities to shareholders’ funds
Other Variables ACCR AR BVCHA BVPS CS DEBT LL NPCHA NPP NPPS PRICE SP CF NP
Accruals scaled by total assets Annual stock return Change in firm book value following the transition from the Greek GAAP to IFRSs Book value per share Indicates the equity financing needs of firms Indicates the debt financing needs of firms Large losses Change in firm net profits following the transition from the Greek GAAP to IFRSs Net profit to share price Net profit per share Share price Small profits Change in operating cash flows scaled by total assets Change in net profit scaled by total assets
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Brown, P., & Tarca, A. (2005). A commentary on issues relating to the enforcement of international financial reporting standards in the EU. European Accounting Review, 14(1), 181–212. Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24, 99–126. Capkun, V., Cazavan-Jeny, A., Jeanjean, T., & Weiss, L. (2007). Transition to IFRS: Value relevance and earnings management (working paper). University of Paris. Dechow, P., & Ge, W. (2006). The persistence of earnings and cash flows and the role of special items: Implications for the accrual anomaly. Review of Accounting Studies, 11(2/3), 253–296. Dumontier, P., & Raffournier, B. (1998). Why firms comply voluntarily with IAS: An empirical analysis with Swiss data. Journal of International Financial Management and Accounting, 9(3), 216–245. El-Gazzar, S., Finn, P., & Jacob, R. (1999). An empirical investigation of multinational firms’ compliance with international accounting standards. The International Journal of Accounting, 34(2), 239–248. Gassen, J., & Sellhorn, T. (2006). Applying IFRS in Germany: Determinants and consequences (working paper). University of Berlin. Glaum, M. (2000). Bridging the GAAP: The changing attitude of German managers towards Anglo-American accounting and accounting harmonization. Journal of International Financial Management and Accounting, 11(1), 23–47. Goodwin, J., & Ahmed, K. (2006). The impact of international financial reporting standards: Does size matter? Managerial Auditing Journal, 21(5), 460–475. Grant Thornton. (2007). 2006: Impact of I.F.R.S on listed firms. Greece: Grant Thornton. Healy, P., & Palepu, K. (2001). Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature. Journal of Accounting and Economics, 31, 405–440. Hung, M., & Subramanyam, K. (2007). Financial statement effects of adopting international accounting standards: The case of Germany. Review of Accounting Studies, 12(4), 21–48. Iatridis, G. (2008). Accounting disclosure and firms’ financial attributes; Evidence from the UK stock market. International Review of Financial Analysis, 17(2), 219–241. Iatridis, G. (2008b). Implementation of international financial reporting standards and the quality of financial statement information; An investigation of earnings management and value relevance (working paper). University of Thessaly. Jermakowicz, E., & Gornik-Tomaszewski, S. (2006). Implementing IFRS from the perspective of EU publicly traded companies. Journal of International Accounting, 15, 170–196. Land, J., & Lang, M. (2002). Empirical evidence on the evolution of international earnings. The Accounting Review, 77(Suppl.), 115–133. Lang, M., Lins, K., & Miller, D. (2003). ADRs, analysts and accuracy. Journal of Accounting Research, 41, 317–345. Lang, M., Raedy, J., & Wilson, W. (2005). Earnings management and cross listing: Are reconciled earnings comparable to US earnings? (working paper). University of North Carolina. Lantto, A. (2005). Does IFRS improve the usefulness of accounting information in a code-law country? (working paper). University of Oulu. Leuz, C. (2003). IAS versus U.S. GAAP: Information asymmetry-based evidence from Germany’s new market. Journal of Accounting Research, 41(3), 445–472. Leuz, C., & Verrecchia, R. (2000). The economic consequences of increased disclosure. Journal of Accounting Research, 38, 91–124. Leuz, C., Nanda, D., & Wysocki, P. (2003). Earnings management and investor protection: An international comparison. Journal of Financial Economics, 69(3), 505–528. Myers, L., & Skinner, D. (2002). Earnings momentum and earnings management (working paper). University of Michigan. Renders, A., & Gaeremynck, A. (2007). The impact of legal and voluntary investor protection on the early adoption of international financial reporting standards (IFRS). De Economist, 155, 49–72. Tarca, A. (2004). International convergence of accounting practices: Choosing between IAS and U.S. GAAP. Journal of International Financial Management and Accounting, 15, 60–91. Tendeloo, B., & Vanstraelen, A. (2005). Earnings management under German GAAP versus IFRS. European Accounting Review, 14(1), 155–180. Weil, D., Fung, A., Graham, M., & Fagotto, E. (2006). Regulation by transparency: The effectiveness of government mandated disclosure policies. Journal of Policy Analysis and Management, 25(1). Zarzeski, M. (1996). Spontaneous harmonization effects of culture and market forces on accounting disclosure practices. Accounting Horizons, 10, 18–37.
