Do IASB s Standard Setting Pronouncements Meet Investors Demands around the World?

Transcription

1 Do IASB s Standard Setting Pronouncements Meet Investors Demands around the World? Michael Stich* and Jürgen Ernstberger Ruhr-University Bochum, Universitätsstraße 150, D Bochum, Germany Preliminary conference version please do not quote without permission Abstract This paper investigates whether the IASB standard setting pronouncements, i.e., the publications of specific milestone-documents in the IASB s due process (discussion papers, exposure drafts, and final standards) meet the demands of investors. Specifically, we analyze abnormal return volatilities and cumulative abnormal returns to these pronouncements for firms applying IFRS around the world. The major challenge of the IASB in the standard setting process is to evaluate whether the benefits of new standards outwgh the costs in order to gauge thr efficiency. Using a sample of all IASB pronouncements from 2001 through 2009, we find that IASB standard setting pronouncements are associated with significant market reactions by investors. However, the overall market reactions are not positive, but vary cross-sectionally by jurisdiction, time period, and type of pronouncement. Further, we provide some evidence that standard setting pronouncements which tend to increase options and choices as well as fair value accounting are associated with more negative cumulative abnormal returns than other pronouncements. JEL Classification: G14; M48; M41 Keywords: IFRS; IASB; standard setting; due process; event study; market reaction We like to thank Frank Clarke (The University of Newcastle), Graeme Dean (The University of Sydney), Luzi Hail (The Wharton School, University of Pennsylvania), Bernhard Pellens (Ruhr-University Bochum), and the participants of the 2010 Doctoral Seminar on Market-Based Research in International Accounting at the University of Zürich, of the 2010 Ruhr-University Bochum Doctoral Colloquium in Accounting, of the Annual Congress of the European Accounting Association 2011 in Rome, and of the Ruhr-University Bochum Research School for helpful comments and suggestions. Moreover, we thankfully acknowledge helpful comments of anonymous reviewers. All remaining errors are ours. *Corresponding Author. Tel.: michael.stich@rub.de

2 1. Introduction During the last decade the International Financial Reporting Standards (IFRS) have become global accounting standards for the preparation of financial statements by publicly traded firms. The IFRS are issued by the International Accounting Standards Board (IASB) which began operations in 2001, when it succeeded the International Accounting Standards Committee (IASC). The major objective of the IASB is to develop a single set of high quality, understandable, and enforceable global accounting standards and to encourage convergence on these standards (IASB 2010b). IFRSs are developed through a due process, i.e., an international consultation process that involves interested individuals and organizations from around the world. The primary challenge of the IASB is to evaluate whether the benefits of new standards and modifications of existing standards outwgh the cost in order to gauge the efficiency of the IFRS application as a whole. This paper investigates whether the IASB standard setting pronouncements, i.e., the publications of specific milestone documents in the IASB s due process (discussion papers, exposure drafts, and final standards) meet the demand of investors. Specifically, we explore investors market reactions to all pronouncements between 2001 and As measures for the market reactions we use abnormal return volatility as well as cumulative abnormal return measures calculated for three-day event-windows around the publication of new pronouncements. We analyze the overall impact of new pronouncements as well as the determinants likely to influence investors assessments. For a sample of all firms around the world applying IFRS at the pronouncements publication dates we find that the IASB activities comprise important information content for investors. However, these pronouncements are overall not associated with positive cumulative abnormal returns. Basically, our results contradict the hypothesis that overall the IASB s standard setting pronouncements are percved to entail net-benefits for investors. The reason for this result might be the worldwide scope of the IFRS which makes it even more difficult to 2

3 understand the implications of standard setting pronouncements in different jurisdictions with different institutional settings. We also examine whether the market reactions vary by the type of standard setting pronouncements. We focus on discussion papers, exposure drafts, and final standards as the most important types of standard setting pronouncements as well as the most important steps of the IASB s due process. Our findings document significant differences in the market reactions bng most negative for discussion papers. To explore whether market reactions change over time we conduct an in-depth analysis of the IASB s standard setting pronouncements and identify three time periods with different strategies, i.e., a period of creating a stable platform for the mandatory IFRS adoption in the EU (years 2001 to 2004), a period of converging with the US GAAP and of improving as well as expanding the standards (years 2005 to 2007), and a period of reacting to the financial crisis (years 2008 to 2009). For these time periods we also find significant differences in investors market reactions bng most negative for the last time period. Further, we investigate the market reactions in different jurisdictions and industries. Our findings suggest that the market reactions significantly differ between jurisdictions and between the three clusters of institutional environments identified by Leuz (2010). The market reactions seem to be more negative in environments which are not represented in the IASB by a member and which are not specifically in the focus of the IASB s standard setting strategy, i.e., in developing jurisdictions or in jurisdictions with weaker enforcement. Moreover, we document differences in the market reactions of different industries but without a clear tendency in the desirability of IASB standard setting pronouncements for specific industries. We also examine whether the content of standard setting pronouncements has an impact on market reactions. We document that standard setting pronouncements which tend to increase options and choices for the preparers of financial statements are associated with more negative market reactions than other pronouncements. Further, we provide some evidence that 3

