Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting
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131
The question whether the adoption of International Financial Reporting Standards (IFRS) will result in measurable economic benefits is of special policy relevance in particular given the European Union’s decision to require the application of IFRS by listed companies from 2005/2007. In this paper, I investigate the common con-jecture that internationally recognized high quality reporting standards (IAS/IFRS or US-GAAP) reduce the cost of capital of adopting firms (e.g. Levitt 1998; IASB 2002). Building on Leuz/Verrecchia (2000), I use a set of German firms which pre-adopted such standards before 2005, but investigate the potential economic benefits by analyzing their expected cost of equity capital utilizing and customizing avail-able implied estimation methods (e.g. Gebhardt/Lee/Swaminathan 2001, Easton/Taylor/Shroff/Sougiannis 2002, Easton 2004). Evidence from a sample of about 13,000 HGB, 4,500 IAS/IFRS and 3,000 US-GAAP firm-month observations in the period 1993-2002 generally fails to document lower expected cost of equity capital and therefore measurable economic benefits for firms applying IAS/IFRS or US-GAAP. Accordingly, I caution to state that reporting under internationally accepted standards, per se, lowers the cost of equity capital of adopting firms.
122
This study contributes to the valuation of employee stock options (ESO) in two ways: First, a new pricing model is presented, admitting a major part of calculations to be solved in closed form. Designed with a focus on good replication of empirics, the model fits with publicly observable exercise characteristics better than earlier models. In particular, it is able to account for the correlation of the time of exercise and the stock price at exercise, suspected of being crucial for the option value. The impact of correlation is weak, however, whereas cancellations play a central role. The second contribution of this paper is an examination to what extent the ESO pricing method of SFAS 123 is subject to discretion of the accountant. Given my model were true, the SFAS price would be a good proxy. Yet, outside shareholders usually cannot observe one of the SFAS input parameters. On behalf of an example I show that there is wide latitude left to the accountant.
122 r
This study contributes to the valuation of employee stock options (ESO) in two ways: First, a new pricing model is presented, admitting a major part of calculations to be solved in closed form. Designed with a focus on good replication of empirics, the model fits with publicly observable exercise characteristics better than earlier models. In particular, it is able to account for the correlation of the time of exercise and the stock price at exercise, suspected of being crucial for the option value. The impact of correlation is weak, however, whereas cancellations play a central role. The second contribution of this paper is an examination to what extent the ESO pricing method of SFAS 123 is subject to discretion of the accountant. Given my model were true, the SFAS price would be a good proxy. Yet, outside shareholders usually cannot observe one of the SFAS input parameters. On behalf of an example I show that there is wide latitude left to the accountant.
41
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm’s cost of capital. But whi le the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (IAS or US -GAAP), thereby committing themselves to increased le vels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely the bid-ask spread and trading volume, behave in the predicted direction compared to firms employing the German reporti ng regime.
40
This paper studies the incentives of German firms to voluntarily disclose cash flow statements over time. While cash flow statement are mandated under many GAAP regimes, its disclosure has not been mandatory in Germany until recently. Nevertheless, an increasing number of firms provides cash flow statements voluntarily. These firms are likely to be influenced by recommendations of the German accounting profession, IAS 7 as well as the respective standards of other countries. The idea of the paper is to study this influence by looking at the adoption pattern over time and the format of the cash flow statement. It documents the development of voluntary cash flow statement disclosures by German firms with respect to ”milestones” in the evolution of German professional recommendations and respective international standards. The cross-sectional determinants of voluntary and international cash flow statements are analyzed using probit regressions and factor analysis. The results are generally consistent with the idea that capital-market forces drive voluntary cash flow statements that are in line with international reporting practice.