Contents lists available at ScienceDirect
Journal of International Accounting, Auditing and Taxation
The post-adoption effects of the implementation of International Financial Reporting Standards in Greece George Iatridis a,∗ , Sotiris Rouvolis b a b
University of Thessaly, Department of Economics, 43 Korai street, 38 333 Volos, Greece Eurovoli AEED, Greece
a r t i c l e
i n f o
Keywords: International Financial Reporting Standards Greek GAAP Financial statement effects Voluntary IFRS disclosures Earnings management Value relevance
a b s t r a c t This study investigates the effects of the transition from Greek GAAP to IFRS on the financial results of Greek listed firms. The study also examines the factors associated with the provision of voluntary IFRS disclosures before the official period of adoption, the degree of earnings management under IFRS, and the value relevance of IFRS-based accounting numbers. The findings show that the implementation of IFRS has introduced volatility in key income statement and balance sheet measures of Greek firms. Although the effects of IFRS adoption in the first year of adoption appear to be unfavourable, perhaps due to the IFRS transition costs, firms’ financial measures improved significantly in the subsequent period. This result explains why in the official adoption period there is some evidence of earnings management, which is reduced in the subsequent period. The factors associated with providing voluntary IFRS disclosures before the official period of adoption include firm size and debt and equity financing needs. The study provides evidence that IFRS adoption leads to more value relevant accounting measures. © 2009 Elsevier Inc. All rights reserved.
1. Introduction The globalisation of international financial markets has increased the need for world-wide comparable accounting standards and regulation (Zarzeski, 1996). The required implementation of International Financial Reporting Standards (IFRS) by listed firms that operate in member-states of the European Union, as of January 1, 2005, should assist investors in their decision-making and enhance stock market efficiency (Botosan & Plumlee, 2002; Healy & Palepu, 2001; Leuz, 2003). At the same time, the world-wide acceptance of IFRS may indicate their high quality (Tendeloo & Vanstraelen, 2005). Compliance with IFRS is compulsory for listed firms in Greece. Firms listed on the Athens Stock Exchange have been using IFRS since January 2005. Firms that are not listed use Greek GAAP. The transition from Greek GAAP to international accounting standards may have an effect on firms’ financial results. This outcome may motivate firms to develop adjustment mechanisms to overcome potential adverse consequences of IFRS implementation (Tarca, 2004) and could lead to behaviour aimed at improving certain accounting variables, such as profitability and compensation, avoiding debt covenant violation, and reinforcing firm financial position (Weil, Fung, Graham, & Fagotto, 2006). This study examines the impact of the adoption of IFRS on the financial performance of firms listed on the Athens Stock Exchange. This study also seeks to identify the financial attributes of firms that voluntarily abided by the requirements of IFRS before the mandated adoption date. Finally, the paper investigates whether IFRS adoption reduces the level of earnings management and enhances the value relevance of IFRS-based accounting numbers.
∗ Corresponding author. Tel.: +30 24210 44810; fax: +30 24210 74772. E-mail address: [email protected] (G. Iatridis). 1061-9518/$ – see front matter © 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.intaccaudtax.2009.12.004
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The study examines the periods before and after the official adoption of IFRS. The focus of the study is on firms that adopted IFRS after 2005 (mandatory IFRS adopters) and on firms that provided voluntary IFRS disclosures before the official implementation of IFRS (voluntary IFRS disclosers). Before 2005, firms had to abide by the Greek GAAP. There was no option to voluntarily adopt IFRS before 2005. Thus, voluntary IFRS disclosers are firms that prior to 2005 used the Greek GAAP and simultaneously provided disclosures on IFRS in a voluntary manner. The study shows that in the year of first adoption, 2005, firms tended to exhibit lower key accounting measures, such as profitability, liquidity and growth, most likely due to the fair value orientation of IFRS and the associated transition costs. In the subsequent year, firms displayed improved financial measures. The provision of voluntary IFRS disclosures before the official adoption period is associated with large size and strong debt and equity financing needs. The scope for earnings management is significantly reduced in the post-adoption period while in their first adoption year, firms tended to manage their accounting numbers in an effort to mitigate adverse results from the adoption of IFRS. The findings also show that the use of IFRS appeared to lead to accounting measures with higher value relevancy. The remainder of the study is organised as follows. Section 2 presents the background of the study. Section 3 discusses the research hypotheses. Section 4 describes the data while Section 5 discusses the results, and Section 6 presents the conclusions. 2. Background Studies have shown that the factors that influence the decision to provide voluntary IFRS-based disclosures include size, profitability and leverage, which are larger for voluntary IFRS disclosers (Dumontier & Raffournier, 1998; Glaum, 2000; Tarca, 2004), and international exposure and dispersion of ownership (Gassen & Sellhorn, 2006). Prior research has also shown that the use of IFRS enhances comparability and quality of accounting information, and leads to accounting harmonisation, investment growth and lower cost of capital (Barth, Landsman, & Lang 2005). Renders and Gaeremynck (2007) report that IFRS implementation is accompanied by less earnings management. The transition to IFRS presents firms with difficulties including technical differences, the cost of change and adjustment, the time factor, and the insufficient experience and knowledge (Brown & Tarca, 2005; Gassen & Sellhorn, 2006). In addition, the fair value orientation of IFRS is likely to introduce volatility in book values and reported earnings (Andrews, 2005; Barth et al., 2005; Goodwin & Ahmed, 2006; Hung & Subramanyam, 2007), and consequently, distort the financial profile of adopting firms. These considerations may influence the financial behaviours of firms and may motivate them to redefine their strategies and decision-making processes in order to mitigate the adverse impact of adoption on their accounting numbers (Jermakowicz & Gornik-Tomaszewski, 2006). Financial reporting under IFRS appears to provide more information about company performance (Adams, Weetman, & Gray, 1993). Countries with strong investor-protection mechanisms and regulation in place are likely to experience lower IFRS transition costs (Capkun, Cazavan-Jeny, Jeanjean, & Weiss, 2007; Lantto, 2005; Renders & Gaeremynck, 2007). Hence, the institutional background of a country may influence the effects of IFRS adoption. The main differences between Greek GAAP and IFRS (see Grant Thornton, 2007) relate to the presentation of financial results, the readjustment of value of real estates, the accounting treatment and depreciation of certain tangible and intangible fixed assets, research and development expenditure and capitalisation criteria, pricing and evaluation of securities and financial instruments, deferred taxation, distinction between operating and financial leasing, post-employment employee benefits, provisions, consolidation criteria and methods, and accounting for goodwill and goodwill amortisation. 3. Research hypotheses 3.1. IFRS transition and financial statement effects The study examines the impact of the transition from Greek GAAP to IFRS on the financial performance of Greek listed firms. As noted in Section 2, the implementation of IFRS would be expected to have a favourable impact on firms’ financial performance and financial reporting quality. Given that the differences between the two financial reporting regimes may be substantial in terms of measurement, recognition and disclosure, the impact of IFRS adoption is likely to be significant. Also, the fair value orientation of IFRS would be expected to introduce volatility in the IFRS-based accounting numbers. The hypothesis that is tested is as follows: H1 .
