Transparency and accounting standards

Abstract

This dissertation tests the extent to which International Financial Reporting Standards (IFRS) affect corporate transparency. This association is tested in the context of three factors relevant to transparency; The adverse selection component of the bid-ask spread, the cost of equity capital, and stock return volatility, with each addressed as a separate essay. The first essay tests whether the global move toward IFRS, leads to a reduction in adverse selection for adopting firms, following adoption. A parsimonious model by Bollen et al. (2004), allows for decomposition of the spread into its respective components; order processing costs, inventory holding costs, and adverse selection costs. As the variable of interest, the Inventory Holding Premium (IHP) is examined surrounding IFRS adoption. Results reveal that the bid-ask spread itself actually increased following adoption across the entire sample, however the adverse selection component, modelled as the IHP, decreased. Restricting the sample to early adopters only and controlling for potential self selection bias, early adopters enjoy a lower bid-ask spread over official adopters, but fail to show any change in adverse selection costs. The second essay tests the contention that firms that switch to compliance with the IFRS from local generally accepted accounting principles (GAAP) experience a reduction in their cost of equity following the change. Drawing upon an ex ante cost of equity measure due to Pastor et al. (2008); and using Easton (2004) for robustness, models developed incorporate a post IFRS dummy variable, and control for other factors related to the cost of equity. Additionally, tests isolate early adopters and control for self-selection bias. Results provide only weak evidence that the IFRS succeed in reducing the cost of equity, with some mixed results across the specified models. Overall results suggest that in this context, it is possible that early adoption has merits, particularly for firms exhibiting greater visibility afforded by higher analyst following. Finally essay three tests whether the switch to International Financial Reporting Standards (IFRS), results in a decrease in stock return volatility following adoption. An intuitive cross sectional volatility model is developed which identifies market volatility and {u03B2} as important factors. Further, given prior research, short-term and long-term effects are predicted to differ, hence separate tests identify the extent of the pre-post windows with this in mind. Results reveal that across the entire sample of adopters, the null of no decrease in stock volatility in the 10 months following adoption, is rejected. Short term tests are less convincing, with all but one specification failing to reject the null. This provides some evidence that the behaviour of stock volatility following this information event differs between the short and long term.