This study collates potential economic effects of mandated disclosure and reporting standards for corporate social responsibility (CSR) and sustainability topics. We first outline key features of CSR ...reporting. Next, we draw on relevant academic literatures in accounting, finance, economics, and management to discuss and evaluate the potential economic consequences of a requirement for CSR and sustainability reporting for U.S. firms, including effects in capital markets, on stakeholders other than investors, and on firm behavior. We also discuss issues related to the implementation and enforcement of CSR and sustainability reporting standards as well as two approaches to sustainability reporting that differ in their overarching goals and materiality standards. Our analysis yields a number of insights that are relevant for the current debate on mandatory CSR and sustainability reporting. It also points scholars to avenues for future research.
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CEKLJ, EMUNI, FIS, FZAB, GEOZS, GIS, IJS, IMTLJ, KILJ, KISLJ, MFDPS, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, SBMB, SBNM, UKNU, UL, UM, UPUK, VKSCE, ZAGLJ
This paper examines whether cross-listing in the U.S. reduces firms’ costs of capital. We estimate cost of capital effects implied by market prices and analyst forecasts, which accounts for changes ...in growth expectations around cross-listings. Firms with cross-listings on U.S. exchanges experience a decrease in their cost of capital between 70 and 120 basis points. These effects are sustained and exist after the Sarbanes-Oxley Act. We find smaller reductions for cross-listings in the over-the-counter market and for exchange-listings from countries with stronger legal institutions. For exchange-traded cross-listings, the cost of capital reduction accounts for over half of the increase in firm value, whereas for other types of cross-listings the valuation effects are primarily attributable to contemporaneous revisions in growth expectations.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, ...but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are concentrated in the European Union (EU) and limited to five EU countries that concurrently made substantive changes in reporting enforcement. There is little evidence of liquidity benefits in IFRS countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Thus, changes in reporting enforcement or (unobserved) factors associated with these changes play a critical role for the observed liquidity benefits after mandatory IFRS adoption. In contrast, the change in accounting standards seems to have had little effect on market liquidity.
•Panel-data design together with novel data on other regulatory changes allows the identification and separation of liquidity effects around mandatory IFRS adoption.•Liquidity benefits observed around IFRS adoption are limited to five EU countries with concurrent changes to the enforcement of financial reporting.•Liquidity benefits are present not only for mandatory IFRS adopters but also for voluntary IFRS adopters in those countries, suggesting that the switch in standards is not the primary driver.•No or little evidence for liquidity effects of switch to IFRS per se even when the existing legal and enforcement systems are strong.•Changes to reporting enforcement are a likely explanation for the capital-market outcomes around IFRS adoption.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
ABSTRACT
We analyze the effects of partner tenure and mandatory rotation on audit quality, pricing, and production for a large cross-section of U.S. public firms during 2008–2014. On average, we find ...no evidence that audit quality declines over the tenure cycle and little support for “fresh-look” benefits provided by the new audit partner. Audit fees decline and audit hours increase after mandatory rotation, but then reverse over the tenure cycle. We also find evidence that audit firms use “shadowing” in preparation for a lead partner turnover. These effects differ by competitiveness of the local audit market, client size, and partner experience. When multiple members of the audit team commence work at a new client, the transition appears to be more disruptive and more likely to exhibit audit quality effects. Our findings point to costly efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations.
JEL Classifications: J01; J44; L84; M21; M42.
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IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
This paper examines the economic consequences of mandatory International Financial Reporting Standards (IFRS) reporting around the world. We analyze the effects on market liquidity, cost of capital, ...and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects occur prior to the official adoption date. Partitioning our sample, we find that the capital-market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self-selection, the latter result cautions us to attribute the capital-market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries make concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects.
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BFBNIB, FZAB, GIS, IJS, KILJ, NLZOH, NMLJ, NUK, OILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK
This paper examines international differences in firms' cost of equity capital across 40 countries. We analyze whether the effectiveness of a country's legal institutions and securities regulation is ...systematically related to cross-country differences in the cost of equity capital. We employ several models to estimate firms' implied or ex ante cost of capital. Our results support the conclusion that firms from countries with more extensive disclosure requirements, stronger securities regulation, and stricter enforcement mechanisms have a significantly lower cost of capital. We perform extensive sensitivity analyses to assess the potentially confounding influence of countries' long-run growth differences on our results. We also show that, consistent with theory, the cost of capital effects of strong legal institutions become substantially smaller and, in many cases, statistically insignificant as capital markets become globally more integrated.