The financial results reported under the Greek GAAP are significantly different than those reported under IFRS.
To test H1 , the study compares the financial results of firms that adopted IFRS in 2005 with the 2004 IFRS comparative figures that were previously Greek GAAP-based and that accompany the 2005 IFRS disclosures. The study also compares the IFRS-based financial results reported in 2005 with those reported in the post-official adoption period, 2006. This set of analyses investigates how firms have been affected by IFRS and how they have adjusted over time. The logistic regression models used are as follows. RRi,t = a0 + a1 Sizei,t + a2 Dividendi,t + a3 Growthi,t + a4 Profitabilityi,t + a5 Liquidityi,t + a6 Leveragei,t + ei,t
(1)
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PAi,t = a0 + a1 Sizei,t + a2 Dividendi,t + a3 Growthi,t + a4 Profitabilityi,t + a5 Liquidityi,t + a6 Leveragei,t + ei,t
57
(2)
where RRi,t is a dummy variable indicating the regulatory regime. RRi,t = 1 for financial numbers reported under IFRS and RRi,t = 0 for financial numbers reported under the Greek GAAP; PAi,t is a dummy variable indicating the post-adoption effects. PAi,t = 1 for financial numbers reported under IFRS in 2006 and PAi,tt = 0 for financial numbers reported under IFRS in 2005; Profitabilityi,t , Growthi,t , Leveragei,t , Liquidityi,t , Sizei,t , and Dividendi,t are proxies used to control for firm profitability, growth, leverage, liquidity, size and dividend respectively (see Appendix B); and ei,t is the error term. 3.2. Voluntary IFRS disclosure in the pre-official adoption period The adoption of IFRS enhances transparency, disclosure and comparability (Biddle & Saudagaran, 1989). The implementation of IFRS leads to lower cost of capital and transaction costs, higher market value and better reputation (Leuz & Verrecchia, 2000). The higher disclosure requirements and financial reporting quality that stem from adopting IFRS should reduce information asymmetry and give a positive signal to investors (Tarca, 2004). Thus, in the period prior to the official IFRS adoption, firms may be motivated to provide voluntary IFRS-based accounting disclosures in order to impress market participants and improve their financial profile and/or obtain debt and equity capital (see El-Gazzar, Finn, & Jacob, 1999). In Greece, there was no option of adopting IFRS before the official adoption date. Greek GAAP was in force prior to 2005. Firms, however, could provide voluntary IFRS disclosures in the pre-adoption period. This study compares the financial attributes of firms that voluntarily provided IFRS disclosures to those firms that did not provide voluntary IFRS disclosures in the pre-adoption period of 2004 (see also Iatridis, 2008a). The hypothesis that is tested is: H2 . Firms that provided voluntary IFRS disclosures are significantly different than firms that did not provide voluntary IFRS disclosures. The study uses the following regression model: VDi,t = a0 + a1 Sizei,t + a2 Dividendi,t + a3 Growthi,t + a4 Profitabilityi,t + a5 Liquidityi,t + a6 Leveragei,t +a7 CSi,t + a8 DEBTi,t + ei,t
(3)
where VDi,t is a dummy variable indicating voluntary IFRS disclosure. VDi,t = 1 for voluntary IFRS disclosers and VDi,t = 0 for non-voluntary IFRS disclosers; CSi,t is a dummy variable indicating the equity financing needs of firms. CSi,t = 1 for firms that raised capital during the period under investigation and CSi,t = 0 otherwise; and DEBTi,t is a dummy variable indicating the debt financing needs of firms. DEBTi,t = 1 for firms that issued debt during the period under investigation and DEBTi,t = 0 otherwise. All other variables are defined as in Eqs. (1) and (2). 3.3. IFRS and earnings management The study investigates whether the transition to IFRS reduces earnings management. IFRS require firms to provide informative accounting disclosures and enhance the investor-protection mechanisms that are in place, thereby improving the quality of financial reporting. Hence, the adoption of IFRS would be expected to lead to lower opportunism and earnings management (Leuz, 2003). The hypothesis tested is as follows: H3 .
IFRS adoption reduces earnings management.