4 (proposed) standards which tend to increase fair value accounting in IFRS financial statements on average exhibit more negative abnormal returns than others. The paper contributes to the accounting literature in several ways. It is the first study which comprehensively documents market reactions to IASB standard setting pronouncement around the world and to assess the determinants of these reactions. Our finding that additional options and choices as well as an extension of fair value accounting are associated with negative market reactions is relevant for future standard setting of the IASB. The next section of the paper (Section 2) provides the theoretical background of our study and develops our hypotheses. Section 3 presents the research methodology and our measurement variables. Section 4 describes our sample and the data used for the analyses. Section 5 provides the results and Section 6 concludes. 2. Background, prior studies, and hypotheses 2.1 Global importance of the IASB Today more than 12,000 firms in more than 100 legislations have adopted IFRS and others (e.g., Canada in 2011, India in 2011, and Japan in 2013) are expected to pass or have plans to converge thr national standards. For the United States, the SEC issued a rule that allows forgn issuers to submit financial statements to the Commission using IFRS without an enclosed reconciliation of the IFRS data to US GAAP in December In November 2008, the SEC published a roadmap for a potential use of IFRS by US issuers, which sets four milestones that, if achieved, could lead to the required use of IFRS by US firms in 2014 (for an analysis of the economical and political factors see: Hail and Leuz 2009). With expanding acceptance and so with the growing importance of the IFRS, the IASB has become a global standard setter. The IASB is an independent standard setting body of the 4

5 IFRS Foundation and based in London. 1 It consists of 15 full-time members 2 from ten jurisdictions and from different interest groups like national standard-setters, users, auditors, academics, or preparers. The IASB is funded by contributions from firms, private financial institutions, major accounting firms, and other international organizations throughout the world. 2.2 Due process of the IASB The standard setting of the IASB follows a certain due process which generally consists of six stages: (1) adding a potential project to the agenda, (2) planning the project, (3) developing and issuing a discussion paper, (4) developing and issuing an exposure draft, (5) developing and issuing a new standard or changes to an existing standard, and (6) holding meetings with interested parties, including other (e.g., national) standard setting bodies, to help understand issues related to the practical implementation and potential impact of the changes. In stage (1) the IASB consults the Standards Advisory Council (SAC), which consists of approximately 40 representatives from organizations that are relevant to standard setting, and discusses a possible project in public meetings. When adding a project to its active agenda, the IASB decides in stage (2) on whether to conduct the project jointly with the Financial Accounting Standards Board (FASB) and whether a working group is established. The IASB selects a project manager who draws up a working plan and appoints project team members. A discussion paper is published in stage (3) for major new projects to provide an overview of important issues and possible approaches in addressing these issues. It may also include preliminary views of the IASB on the possible approaches and seeks to recve public comments from interest groups. The IASB could publish a discussion paper drafted ther by 1 Effective in July 2010 the International Accounting Standards Committee (IASC) Foundation was renamed without changes in function and competences as International Financial Reporting Standards (IFRS) Foundation. 2 At a meeting in January 2009 the Trustees of the IFRS Foundation decided to expand the IASB to 16 members by

6 its members or by supporting other standard setters. E.g., a recently published discussion paper about fair value measurement was developed by the FASB. Own discussion papers of the IASB are usually based on a research paper provided by its staff and considers comments by the SAC and other standard-setters. Stage (4) involves the publication of an exposure draft by the IASB, which is the main step of the due process in order to consult the public. Unlike a discussion paper, an exposure draft is mandatory in each due process and proposes specific rules for a new standard or amendments to an existing standard. Based on the public comments, the IASB revises its standard proposal and considers whether to issue a reexposure for public comment. When the IASB decides that a final conclusion is reached about all major issues, the staff develops a pre-ballot draft in stage (5). This draft is normally reviewed by the IFRIC and a near-final draft is published by the IASB on its internet platform eifrs. Finally, the new standard (amendment to an existing standard, respectively) is issued when the IASB members have balloted in favor of it. Stage (6) consists of educational activities to help interested parties in understanding and correctly applying the new standard (standard amendment). 2.3 Standard setting strategy of the IASB over time In the following, we analyze the IASB s standard setting strategy (e.g., Allen and Ramanna 2010) leading to several major pronouncements analyzed afterwards. Appendix 1 provides an overview of the standard setting pronouncement of the IASB for the years 2001 to Figure 1 illustrates the number of (projected) changes in standards pronounced by the IASB per year. === Figure 1 === 6

