Earnings quality in private firms: The role of IFRS and firm-level reporting incentives
Final Report Abstract
This report summarizes the final output of the above mentioned DFG financed project and the research process until success has been achieved. In short, we concluded the project very successfully with two publications in internationally recognized high quality journals. The first and primary project led to the publication "IFRS adoption, reporting incentives and financial reporting quality in private firms" by Moritz Bassemir and Zoltán Novotny-Farkas in the "Journal of Business Finance and Accounting", Vol. 45, No. 7-8 (2018): 759-796. Consistent with our proposal to the DFG, in this paper we examine the financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ. The process until publication of this paper was long and cumbersome for several reasons. First, much of the data necessary for the project had to be hand collected from multiple sources, which was very time consuming. We presented early versions of the paper at international conferences (including the Annual Congress of the European Accounting Association) and at invited research seminars at the some of the leading universities of our area, including the Wharton School of the University of Pennsylvania, Maastricht University and Tilburg University. We collected useful feedback at these presentation and revised the paper several times. We were successful with our submission to “Journal of Business Finance and Accounting” (JBFA). In fact, we were invited by the Editors of the journal to present the paper at the high profile, invitation - only JBFA Capital Markets Conference at the University of North Carolina in 2016. To capitalize on the unique dataset that we generated for the above paper, Moritz Bassemir started and successfully completed a separate, but related project on the determinants of private firms’ IFRS adoption. His paper "Why do private firms adopt IFRS" is published in the Accounting and Business Research Vol. 48, No. 3 (2018): 237-263. In this paper, he exploits the unique data on the German setting to examine why German private firms adopt IFRS. He finds that the expected net benefits of IFRS adoption vary substantially across the group of private firms, depending on their financing needs, governance system, and organizational and informational complexity. Specifically, he finds that private firms using IFRS have more growth opportunities, are more leveraged, are externally rated, seek to raise external capital by issuing public bonds or equity, are registered as a stock corporation, are characterized by private equity (PE) involvement, have more international sales and operations, and have a Big Five auditor. These insights should be of great interest to both preparers and regulators in the current debate about the future of financial reporting in private firms.
Publications
- IFRS adoption, reporting incentives and financial reporting quality in private firms. Journal of Business Finance & Accounting, July/August 2018, Pages 759-796
Moritz Bassemir, Zoltan Novoiny-Farkas
(See online at https://doi.org/10.1111/jbfa.12315) - Why do Private Firms Adopt IFRS? Accounting and Business Research
Volume 48, 2018 - Issue 3, 237-263
Moritz Bassemir
(See online at https://doi.org/10.1080/00014788.2017.1357459)