The first earnings management test involves examining the volatility of the change in net profit scaled by total assets, NP, and the volatility of the change in net profit, NP, to the change in operating cash flows, CF. Less volatile figures provide evidence of earnings management. The investigation focuses on normal adopters and compares the accounting numbers reported in the official adoption period with those reported in the pre-official adoption period. The second earnings management test examines the association between accruals and cash flows. The study first evaluates the Pearson correlation between accruals and cash flows separately in the pre-official, official and post-official adoption periods. A negative correlation is an indication of earnings management, since firms tend to influence their accruals upwards when cash flows appear to be lower (Land & Lang, 2002; Myers & Skinner, 2002). The study then uses an Ordinary Least Square (OLS) regression to investigate the association between accruals and cash flows, profitability, leverage and size. This analysis focuses on normal adopters using accounting numbers based on the Greek GAAP for the pre-official adoption period and accounting numbers based on IFRS for the official and post-official adoption periods, respectively. The regression model that is used is as follows (see Tendeloo & Vanstraelen, 2005; Iatridis, 2008b): ACCRi,t = a0 + a1 FRSi,t + a2 FRSOCFi,t + a3 FRSLNMVi,t + a4 FRSOPMi,t + a5 FRSTLSFUi,t + ei,t
(4)
where ACCRi,t is accruals scaled by total assets. As in Barth, Cram, and Nelson (2001), Barth et al. (2005) and Dechow and Ge (2006), accruals equal earnings less cash flows from operating activities; FRSi,t is a dummy variable indicating the financial reporting system in use. FRSi,t = 1 for firms reporting under IFRS in 2005 and FRSi,t = 0 for firms reporting under the Greek GAAP in 2004; FRSOCFi,t is a variable used to examine the impact of IFRS on the association between accruals and cash flows. It is the multiplication of FRS and operating cash flows (OCF); FRSLNMVi,t is a variable used to examine the impact of IFRS on
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the association between accruals and size. It is the multiplication of FRS and the natural logarithm of market value (LNMV); FRSOPMi,t is a variable used to examine the impact of IFRS on the association between accruals and profitability. It is the multiplication of FRS and operating profit margin (OPM); FRSTLSFUi,t is a variable used to examine the impact of IFRS on the association between accruals and leverage. It is the multiplication of FRS and total liabilities to shareholders’ funds (TLSFU); and ei,t is the error term. The third earnings management test examines whether firms attempt to report small positive profits rather than losses or influence the timing of losses (see Burgstahler & Dichev, 1997; Leuz, Nanda, & Wysocki, 2003). Studies suggest that in the presence of earnings management, large losses tend not to be frequent (Ball, Kothari, & Robin, 2000; Lang, Raedy, & Wilson, 2005). The analysis focuses on normal adopters and compares the accounting numbers reported under IFRS with those reported under the Greek GAAP, using the logit model below (see also Iatridis, 2008b): RRi,t = a0 + a1 Profitabilityi,t + a2 Growthi,t + a3 Leveragei,t + a4 Liquidityi,t + a5 Sizei,t + a6 Dividendi,t + a7 SPi,t + a8 LLi,t + ei,t
(5)
where SPi,t is a dummy variable indicating a measure of small positive profits. SPi,t = 1 if net profit scaled by total assets is between 0 and 0.01 (see Lang, Lins, & Miller, 2003; Barth et al., 2005) and SPi,t = 0 otherwise; and LLi,t is a dummy variable indicating a measure of timely loss recognition. LLi,t = 1 if net profit scaled by total assets is less than −0.20 (see Lang, Lins, et al., 2003; Lang, Raedy, et al., 2005) and LLi,t = 0 otherwise. All other variables are defined as in Eqs. (1) and (2). 3.4. Value relevance and IFRS Prior research indicates that the IFRS-based accounting numbers tend to exhibit higher quality and value relevance (Barth, Cram, et al., 2001; Barth, Landsman, et al., 2005). To determine if that is the case in Greece, the following hypothesis is tested: H4 .
Accounting measures reported under IFRS exhibit higher value relevance.
The first value relevance test is an OLS regression of share price on book value per share and net profit per share. The analysis focuses on normal adopters and compares their IFRS-based financial numbers reported in 2005 with their Greek GAAP-based financial numbers reported in 2004. A similar comparison is then drawn between 2005 and 2006. The model is as follows (see Barth et al., 2005; Hung & Subramanyam, 2007; Iatridis, 2008b): Pi,t = a0 + a1 BVPSi,t + a2 NPPSi,t + ei,t
(6)
where Pi,t is total market value of equity at year-end deflated by number of shares outstanding; BVPSi,t is total book value of equity deflated by number of shares outstanding; NPPSi,t is total net profit deflated by number of shares outstanding; and ei,t is the error term. The second value relevance test is an OLS regression of profits on stock returns using the same sample considerations as above. High quality profits would be expected to exhibit higher association with stock returns. The model is presented below (see Barth et al., 2005; Lang et al., 2005; Iatridis, 2008b): NPPi,t = a0 + a1 ARi,t + ei,t
(7)
where NPPi,t is net profit divided by beginning of year share price; ARi,t is the annual stock return at year-end. ARi,t is calculated as follows: (Pit + Dit − Pit−1 /Pit−1 ), where Pit is the price of security i at the end of period t, Dit is the dividend paid for security i in period t and Dit is the price of security i at the end of period t − 1; and ei,t is the error term. The third value relevance test examines the association between IFRS-based book value and net profit figures and stock returns. The study focuses on normal adopters using financial measures reported in the official adoption period. The OLS regression model used is as follows (see Hung & Subramanyam, 2007; Iatridis, 2008b): ARi,t = a0 + a1 BVPSi,t + a2 BVCHAi,t + a3 NPPSi,t + a4 NPCHAi,t + ei,t
(8)
where ARi,t is the annual stock return at year-end; BVPSi,t is total book value of equity under IFRS deflated by number of shares outstanding; BVCHAi,t is a variable indicating the change in firm book value following the transition from the Greek GAAP to IFRS. BVCHAi,t is calculated as follows: [total book value of equity under IFRS (using 2005 financial measures) − total book value of equity under the Greek GAAP (using 2004 financial measures)] divided by total book value of equity under the Greek GAAP (using 2004 financial measures); NPPSi,t is net profit under IFRS deflated by number of shares outstanding; NPCHAi,t is a variable indicating the change in firm net profits following the transition from the Greek GAAP to IFRS. NPCHAi,t is calculated as follows: [net profit under IFRS (using 2005 financial measures) − net profit under the Greek GAAP (using 2004 financial measures)] divided by net profit under the Greek GAAP (using 2004 financial measures); and ei,t is the error term. 4. Data and empirical methods The sample consists of 254 firms that are listed on the Athens Stock Exchange. The study excluded banks, insurance, pension and brokerage firms since their accounting measures are not always comparable with those of industrial firms.