7 We identified three time periods with different strategies: The first period from 2001 through 2004 was characterized by starting a convergence project with the FASB and creating a stable platform for the mandatory IFRS adoption in Europe. The IASB assumed accounting standard-setting responsibilities from its predecessor body, the International Accounting Standards Committee (IASC) on April 1, This was the result of a fundamental restructuring of the IASC to realign its strategy and to foster its role as an independent and international standard setter. After consultations with national standard-setters and other interested parties, the IASB announced an initial agenda of nine technical projects. In the following, the IASB amended several existing IASs and in 2003 issued its first new standard on first-time adoption of IFRSs named IFRS 1. In September 2002, the IASB had a joint meeting with the US Financial Accounting Standards Board (FASB) and issued the so-called Norwalk Agreement or Memorandum of Understanding (MoU) in which they committed to a strategy of convergence between IFRS und US GAAP. To achieve this goal both standard setters revised or replaced existing standards or conducted joint projects in order to eliminate differences. By the end of 2003, the IASB completed its first Improvements Project which revised 14 standards and covered a variety of issues related to problems with implementing existing standards. In 2004, the IASB issued four IFRSs, two revised IASs and an amendment to the financial instruments standard by the end of March and announced the completion of a stable platform of standards for use by firms adopting IFRS from January The second period from 2005 through 2007 was characterized by the convergence project with the FASB and by an improvement and expansion of the standards. In two joint meetings, the IASB and the FASB reaffirmed the MoU in 2005 and issued a roadmap for completing the major MoU projects by The IASB started its second Improvements Project which was enacted in 2008 and expanded the scope of its standard setting, e.g., to management reports or to accounting rules for small and medium sized entities. 7

8 The third period from 2008 to 2009 was characterized by reactions to the financial crisis. At the climax of the financial crisis in 2008 the IASB forewent the regular due process and announced amendments to IAS 39 (Financial Instruments: Recognition and Measurement) and IFRS 7 (Financial Instruments: Disclosures) to relax reclassification rules for financial instruments measured at fair value due to political pressure (e.g., Bischof et al. 2009; Laux and Leuz 2009). In the following, several financial crisis related projects were added to the agenda, e.g., the replacement of IAS 39, the amendment of consolidation rules, and a new standard about the measurement of fair values. The leaders of the G20 nations issued declarations after thr meetings in Pittsburgh 2009 and in Toronto 2010 which requested the IASB and FASB to increase thr efforts to converge thr standards. The originally stated deadline of 2011 was not repeated in In addition, the G20 leaders encouraged the IASB to further improve the involvement of stakeholders, including outreach to emerging market economies. By the end of 2010, the IASB and the FASB published documents seeking views on thr standard setting strategy. They acknowledged that several new standards were about to be finalized and they requested whether or how to sequence effective dates in order to reduce the burden to interested parties. 2.4 Prior literature Our study is related to the literature on market reactions to the pronouncement or adoption of new accounting standards or other pieces of regulation. In early studies, Collins et al. (1981) and Lys (1984) investigate the determinants of the market reactions to the proposed elimination of full cost accounting in the oil and gas industry which negatively affected reported earnings and shareholders equity. The studies find that debt covenants and firm size are important determinants of the negative abnormal market returns for firms in the oil and gas industry. Espahbodi et al. (1991) analyze the market reaction to nine pronouncements related to the proposed SFAS 106 (Employers Accounting for Postretirement Benefits Other 8

9 Than Pensions) accounting for postretirement benefits other than pensions. They show that firms issuing such benefits exhibit significant negative market reactions around the issuance of the exposure draft. In line with contracting cost hypotheses they find that the valuedecreasing impact of the required disclosures are more pronounced for less mature, small, and highly leveraged firms. D Souza (2000) and Khurana and Loudder (1994) complement these results by suggesting a different market reaction for rate-regulated firms. They provide evidence that investors in public utilities did not, on average, view the proposed standard as a value-decreasing event. Moreover, the relation between financial leverage and the market impact of the proposed standard is contrary to that documented for the general population of firms. While the aforementioned studies explore the impact of eliminating income-increasing accounting method, Espahbodi et al. (1995) and Ricks and Hughes (1985) focus on the impact of introducing income-increasing standards. The former find no market reaction in weeks containing public pronouncements leading up to and including the Accounting Principles Board s adoption of a change from the cost to the equity method of accounting for long-term investments. The latter ones focus on accounting for income taxes, namely SFAS 96 (Recognition of Assets and Liabilities) and SFAS 109 (Accounting for Income Taxes). Around the exposure draft dates of these standards they find significant positive abnormal returns. The stock market reactions vary cross-sectionally and are more pronounced for small firms with high debt ratios and high deferred tax liabilities or high loss carry-forward benefits. Beatty et al. (1996) analyze the impact of fair value accounting according to SFAS 115 (Accounting for Certain Investments in Debt and Equity Securities) on stock prices of bank holding firms and insurance firms. They find negative market returns of bank shares, but only little market reactions of insurance firm shares. Analyzing the determinants of the market reactions, they provide evidence that banks with more frequently traded investments, with longer maturing investments and with more fully hedged portfolios were most negatively affected by the new standards. Dechow et al. (1996) and Espahbodi et al. (2002) examine the market reactions to 9