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BFBNIB, FZAB, GIS, IJS, KILJ, NLZOH, NMLJ, NUK, OILJ, PNG, SAZU, SBCE, SBMB, UL, UM, UPUK
This paper examines how capital market pressures and institutional factors shape firms' incentives to report earnings that reflect economic performance. To isolate the effects of reporting ...incentives, we exploit the fact that, within the European Union, privately held corporations face the same accounting standards as publicly traded companies because accounting regulation is based on legal form. We focus on the level of earnings management as one dimension of accounting quality that is particularly responsive to firms' reporting incentives. We document that private firms exhibit higher levels of earnings management and that strong legal systems are associated with less earnings management in private and public firms. We also provide evidence that private and public firms respond differentially to institutional factors, such as book-tax alignment, outside investor protection, and capital market structure. Moreover, legal institutions and capital market forces often appear to reinforce each other.
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BFBNIB, CEKLJ, IZUM, KILJ, NMLJ, NUK, PILJ, PNG, SAZU, UL, UM, UPUK
SYNOPSIS: This article is Part I of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In this part, we develop the conceptual ...framework for our analysis of potential costs and benefits from IFRS adoption in the United States. Drawing on the academic literature in accounting, finance, and economics, we assess the potential impact of IFRS adoption on the quality and comparability of U.S. reporting practices, the ensuing capital market effects, and the potential costs of switching from U.S. GAAP to IFRS. We also discuss the compatibility of IFRS with the current U.S. regulatory and legal environment, as well as the possible macroeconomic effects of IFRS adoption. Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit trade-off between (1) recurring, albeit modest, comparability benefits for investors; (2) recurring future cost savings that will largely accrue to multinational companies; and (3) one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. In Part II of the series (see Hail et al. 2010), we provide an analysis of the policy factors related to the decision and present several scenarios for the future evolution of U.S. accounting standards in light of the current global movement toward IFRS.
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CEKLJ, IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
The relationship between disclosure quality and cost of equity capital is an important topic in today's economy. In general, economic theory and anecdotal evidence suggest a negative association. ...Empirical work on this link, however, is confronted with major methodological drawbacks - neither disclosure level nor cost of capital can be observed directly - and has documented somewhat confounding results so far. Adopting a finite horizon version of the residual income model, I provide evidence on the nature of the above relationship and try to quantify the effect of a firm's voluntary disclosure policy on its implied cost of capital. Switzerland seems especially suited for an analysis of this kind given that Swiss firms have considerable reporting discretion and the mandated level of disclosure is low. For a cross-sectional sample of seventy-three non-financial companies I show a negative and highly significant association between the two variables. The magnitude is such that the most forthcoming firms enjoy about a 1.8 to 2.4% cost advantage over the least forthcoming firms. The findings persist even after controlling for other potentially influential variables, e.g. risk characteristics and firm size. Furthermore, adjusting for self-selection bias - a major concern in disclosure studies - the marginal effect remains of the same direction and even increases in magnitude, although at lower levels of statistical significance. One reason for the strong relationship might be found in differing institutional factors between the US and Swiss capital markets.
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BFBNIB, IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
SYNOPSIS: This is the second article of a two-part series analyzing the economic and policy factors related to the potential adoption of IFRS by the United States. In Part I (see Hail et al. 2010), ...we develop the conceptual framework for our analysis and discuss economic factors driving the costs and benefits associated with IFRS adoption. In this part, we provide an analysis of the political factors related to the possible U.S. adoption of IFRS, present several scenarios for the evolution of U.S. accounting standards, and outline opportunities for future research on global accounting standards and regulation. We start with a general discussion of the standard-setting process in accounting and how a U.S. switch to IFRS might affect worldwide competition among accounting standards and standard setters. We discuss potential political ramifications of such a decision on the standard-setting process in the United States, as well as on the governance structure of the International Accounting Standards Board. Drawing on our economic framework and the insights from our analysis, we conclude by outlining several possible ways of how U.S. accounting standards could evolve. These scenarios include maintaining U.S. GAAP, letting firms decide whether and when to adopt IFRS, mandating full compliance with IFRS within a prespecified schedule, or creating a competing U.S. GAAP-based set of accounting standards that could serve as a global alternative to IFRS.
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CEKLJ, IZUM, KILJ, NUK, PILJ, SAZU, UL, UM, UPUK
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