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Table 1 Descriptive statistics. Panel A
Panel B
Panel C
Pre-official adoption period, Greek GAAP: 2004
Official adoption period, IFRS: 2005
Pair-wise t-tests for equality of means, Greek GAAP vs. IFRS
Pair-wise F-test for equality of variances, Greek GAAP vs. IFRS
Mean
Std deviation
Mean
Std deviation
2004 vs. 2005
2004 vs. 2005
−0.4544 2.004 899 0.0432 1.5032 0.2416 0.4394 3.0944 0.0364 0.2513
12.7292 15.332 4.407 0.2767 5.4518 3.6756 2.0512 4.9936 0.1878 0.4348
−0.6618 2.944 345 −0.1719 1.1978 −1.0141 0.1643 3.45 0.0287 0.1
13.43 22.574 6.502 2.4367 3.276 6.5695 0.8386 5.1033 0.1673 0.3008
0.0742 16.874 4.4241
0.212 20.0692 5.3097
0.1042 21.1119 1.6555
0.2879 28.6238 4.7223
6.0609
8.503
1.4251
Profitability PLOWB NPM OPM EPS ROCE
−0.4679 −0.3714 −0.3144 0.2857 0.1159
9.941 6.8918 6.8664 1.2526 0.4156
2.2307 −0.1049 −0.0494 0.1637 −0.1028
16.045 2.0176 2.0723 0.8369 3.1125
Liquidity OCF CUR QUI CFM WCR
4.947 2.886 1.9846 0.0296 2.2721
18.448 7.7602 5.826 3.1262 13.3273
4.134 2.0598 1.5888 −0.4079 2.3313
17.974 2.5577 2.2348 4.6567 14.1885
Leverage DEBT TLSFU CGEAR INTCOV DEBTE DSFU
2.843 0.6302 0.4537 12.2979 0.2278 0.2582
3.5658 2.4104 0.3245 49.1163 0.4252 0.3534
3.0986 1.325 0.7138 10.7945 1.2402 0.4687
5.4077 1.8246 1.0972 41.8915 1.8934 1.0747
Test variables NP/OCF ACCR NPP BVCHA BVPS NPCHA NPPS PRICE LL SP Dividend DIVSH DIVYI DIVCOV Growth MVBV
* ** ***
*** *
***
* *** ***
***
8.0718 *
***
*
*
** **
*
***
***
** *
***
***
**
***
Statistically significant factor at 10%. Statistically significant factor at 5%. Statistically significant factor at 1%.
Accounting and financial data were collected from DataStream. Information about firms’ accounting choices and policies was collected from the Financial Times Annual Report Service. The empirical analysis concentrates on the official adoption period of IFRS, 2005, as well as on the pre- and post-official adoption periods, 2004 and 2006, respectively. Appendix A presents the industrial sector structure of the sample firms. Appendix B shows the explanatory variables that are employed in the empirical analysis. The research hypotheses are tested using the binary logistic regression analysis and the OLS regression analysis. The logistic regression is useful in analysing categorical data, where the dependent variable is dichotomous and takes only two values, 0 and 1. The parameters of the logistic regression are estimated based on the maximum likelihood method, while the hypothesis testing is based on the Wald statistic. The study accounts for heteroscedasticity, autocorrelation, departure from normality and multicollinearity, where appropriate. 5. Results 5.1. Descriptive statistics The descriptive statistics in Table 1 present the comparison between financial numbers of normal adopters reported under Greek GAAP and IFRS. Panel B shows that under IFRS, firms exhibit lower profitability figures (NPCHA and NPPS), while they
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Table 2 Financial statement effects of IFRS implementation. Panel A IFRS vs. Greek GAAP, 2005 vs. 2004-IFRS adjusted
Panel B IFRS regime, 2005 vs. 2006
Variables
Coefficients
Variables
Coefficients
DSFU QUI NPM MVBV NAVSH Constant
0.0160** (0.008) −2.6270* (1.506) −0.3800* (0.202) 0.093*** (0.037) 0.2780* (0.162) −1.722 (1.958)
MVBV CGEAR TLSFU QUI EPS Constant
2.9819** (1.39) 1.6320** (0.689) 1.0880*** (0.24) −1.8109*** (0.678) 0.19* (0.133) −7.096 (1.294)
Model 2 % correctly classified Sample size
16.274** 88.135*** N0 = 254, N1 = 254
153.855*** 54.752*** N0 = 254, N1 = 254
All the explanatory variables were entered/removed from the logistic regression using a step-wise procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used to test the null hypothesis that each coefficient is zero. * Statistical significance at 10% level (two-tailed). ** Statistical significance at 5% level (two-tailed). *** Statistical significance at the 1% level (two-tailed).