10 pronouncements related to accounting for stock-based compensation (in particular SFAS 123 [Accounting for Stock-Based Compensation]). While Dechow et al. (1996) nther find any significant stock market reaction to these pronouncements nor any firm-specific variables to be related to the stock market reactions, Espahbodi et al. (2002) document significant abnormal returns around the pronouncements which are more pronounced for high-tech, highgrowth, and start-up firms. Weber (2004) investigates market reactions to the adoption of SAB 96 which forced firms to choose between maintaining thr share repurchase programs and using the pooling-ofinterests method for business combinations. He documents a statistically significant negative market reaction to firms that had pending pooling-of-interests mergers on the date the pronouncement which is less pronounced for firms that used pooling-of-interests to avoid relatively larger reductions in future earnings. Both results imply that investors considered the pronouncement of the new restriction on the use of pooling-of-interests to be costly. Two studies examine the impact of new regulations not affecting reported income or shareholders equity. Lo (2003) investigates the 1992 revision of executive compensation disclosure rules and finds that firms lobbying against this regulation had, in comparison to control firms, abnormal stock returns of 6% over the 8-month period between the pronouncement of the proposed regulation and its adoption. This effect is more pronounced for firms which lobbied more vigorously against the new regulation. Both results are consistent with the notion that the proposed regulation induced corporate governance improvements to investors. In addition, Marquardt and Wiedman (2007) investigate the revision of financial reporting requirements for contingent convertibles (COCOs) to include them into diluted earnings per share. The authors provide evidence of significantly negative stock returns around pronouncement dates associated with the financial reporting changes, consistent with investor anticipating higher agency costs associated with the rule change. 10

11 Our study contributes to this prior literature by documenting the market reactions around the world on IASB standard setting pronouncements for the years 2001 through Hence, we provide comprehensive evidence of all pronouncements of a standard setter during a period of introducing and improving a relatively new accounting regime. In addition, this study adds to the literature which explores the economic consequences of applying IFRS. Comprehensives reviews are provided for the consequences of the voluntary IFRS adoption by Soderstrom and Sun (2007) and for the consequences of the mandatory IFRS adoption by Brüggemann et al. (2010). Extant literature provides evidence of positive reactions by capital markets and at the macroeconomic level upon the IFRS adoption, while they find mixed evidence for the impact on reporting practices. Our study is related to the capital market based consequences of IFRS adoption on, e.g., cost of capital, stock liquidity, stock price informativeness, information content of earnings pronouncements, analysts forecast properties or credit ratings. Most related to our research are studies analyzing investors responses to events that are expected to change the likelihood of an IFRS adoption by the EU. Comprix et al. (2003) explore short-window market reactions to events between 2000 and They provide evidence that the market reactions vary cross-sectionally with expected implementation costs, the quality of corporate governance mechanisms and the extent to which IFRS differs from domestic standards. Christensen et al. (2007) explore both short- and long-window market reactions for a sample of UK firms. They find a firm s willingness to adopt IFRS to be a determinant of the stock market reactions in the short and in the long-run. Pae et al. (2008) show that between 1999 and 2003 Tobin s q ratios of EU firms with high agency costs increased which they attribute to the IAS Regulation. Armstrong et al. (2010) investigate stock market reactions to 16 events between 2002 and 2005 that are expected to change the likelihood and scope of mandatory IFRS introduction in Europe. The results are consistent with investors anticipating net benefits from an increase in accounting quality and comparability due to mandatory IFRS adoption. However, investors reactions are 11

12 negative in code law countries that have might have weak enforcement environments. We complement the findings of these papers by exploring the capital market reactions to different standard setting pronouncements of the IASB and the determinants of cross-sectional variations of these reactions. Finally, our study is related to literature on the political economy of accounting standard setting. While most research in this area investigates constituents involvement in the due process by analyzing comment letters, only a few studies focus on the standard setting process itself. Allen and Ramanna (2010) examine the role of FASB members in shaping the properties of accounting standards. Thr findings suggest that longer board tenure and a prior career in investment banking or investment management are associated with proposing standards percved as decreasing accounting reliability. In contrast, FASB members contributions to the Democratic Party are associated with proposing standards percved as increasing accounting reliability. We contribute to this literature by exploring the determinants of net benefits attributable to new accounting standards Hypotheses Changes in accounting standards can improve financial reporting quality for investors (e.g., Ball 2006), e.g., by higher transparency and comparability, reduced information asymmetries, and less information risks (e.g., Barth et al. 1999; Leuz and Verrecchia 2000; Barth et al. 2008, 2010) leading to desirable outcomes for investors (e.g., lower cost of capital and more efficient investment decisions). Furthermore, new standards could be beneficial for investors in terms of positive cash flow effects (e.g., reduced contracting costs, Beatty et al. 1996; reduced scope for managerial rent extraction, Hope et al. 2003). As the IFRS are conceptually 3 In line with Armstrong et al. (2010), we note that the setting our study, which investigates investor reactions to the introduction of a great variety of financial reporting rules, shows some overlapping characteristics with prior research on the economic consequences of the establishment of broad pieces of legislations, e.g., of the Sarbanes-Oxley Act in 2002 (e.g., Jain and Rezaee 2006; Zhang 2007; Li et al. 2008). 12

