The effect on the BTD of IFRS adoption and the end of the Transitional Tax Regime (RTT) in Brazil

ABSTRACT This paper aimed to evaluate the moderation by variables related to incentives for earnings management (indebtedness, profitability, and size) over the effect of the change in standards (accounting or tax) on the book-tax differences (BTD). The end of the Transitional Tax Regime (RTT) enables us to evaluate the symmetry between the divergence and reconvergence of the accounting and tax standards, helping to identify the moderating effect of characteristics such as size, leverage, and profitability over the use of the discretion allowed by the International Financial Reporting Standards (IFRS). Studying the effects of changes in the standards contributes to understanding how they affect accounting information quality, particularly when we observe symmetrical movements of divergence of the accounting and tax standards, such as IFRS adoption, and of reconvergence, with the end of the RTT. The analysis conducted enables us to separate effects of divergence between the tax and accounting standards from the innovations introduced by the IFRS. An understanding of the effect of the standard over accounting information quality contributes to the quality of the work of financial analysts, tax authorities, and regulators. Event studies are conducted to evaluate the effect of IFRS adoption, as well as the end of the RTT, over the BTD (a proxy for earnings management), in cross sections of companies. We use explanatory variables related to incentives to manage book and taxable income (indebtedness, profitability, and size), which could explain the ambiguity of the results in the literature. The article provides evidence that the indebtedness and size of companies influence the effect of IFRS adoption, as well as of the end of the RTT. We observed a negative relationship of indebtedness and size with the impact of changes in standards over differences between book and taxable income (BTD).

R&D Reporting Rule and Firm Efficiency

Critics opine that full expensing of research and development (R&D) depresses near-term profits and incentivizes myopic managers to under-invest in R&D, compromising firm efficiency. Advocates of the expensing rule argue that little rigorous research evidence supports the claimed adverse consequences. We examine the impact of the R&D expensing rule on firm efficiency by exploiting an exogenous shock: a shift in the accounting regime in Germany from full expensing to partial capitalization of R&D when it mandated International Financial Reporting Standard (IFRS) adoption in 2005. We employ Stochastic Frontier Analysis and Data Envelopment Analysis to estimate efficiency for the same German firms before and after the IFRS adoption. We find robust evidence of efficiency improvement in the post-period relative to the pre-period for German R&D firms that report R&D expenditures, and for both early adopters and timely adopters. We also document that financially constrained firms and firms experiencing rapid R&D growth prior to the IFRS adoption show greater efficiency improvement. Moreover, we conduct three falsification tests to make sure our results are not attributable to other accounting changes associated with the IFRS adoption, and find no efficiency improvement for the three control groups (German “no-R&D” sample, U.K. firms, and Australian firms), respectively. We conclude that the change in the R&D reporting rule is the likely catalyst for improvements in efficiency of German R&D firms.

Capital market effects of adoption of IFRS

<p>This thesis examines the impact of adoption of IFRS (International Financial Reporting Standards) on two aspects of the operation of capital markets. Firstly, the impact of adoption of IFRS on financial reporting comparability, market liquidity, and cost of capital. Secondly, the impact of adoption of IFRS on seasoned equity offering (SEO) underperformance. To examine the impact of adoption of IFRS on financial reporting comparability, market liquidity, and cost of capital, the study used meta-analysis of empirical studies published since 2000. Meta-analysis provides an objective view of the empirical results, in contrast to narrative reviews, which offer subjective conclusions. From meta-analysis of 55 empirical studies with 1,259 effect sizes, the study finds that IFRS adoption has increased financial reporting comparability, market liquidity, and reduced cost of equity. For cost of debt, a decrease is observed only for voluntary adoption. The meta-regression analysis shows how the results differ across mandatory and voluntary adoption of IFRS and that the measurement choices, type of control variables, study design, and strength of empirical results explain the variation in the observed effect of adoption of IFRS. To examine the impact of adoption of IFRS on SEO underperformance the study analyses a large sample of SEOs from 51 countries over the period 1992-2017. Given that the empirical literature on SEOs has established that information asymmetry contributes to SEO underperformance, it is important to assess whether adoption of IFRS has reduced the uncertainties surrounding SEOs and, thus, subsequent underperformance. The study employs a control sample of non-IFRS adoption countries and applies a difference-in-difference (DiD) design to test for the incremental change for IFRS adoption countries over non-IFRS adoption countries. The study finds that SEO underperformance reduces for IFRS adopters relative to non-IFRS adopters in the post-adoption period. The reduction in SEO underperformance is influenced by increased disclosure, increased comparability, and number of accounting changes. The study also finds that the impact of adoption of IFRS on SEO underperformance exists only for firms in countries with strong enforcement, and is conditional on the implementation credibility of countries. The findings are robust to the application of a different measure of SEO underperformance. Overall, the study suggests that IFRS has had a positive impact on capital markets. However, increased disclosure, comparability, and credible implementation play important roles in realising the benefits of adoption of IFRS. Thus, policymakers of weak enforcement countries are encouraged to strengthen their institutional environment in order to reap the benefits that adoption of IFRS can provide to their capital market.</p>