retain more (PLOWB) for reinvestment and other purposes, e.g. IFRS transition. The new financial reporting regime may influence firms’ profitability due to the fair value orientation, which is likely to introduce volatility in reported figures. This effect is evident in Panel C, which shows that the volatility of profitability measures (PLOWB and ROCE) tends to rise in 2005. Panel B also shows that under IFRS, firms display small profits (SP) less frequently, possibly indicating less earnings management. In 2005, firms also report higher leverage measures (DEBT, CGEAR, DEBTE and DSFU). The higher leverage led to lower liquidity (CUR) and dividend cover (DIVCOV). Firms’ profitability may be lower in 2005 because of the higher leverage and the resulting higher interest expenses that are reported for that year. Panel C indicates that under IFRS, firms display more volatile dividend (DIVSH and DIVYI), leverage (DEBT, CGEAR, DEBTE and DSFU) and liquidity (CFM and WCR) measures, while they exhibit lower volatility in growth (MVBV). Despite the lower profitability and the higher volatility in financial measures that are generally reported under IFRS, the interest coverage ratio (INTCOV) displays lower volatility in 2005. 5.2. IFRS transition and financial statement effects Table 2 compares the 2005 IFRS-based financial numbers with the 2004 IFRS-adjusted comparative financial numbers and investigates the impact of IFRS implementation on firm financial performance. The findings show that the 2005 IFRS-based numbers are significantly different than the 2004 Greek GAAP-IFRS-adjusted numbers. Hence, H1 holds. Panel A shows that under IFRS, firms display higher leverage (DSFU). The higher financial reporting quality of IFRS would enhance the credibility of reported financial numbers and, consequently, reinforce the creditability of firms, thereby leading to higher leverage. The higher leverage and the resulting financial obligations as well as the IFRS transition and adjustment costs are likely to negatively affect firm profitability (NPM) and liquidity (QUI), which were generally lower in 2005. The fair value orientation of IFRS also led to higher net asset value per share (NAVSH) and market to book value (MVBV). Panel B compares the IFRS-based financial numbers reported in 2006 with those reported in 2005, and presents firms’ IFRS adjustment process over time. The results show that firms’ financial numbers improved in 2006. In 2006, firms continue to display higher leverage (CGEAR and TLSFU) and lower liquidity (QUI). However, the negative coefficient of liquidity obtained for 2006 appears to be smaller compared to 2005. Panel B also shows that, in 2006, firms exhibit higher profitability (EPS) and growth (MVBV) measures. This result would indicate that in 2006, firms have overcome some of the difficulties and costs of IFRS transition that they encountered in 2005 and started to reap some benefits of IFRS in terms of comparability, disclosure and financial reporting quality. 5.3. Voluntary IFRS disclosure in the pre-official adoption period Table 3 shows that firms that provided voluntary IFRS disclosures in the pre-official adoption period displayed higher profitability (EPS and NPM) and size (NAVSH). Voluntary IFRS disclosers also exhibited higher leverage (DEBT) and equity financing needs (CS). It appears that in their effort to attract capital in stock and money markets, firms may have provided voluntary IFRS disclosures in order to give lenders and investors assurance about the credibility and quality of the reported financial numbers as well as evidence of superior and high quality managerial ability. Firms may also have provided voluntary IFRS disclosures because they were large and visible in the stock market, and wanted to influence investors’ perceptions about their financial performance and prospects. Alternatively, it may be that firms were profitable and exhibited an overall favourable financial profile, so they were inclined to provide voluntary accounting disclosures, including IFRS-related accounting information. The findings indicate, therefore, that the voluntary IFRS disclosure decision is related to the need to raise funds. The results also indicate that voluntary IFRS disclosers are significantly different than non-voluntary IFRS disclosers.
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Table 3 Voluntary IFRS disclosure. Variables
Coefficients
Voluntary vs. non-voluntary disclosers EPS NPM NAVSH DEBT CS Constant
1.0334** (0.447) 6.4739* (3.494) 0.2222** (0.103) 0.3354** (0.134) 3.9966* (2.392) −7.032 (1.567)
Model 2 % correctly classified Sample size
25.736*** 97.058*** N0 = 206, N1 = 48
All the explanatory variables were entered/removed from the logistic regression using a step-wise procedure with a p-value of 0.05 to enter and a p-value of 0.10 to remove. The Wald statistic was used to test the null hypothesis that each coefficient is zero. * Statistical significance at 10% level (two-tailed). ** Statistical significance at the 5% level (two-tailed). *** Statistical significance at the 1% level (two-tailed).
5.4. IFRS and earnings management The findings presented in Table 4 indicate that, in general, the implementation of IFRS has reduced the level of earnings management as compared to what occurred under Greek GAAP. Therefore, H3 holds. The first earnings management test in Panel A shows that under IFRS, firms exhibit higher volatility in the change in net profit (NP) and in the change in net profit to the change in operating cash flows (NP/CF). This result suggests that the reported profitability figures are less smooth under IFRS than under Greek GAAP. The second earnings management test in Panel B shows that the correlation between accruals and cash flows in 2004 is negative, suggesting that under Greek GAAP there was greater earnings management. Panel B indicates, however, that earnings management still occurred in 2005 under IFRS, where the correlation coefficient is also negative and a bit larger (−0.527 in 2005 as opposed to −0.517 in 2004). This result indicates that in the first year of IFRS implementation, firms may Table 4 Earnings management: Greek GAAP vs. IFRS.