13 focused on the information requirements of investors (IASB 2010a: 10) new standards could affect firm values by influencing the information set of current and potential investors. Thus, the IASB standard setting pronouncements potentially lead to positive capital market reaction. In contrast, new standards come along with direct and indirect cost for firms and thus for thr shareholders. Implementation and transition costs arise for firms adapting information systems and training the employees as well as for investors gaining expertise in the new rules. New standards also lead to costly changes in firms contracts, e.g., management compensation plans or debt contracts. Finally, the new standards might be a compromise between different views of the stakeholders in various jurisdictions which might not account for the needs of investors in a specific jurisdiction. Thus, IASB standard setting pronouncements contain important information about future investors benefits and cost. 4 However, it is ultimately an empirical question whether new pronouncements meet investors needs around the world. Because a priori arguments can be made for ther positive or negative market reactions following the IASB s pronouncements, we state the following hypothesis: H1: IASB standard setting pronouncements contain information relevant for investors and overall lead to positive/negative market reactions. Our second hypothesis examines whether the market reactions to standard setting pronouncements (in terms of the information content as well as concerning the desirability from an investor s perspective) have changed over time. We focus on the three time periods with different strategies of the IASB outlined in Section 2 and conjecture that the market reactions are different. Because of the increased political lobbying during the financial crisis 4 To simplify the exposure of our hypotheses, we focus on aspects of cumulative abnormal returns () within our hypotheses development and do not explicitly refer to our information content measure. However, H1 to H5 are also statistically evaluated using. Within Section 5, we describe our empirical findings for and for in a row. 13

14 the market reactions should be more positive for periods 1 and 2 in comparison to period 3. The difference between the market reactions between period 1 and 2 remains an empirical question. We hypothesize: H2: Market reactions to IASB standard setting pronouncements vary by different time periods. In the next analyses, we explore whether the sign and the magnitude of the market reactions to IASB standard setting pronouncements differ in different jurisdictions. Prior literature shows that legal and institutional differences of jurisdictions affect the properties of accounting outcomes (e.g., Ali and Hwang 2000; Leuz et al. 2003; Bushman and Piotroski 2006). This implies that uniform regulations for all jurisdictions allowing or requiring the use of IFRS might induce different market reactions. In contrast, new or proposed standards try to accommodate divergent national preferences, e.g., by providing choices and options to firms which might imply relatively comparable market reactions to thr pronouncement. We hypothesize: H3: Market reactions to IASB standard setting pronouncements vary by different jurisdictions. In addition, we evaluate whether the market reactions to IASB standard setting pronouncements vary cross-sectionally by industry. The IFRS are financial reporting rules which basically affect all industries, while there are some standards which actually are established to meet the activities of specific industries (e.g., IFRS 6 [Exploration for and Evaluation of Mineral Resources] and IAS 41 [Agriculture]). Further, there are IFRSs applied by all firms but affect specific industries in particular (e.g., IAS 39 [Financial Instruments: 14

15 Recognition and Measurement] for financials ). Moreover, some reactions of the IASB within the financial crisis are of outstanding importance for specific industries (e.g., the amendments to IAS 39 and IFRS 7 [Financial Instruments: Disclosures]; see: Bischof et al. 2009; Laux and Leuz 2009). Thus it seems to be likely that the market reactions to IASB standard setting pronouncements vary cross-industrially leading to the following hypothesis: H4: Market reactions to IASB standard setting pronouncements vary by different industries. Further, we evaluate whether the sign and the magnitude of the impact of new IASB pronouncements are influenced by the type of the pronouncement. Our study focuses on discussion papers, exposure drafts, and enactments of standards by the IASB. A discussion paper is not published in each due process. On the one hand, discussion papers are less binding than an exposure draft or even a standard (amendment), as they only describe alternative solutions and provide preliminary views of the IASB on these solutions. Thus, a relatively small market reaction can be expected. On the other hand, discussion papers are often based on completely new theoretical bases. E.g., the discussion paper on leases requires recognition of all lease contracts on the balance sheet which differs considerably from the current approach of recognizing only assets and liabilities from finance lease contracts. Further, participants of capital markets probably urge the IASB to improve the quality of the IFRSs (e.g., to decrease existing uncertainties in standards or unbefitting accounting rules). Hence, there might be a rather large market reaction to discussion papers because it signals to market participants that the IASB is committed to improve the quality of a certain regulation. An exposure draft is always published in a due process. It is more binding than a discussion paper because it states draft new regulations. However, the IASB could revise these regulation based on the comment letters recved. Moreover, some of these regulations could 15

16 be inferred from the discussion paper and from the public discussions of the IASB. In sum, the relative magnitude of the market reaction to an exposure draft in comparison to a discussion paper is unclear ex-ante. The final standard usually provides even less news to the market, but it will be mandatory beyond the effective date for all firms applying IFRS. Again, no ex-ante expectation about the difference in market reactions to a new standard (amendment) in comparison to discussion papers or exposure drafts can be stated. Thus, we test the following hypothesis: H5: The market reactions to discussion papers, exposure drafts, and final standards are different. Finally, we conjecture that market reactions to standard setting pronouncements by the IASB differ due to thr nature. First, we investigate whether major changes, i.e., the introduction of a standard for a new issue or a major amendment of an existing standard by suggesting or requiring a new theoretical approach, trigger different market reactions. Second, we test whether (proposed) standards which provide additional choices or options to its users lead to different market reactions than others. Options and choices provide leeway for earnings management, but they could also be used to signal future performance. Third, the use of fair value accounting is assumed to provide more transparency to the market but also more volatility to earnings and equity. We investigate whether the market reactions to standard setting pronouncement differ between pronouncements increasing the use of fair value accounting and others. Fourth, we explore whether more disclosures in fact provides more information to users of financial statements or whether they cause increased cost for firms effectively bearded by thr owners and could lead to an information overload. Based on the above discussion, our fourth hypothesis is as follows: 16