Capital market effects of adoption of IFRS

<p>This thesis examines the impact of adoption of IFRS (International Financial Reporting Standards) on two aspects of the operation of capital markets. Firstly, the impact of adoption of IFRS on financial reporting comparability, market liquidity, and cost of capital. Secondly, the impact of adoption of IFRS on seasoned equity offering (SEO) underperformance. To examine the impact of adoption of IFRS on financial reporting comparability, market liquidity, and cost of capital, the study used meta-analysis of empirical studies published since 2000. Meta-analysis provides an objective view of the empirical results, in contrast to narrative reviews, which offer subjective conclusions. From meta-analysis of 55 empirical studies with 1,259 effect sizes, the study finds that IFRS adoption has increased financial reporting comparability, market liquidity, and reduced cost of equity. For cost of debt, a decrease is observed only for voluntary adoption. The meta-regression analysis shows how the results differ across mandatory and voluntary adoption of IFRS and that the measurement choices, type of control variables, study design, and strength of empirical results explain the variation in the observed effect of adoption of IFRS. To examine the impact of adoption of IFRS on SEO underperformance the study analyses a large sample of SEOs from 51 countries over the period 1992-2017. Given that the empirical literature on SEOs has established that information asymmetry contributes to SEO underperformance, it is important to assess whether adoption of IFRS has reduced the uncertainties surrounding SEOs and, thus, subsequent underperformance. The study employs a control sample of non-IFRS adoption countries and applies a difference-in-difference (DiD) design to test for the incremental change for IFRS adoption countries over non-IFRS adoption countries. The study finds that SEO underperformance reduces for IFRS adopters relative to non-IFRS adopters in the post-adoption period. The reduction in SEO underperformance is influenced by increased disclosure, increased comparability, and number of accounting changes. The study also finds that the impact of adoption of IFRS on SEO underperformance exists only for firms in countries with strong enforcement, and is conditional on the implementation credibility of countries. The findings are robust to the application of a different measure of SEO underperformance. Overall, the study suggests that IFRS has had a positive impact on capital markets. However, increased disclosure, comparability, and credible implementation play important roles in realising the benefits of adoption of IFRS. Thus, policymakers of weak enforcement countries are encouraged to strengthen their institutional environment in order to reap the benefits that adoption of IFRS can provide to their capital market.</p>

INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTION, INVESTOR PROTECTION, AND FOREIGN PORTFOLIO INVESTMENT: A REVIEW

This paper aims to analyze the impacts of International Financial Reporting Standards (IFRS) adoption on foreign portfolio investment (FPI) in relation to investor protection based on existing empirical literature. This study uses a historical approach and focuses on thirty-six relevant articles published in accounting and finance journals. The author provides a theoretical groundwork of the association between IFRS adoption and FPI and summarizes the results. The findings are critically analyzed by employing developed vs. developing country lens. The review study reveals that the effects of IFRS adoption on FPI significantly differ between developed and developing countries. Although the positive impact of IFRS adoption on FPI is documented in existing literature, not all countries (particularly developing countries), firms, and users have benefited or equally benefited from IFRS adoption regarding FPI. In addition, the positive impacts of IFRS adoption on FPI are associated with the country's regulatory environment, such as level of investor protection. The findings of the study suggest that developing countries should ensure a proper regulatory environment to reap the full benefits of IFRS adoption. This review contributes to the existing literature by providing a comparative analysis of IFRS adoption effect on FPI between developed and developing countries while also suggests future research avenues.