Panel A earnings volatility Volatility of NP Volatility of NP/CF
Greek GAAP: 2004 Std deviation
IFRS: 2005 Std deviation
F-Test
3.6717 12.7292
6.3894 13.43
**
Greek GAAP: 2004 Correlation coefficient Panel B correlation between accruals and cash flows Correlation of ACCR and OCF −0.517 Greek GAAP vs. IFRS, 2004 vs. 2005 Variables
Coefficients
0.886 N0 = 254, N1 = 254
Greek GAAP vs. IFRS: 2004 vs. 2005 Variables
Coefficients
Panel D Logistic regression extract: small profits and large losses SP −1.022** (0.345) LL 2.529* (1.488) * **
IFRS: 2005 Correlation coefficient
IFRS: 2006 Correlation coefficient
Significance
−0.527
−0.344
**
IFRS regime, 2005 vs. 2006
Panel C OLS regression of accruals on firm financial measures FRSOCF −1.05** (0.049) FRSLNMV −0.003** (0.001) FRSOPM 0.414** (0.039) FRSTLSFU −0.214** (0.034) Constant 0.026 (0.018) R2 adj. Sample size
**
Statistical significance at 10% level (two-tailed). Statistical significance at 10% level (two-tailed).
Variables
Coefficients
FRSOCF FRSLNMV FRSOPM Constant
−0.976** (0.044) −0.001* (0.001) 0.126** (0.03) 0.009 (0.017) 0.880 N0 = 254, N1 = 254
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Table 5 Value relevance: Greek GAAP vs. IFRS. Greek GAAP: 2004 Variables
IFRS: 2005 Coefficients
IFRS: 2006
Variables
Coefficients
Panel A OLS regression of price on book value per share and net profit per share NPPS 3.064** (0.254) NPPS 3.053** (0.173) BVPS 0.636** (0.183) BVPS 0.328** (0.068) Constant 1.957 (0.232) Constant 2.064 (0.264) R2 adj. Sample size
0.5669 N = 254 IFRS: 2005 Coefficients
Variables
Panel B OLS regression of net profit deflated by price on stock returns AR AR 2995.419** (693.553) Constant 1381.831 (324.704) Constant R2 adj. Sample size
0.073 N = 254
* **
3.231** (0.682) 1.426** (0.124) 4.072 (0.560) 0.811 N = 254
Coefficients
Variables
Coefficients
3221.090** (1081.532) 1241.2630 (551.765)
AR Constant
3881.493* (2218.499) 39.6690 (8.444)
0.0873 N = 254
0.0889 N = 254 IFRS: 2006
Coefficients
Panel C OLS regression of stock returns on book value and net profit change BVPS 0.047 (0.862) BVCHA 0.305** (0.030) NPPS 0.032 (0.048) NPCHA 0.001 (0.006) Constant 0.502 (0.053) R2 adj. Sample size
NPPS BVPS Constant
IFRS: 2006
IFRS: 2005 Variables
Coefficients
0.635 N = 254
Greek GAAP: 2004 Variables
Variables
0.298 N = 254
Variables
Coefficients
BVPS BVCHA NPPS NPCHA Constant
0.018 (0.013) 0.25* (0.136) 0.007 (0.005) 1.592** (0.554) 0.016 (0.098) 0.225 N = 254
Statistical significance at 10% level (two-tailed). Statistical significance at the 1% level (two-tailed).
have used earnings management techniques to improve their financial numbers and/or smooth potential adverse adoption consequences. In 2006, firms are in the second year of IFRS implementation and are more familiar with the international accounting requirements. Panel B shows that in 2006, the correlation between accruals and cash flows is still negative, but the correlation coefficient is much smaller at −0.344. It is noteworthy that in all the three periods, the correlation coefficient is negative, but very close to zero. The second earnings management test in Panel C is the OLS regression of accruals on cash flows, profitability, leverage and size. The findings show that the association between accruals and cash flows (FRSOCF) is significantly negative, implying that in 2005, firms with low cash flows tended to use accrual-increasing accounting policies or earnings management. This association remains negative in 2006 but appears to be smaller and closer to zero, as expressed by the respective regression coefficient. The results are similar to those reported above in Panel B. The association between accruals and size (FRSLNMV) is negative for both 2005 and 2006, suggesting that large firms were not inclined to adopt accrual-increasing accounting policies. Likewise, the association between accruals and leverage (FRSTLSFU) is negative, indicating that, under IFRS, firms with high leverage tend not to increase their accruals. The association between accruals and profitability (FRSOPM) is positive for both years, implying that firms with low profitability would tend not to adopt accrual-increasing accounting policies. The third earnings management test in Panel D investigates whether firms manage their accounting numbers to report small profits (SP) rather than losses, and/or to delay the recognition of large losses (LL) in the income statement. The findings indicate that under IFRS, SP is significantly negative, implying that firms tend to report small profits less frequently. In addition, under IFRS, firms exhibit a significantly positive coefficient for LL, indicating that they do recognise large losses when they occur. 5.5. Value relevance and IFRS Table 5 shows that the IFRS-based accounting numbers exhibit higher value relevance than these determined under Greek GAAP, suggesting that H4 holds. The first value relevance test presented in Panel A shows that the coefficients of net profit per share (NPPS) and book value of equity per share (BVPS) are significantly positive and larger for the official period of adoption. IFRS-based financial numbers also have higher R2 , indicating that they are more value relevant than those reported under Greek GAAP. Similar results for the second value relevance test are shown in Panel B, where the annual stock returns (AR) have a significantly positive and larger coefficient as well as higher R2 under IFRS. The figures exhibit even higher