17 H6: The market reactions to IASB standard setting pronouncements are different for major vs. minor (proposed) changes, for (proposed) changes increasing vs. not increasing choices and options, for (proposed) increasing vs. not increasing fair value accounting changes, and for (proposed) changes increasing vs. not increasing disclosure requirement. 3. Research design 3.1 Synthetic benchmarks In classical event studies (e.g., MacKinlay 1997; Binder 1998) researchers basically evaluate the effect of one firm-specific pronouncement on the market value of this firm relative to an index approximating the unobservable and not (substantially) affected market portfolio. For our study, the latter assumption does not hold as the market portfolio is substantially influenced by the high proportion of IFRS-applying firms. Accordingly, the first step is to define a benchmark for each jurisdiction under consideration ( IFRS-jurisdiction ) which is not (directly) influenced by the IASB pronouncements. For this purpose earlier studies use return series from other jurisdictions. E.g., Armstrong et al. (2010) basically use the largest 1,200 Non-European firms out of the Dow Jones STOXX Global 1800 Index as a benchmark for EU firms. Zhang (2007) basically uses Canadian, Asian, and European firms as a benchmark for US firms (benchmarks on the continent level ). For our major analyses we expand these approaches and rely on jurisdiction-specific synthetic return benchmarks. To generate such a benchmark for each IFRS-jurisdiction, we identify the three most similar Non-IFRS-jurisdictions by a propensity score matching procedure (e.g., Rosenbaum and Rubin 1985; Caliendo and Kopnig 2006) based on overall characteristics of these economies. Conceptually comparable to Hope et al. (2006), we estimate the multivariate probit regression model given in equation (1) over several jurisdictions I for each calendar year T separately: 17

18 P IFRS 1 IT 2, T 4, T 0, T 1, T Enforcement Common Law Origin IT 3, T Capital Market Importance IT IT Capital Market Size u IT IT (1) where Greek letters stand for regression coefficients and uit is the residual of the regression. IFRS IT is a binary variable taking a value of 1 if the firms of a jurisdiction I apply IFRS for thr consolidated financial statements on a voluntary or mandatory base in calendar year T, 0 otherwise. Common Law OriginIT is a static binary variable taking a value of 1 if the legal system of jurisdiction I follows a common law legal origin as classified by Djankov et al. (2008), 0 otherwise. 5 Enforcemen t j, is the average amount of the proxies Rule of Law and T Control of Corruption developed by Kaufmann et al. (2010a, 2010b) of jurisdiction I in calendar year T. Rule of Law is an annual jurisdiction-specific measure of contract enforcement quality, as well as of police and court system quality. Control for Corruption is an annual jurisdiction-specific variable measuring the extent to which public power is exercised for private gain and the degree of capture of the state by private interests. Armstrong et al. (2010) aggregate these two measures to proxy for the overall enforcement environment of a jurisdiction. Capital Market Size is the yearly average market IT capitalization of all listed firms of jurisdiction I over the calendar year T (in current 1,000 US$). Capital Market Importance is the ratio of the average market capitalization divided IT by the Gross Domestic Product of jurisdiction I over the calendar year T. Djankov et al. (2008) use this measure to proxy for the development of the stock market. We define the three Non-IFRS -jurisdictions with the least propensity score absolute differences to each IFRS - jurisdiction under consideration as its benchmark jurisdictions. 5 For a contemporary overview about the impacts of the legal origin see: Aguilera and Jackson (2003) and La Porta et al. (2008). 18

19 Next, we calculate daily returns (continuously compounded definition) for all listed firms around the world ( R it ) and aggregate these daily returns for each jurisdiction I using equally It wghted portfolios ( R ). To create a synthetic benchmark return series for each IFRSjurisdiction I ' for each calendar year T we regress the daily returns of the IFRSjurisdiction I ' ( IFRS R I ' Tt ) on the daily returns of the three Non-IFRS benchmark jurisdictions NIFRS1 identified by the above-explained procedure ( R, I ' Tt R NIFRS 2 I ' Tt, and R NIFRS 3 I ' Tt ). For each IFRSjurisdiction I ' and for each calendar year T separately we perform the multivariate regression given in equation (2): R IFRS I ' Tt 0, I ' T 1, I ' T R NIFRS1 I ' Tt 2, I ' T R NIFRS2 I ' Tt 3, I ' T R NIFRS3 I ' Tt v I ' Tt (2) where Greek letters are regression coefficients and take the fitted values of this multivariate regression ( u I ' Tt is the residual of the regression. We ˆ IFRS R I ' Tt series for IFRS-jurisdiction I ' on day t within the calendar year T. 6 ) as the synthetic return benchmark 3.2 Measurement variables To evaluate our hypotheses, we use two measures for each event e on the firm-level. The first measure ( ) captures abnormal trading activities around the IASB pronouncements under examination in terms of abnormal return volatility. Abnormal trading activities indicate that the new information is relevant for investors and consequently reflected in stock prices. The second measure is a cumulative abnormal return metric ( ) based on abnormal returns around the IASB pronouncements under examination. Positive cumulative abnormal returns indicate that investors expect future net-benefits from the announced decisions of the IASB. 6 The average fit (adjusted R²) of these regressions is %. 19

20 In line with prior research, we basically measure the abnormal volatility of stock returns at pronouncements of information as the ratio of the event window return volatility to the nonevent window return volatility (Beaver 1968; Landsman and Maydew 2002; Landsman et al. 2010). We begin by computing daily abnormal returns using the market-model method (e.g., Binder 1998). Thereby, firms abnormal returns are calculated as the difference of realized daily returns ( R t ) and expected daily returns ( Rˆ t ). The latter are determined by a firmspecific market-model which is estimated for a benchmark period covering the 100 trading days prior to the event window. For each firm of the IFRS-jurisdiction I we use the yearadequate synthetic benchmark return series ( ˆ IFRS R I ' Tt ) as this is not influenced by the IASB pronouncements per definition. The modified market-model is given in equation (3): R t 0, 1, Rˆ IFRS I ' Tt w t (3) Where 0, and 1, are coefficients and w i, j, t is the error term of this model. Based on the residuals of this model, we calculate the stock return variance over the 3-day-event window, ( 1;1), which equals the average of the squared residuals over the event window ( w ) for each event e and firm i separately. Next, we calculate the stock return variance of the 2 ˆ estimation window ( ), ( 101; 2) which equals the variance of the residuals over the ˆ trading day estimation window. 7 As the quotient of 2 w ˆ and 2 ˆ is highly right skewed, we follow previous studies (e.g., Landsman et al. 2010) and take its natural logarithm to calculate 7 We exclude event windows arising from other IASB standard setting pronouncement events from our estimation window. 20

21 our abnormal return volatility ratio for event e and firm i. Thus, we get the definition given in equation (4): 8 2 wˆ log ˆ 2 (4) Figure 2 illustrates the distribution of over our largest sample. === Figure 2 === Also based on the previously described calculation of daily abnormal returns AR wˆ R Rˆ ( t t t t ) we define cumulative abnormal returns as the sum of the daily abnormal returns over the three-day event window, containing the event day as well as the trading day before and after this day ( AR, 1 AR,0 AR, 1 ). Figure 3 illustrates the distribution of over our largest sample. === Figure 3 === 3.3 Multivariate cross-sectional analyses In line with our hypotheses, we evaluate the drivers of the market reactions (measured by and ) to pronouncements in the course of the IASB standard setting process using multivariate regressions. We explain the abnormal return volatility ( for each firm i performing the multivariate regression given in equation (5): ) at event e 8 In line with Landsman et al. (2010), we expect that the quotient of the average of the squared residuals over the event window and of the abnormal return variance estimated of the estimation window is one. Thus, we expect that the natural logarithm of this quotient is zero if there is no abnormal volatility. 21

22 First Time IFRS 0 Ownership Concentration 4 Stock Performance 7 1 International Sales Profitability Stock Volatility Leverage 3 Size 6 ( Controls ) a (5) where Greek letters are coefficients and a is the error term of this regression model. All variables as defined in Appendix 2. We also include a binary variable for each firm as well as control variables for the type of IASB pronouncement in our equation. A positive coefficient of a regressor indicates ceteris paribus that higher values of the variable are associated with a higher level of abnormal return volatility around IASB standard setting pronouncements indicating a higher information content of the pronouncement. We explain the cumulative abnormal return at event e for each firm i conduction the following multivariate regression: First Time IFRS 0 Ownership Concentration 4 Stock Performance 7 1 International Sales 2 Profitability Stock Volatility 8 5 Leverage 3 Size 6 ( Controls) b (6) where Greek letters are coefficients and b is the error term of this regression model. All variables as defined in Appendix 2. We also include a binary variable for each firm as well as control variables for the type of IASB pronouncement in our equation. A negative coefficient of a regressor indicates that ceteris paribus higher values of the variable are associated with more pronounced negative investors reactions to the IASB standard setting pronouncements. Additionally, we investigate the impact of the content of the IASB pronouncements on cumulative abnormal returns ( ). To do so we use the regression model for cumulative abnormal returns described above and include a measurement variable X indicating a specific content-aspect of the IASB pronouncement. The resulting model is given in equation (7): 22