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values in 2006 compared to 2005 and 2004. The results of the third value relevance test, presented in Panel C, show that the change in firm book value (BVCHA) following the transition to IFRS is significantly positive. This result can be explained by the fair value orientation of IFRS. The change in net profits (NPCHA), however, appears to be positive but not statistically significant. In the second year of IFRS implementation, 2006, both the change in firm book value and the change in net profits display a statistically significant positive coefficient. The findings show that throughout the period under investigation, the IFRS-based accounting measures provide evidence of value relevancy, which becomes more apparent in the second year of IFRS implementation. 6. Conclusions This study investigates the effects of the change from Greek GAAP to IFRS on the financial results of firms listed on the Athens Stock Exchange. The findings show that the IFRS implementation effects in the official adoption period, 2005, were unfavourable in terms of profitability and liquidity. In 2006, firms reported better financial performance measures in terms of profitability and future growth prospects, perhaps because they became more familiar with and adjusted to IFRS. The study shows that a number of firms provided voluntary IFRS disclosures before the official adoption period. The factors associated with voluntarily providing IFRS-based accounting information include large size and strong debt and equity financing needs. In their search for capital, voluntary IFRS disclosers may have believed they were providing lenders and investors evidence of credibility and quality in their reported financial numbers. The study also finds that in the official adoption period, there is some evidence of earnings management. It is possible that in light of significant IFRS transition costs, firms may manage their accounting numbers in order to mitigate potential adverse effects of IFRS adoption. In the subsequent period, however, the level of earnings management is significantly reduced. Finally, the implementation of IFRS provides more value relevant accounting measures in the second year of adoption compared to the official adoption year. In the second year of adoption, the nature and requirements of IFRS would be clearer, the process of implementing IFRS would be more familiar to users, while the impact of IFRS on firm accounting numbers would be displayed in a more evident and visible manner. This study examines how firms that operate in a non-common-law country, Greece, which is stakeholder-based, respond to IFRS adoption as compared to shareholder-based systems. The literature reports that shareholder-based systems tend to exhibit similarities with IFRS and higher value relevance than stakeholder-based systems (Ali & Hwang, 2000; Ball et al., 2000). Hence, firms that operate in shareholder-based systems are more familiar with IFRS requirements and would subsequently experience less transition costs. Future research should compare the Greek IFRS experience with common-law countries and/or other non-common-law countries. The study is useful for accounting standard setters, especially when they prepare or review a change in accounting regulation. The findings would shed some light on the effects of IFRS adoption on Greek firms and enable accounting regulators to set accounting rules that ease the transition to IFRS and reduce information asymmetry and earnings management. The study would also benefit investors inside Greece when they assess the impact of IFRS on Greek accounts and review their investment strategy, as well as investors outside Greece when they compare the Greek experience with that of other countries or when they consider entering into capital markets that are to adopt IFRS. The main limitation of the study relates to the consideration that the behaviour and choices of managers may not always be observable. For example, it may be difficult to determine whether firms influence their financial results for opportunistic purposes or to smooth their transition to IFRS. Thus, the measures that are employed in the analysis should only be considered as proxies for the attributes that are examined in the study. The effects of IFRS adoption would vary from country to country, depending on the accounting system in use, the corporate culture and practice, and the legal and economic environment. Acknowledgements The authors would like to thank the Editor of the Journal of International Accounting, Auditing and Taxation, Professor Kathleen Sinning, and two anonymous referees for their consideration, effort and valuable comments. Appendix A. Sample industrial sectors. Industry Chemicals Construction and building materials Industrial goods and services Food and beverage Retail Health care Basic resources Travel and leisure Media and entertainment Oil and gas
Number of Firms 11 39 25 34 16 7 17 18 15 4
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Appendix A ( Continued ) Industry
Number of Firms
Personal care and household products Technology Telecommunications Utilities Total
41 22 2 3 254
Appendix B. Accounting measures used as explanatory variables. Size NAVSH RESSFU
Net asset value per share Reserves to shareholders’ funds
Dividend DIVCOV DIVSH DIVYI
Dividend cover Dividend per share Dividend yield
Growth MVBV
Market value to book value
Profitability EPS NPM PLOWB ROCE
Earnings per share Net profit margin Plowback (retention) ratio Return on capital employed
Liquidity CFM CUR OCF QUI WCR
Cash flow margin Current ratio Operating cash flows scaled by total assets Quick ratio Working capital ratio
Leverage DEBTE DSFU INTCOV CGEAR TLSFU
Debt to equity Debt to shareholders’ funds Interest cover Capital gearing Total liabilities to shareholders’ funds
Other Variables ACCR AR BVCHA BVPS CS DEBT LL NPCHA NPP NPPS PRICE SP CF NP
Accruals scaled by total assets Annual stock return Change in firm book value following the transition from the Greek GAAP to IFRSs Book value per share Indicates the equity financing needs of firms Indicates the debt financing needs of firms Large losses Change in firm net profits following the transition from the Greek GAAP to IFRSs Net profit to share price Net profit per share Share price Small profits Change in operating cash flows scaled by total assets Change in net profit scaled by total assets
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