23 X Size Leverage ( Controls ) First Time IFRS 2 Ownership Concentration 5 Stock Performance c International Sales 3 Stock Volatility 9 Profitability 6 (7) where Greek letters are coefficients and c is the error term of this regression model. X stands for various content-specific aspects of the pronouncements. First, X stands for the variable Increase in Fair Value Accounting which is a categorical variable taking a value of 1 ( 1) if there is an increase (decrease) in fair value accounting, 0 otherwise. 13 (4) pronouncements are classified as fair value increasing (decreasing). Second, X stands for the variable Increase in the Number of Options which is a categorical variable taking a value of 1 ( 1) if there is an increase (decrease) in the number of options, 0 otherwise. 9 pronouncements are classified as number of option increasing. Third, X stands for the variable Major Change which is a binary variable taking a value of 1 if a (future) change in the IFRS is judged as fundamental i.e. a new methodology is introduced, existing financial reporting rules are deeply modified, or if a new standard is announced. 36 pronouncements are classified as major change. Fourth, X stands for the variable Increase in Disclosure Requirement which is a categorical variable taking a value of 1 ( 1) if there is an increase (decrease) in the extent of disclosure requirement, 0 otherwise. 41 (2) pronouncements are classified as increasing (decreasing) the extent of disclosure requirements. All other variables as defined in Appendix 2. We also include a binary variable for each firm as well as control variables for the type of IASB pronouncement in our equation. 23

24 4. Identification of events, data sources, and sample description 4.1 Identification of standard setting pronouncement events Basically, we investigate all discussion paper, exposure draft, and standard pronouncements from April 1, 2001 (the date on which the IASB assumed its duties) to December 31, We do not take amendments into account which are described as editorial changes by the IASB itself. Further, we do not rely on amendments, by way of consequence as these modifications are not caused by changes in content but by insurance of consistency between accounting standards. We take the information about the decision of publication of drafts from the staff summaries of the IASB as available on the IASB homepage and from additional explanations provided on this homepage (http//: Information about future financial reporting standards is important for users and preparers of financial statements. Thus, these pieces of information are likely to be reflected in stock prices if thr content changes investors expectations about the amount and the uncertainty of future cash flows. Assuming sufficiently efficient stock markets we expect market reactions in short intervals around the pronouncements. However, from a great number of discussions with board-members and of firms financial accountants we learn that, first, (projected) changes in financial reporting standards are notice by decision makers but, second, decisions of the IASB are not directly observed in most cases but indirectly over publicly available information systems with a time-lag. Inspired by these discussions, we do not directly take the date of the IASB decision or publication of new drafts but the day this information is published on wide-spread international publicly available platforms. In detail, we use one of the most prominent homepages for news and for the development of IFRSs which is provided by Deloitte (http//: We are aware that the publication on this platform can be influenced by unobservable aspects, however, it seems to be appropriate to take such a lagged date as a proxy for the date information about 24

25 the (expected) changes in IFRS are noticed and taken into account by capital market participants and investors in particular. 4.2 Data source We collect daily stock market data (daily return indices and daily trading volumes) as well as the information about accounting principles used by the firms basically from the Datastream Worldscope database. Thereby, we follow the classification proposed by Daske et al. (2008) to identify IFRS adoptions. Further, we assume an effective voluntary or mandatory adoption of IFRS in jurisdictions if more than 10% of the available observations are from IFRS financial statements. As previous studies found several unclear, contradicting or even erroneous entries in this database for the type of accounting principles used (e.g., Daske et al. 2008) we correct this data manually if the item contradicts the relevant commercial code. If the shares of a firm are traded on more than one stock exchange we use data from the main domestic stock exchange defined as the one with the highest absolute trading volume of the stock per year. Macroeconomic data are taken from the homepage of the World Bank. The basic sample of our study comprises all firms applying IFRS (maximum of 10,520 firms from 35 jurisdictions) with data available in the Datastream Worldscope database at any time in the investigated period (fiscal years 2001 to 2009). To construct our jurisdiction-specific synthetic benchmarks, we also use 19,580 firms from a maximum of 40 jurisdictions not applying IFRS in the respective calendar year (including 7,210 firms from the United States). To calculate daily portfolio returns of several jurisdictions we assume that there are at least 25% out of the maximal number of returns of a jurisdiction available. These criteria lead to 48 to 52 jurisdictions for each year of the investigated period (with 35 IFRS-jurisdictions in 2009). Further, we do not use abnormal daily returns which do not result from at least 25 daily observations in the estimation period (out of 100 days before the event window) of each event under consideration. We only take abnormal return volatilities ( 25 ) and

26 cumulative abnormal returns ( ) into account if there are daily abnormal returns available for all days of the event window. This requirements lead to 387,854 observations from 10,520 IFRS-firms from 35 IFRS-jurisdictions. Our variables concerning the content of the IASB pronouncements are self-defined based on independent judgements of the authors. Only in the case if the authors rate the content of the pronouncement equally the information is used. 4.3 Sample distribution Table 1 to 3 provide an overview about the number of observations (abnormal return volatility and cumulative abnormal returns show equal numbers of observations) resulting from all IASB pronouncements from 2001 to Table 1 shows the distribution of observations by jurisdiction. The table shows that most firms of our sample are from Australia (17.901%), from the United Kingdom (14.170%), and from Germany (9.885%). For 2,142 IFRS-firms no information about thr industry classification is available in the Datastream Worldscope database (resulting in a sample of 8,378 firms with 292,261 observations available). === Table 1 === Table 2 gives an overview of the distribution of firms by industry following the 12-industries classification (French 2008) based on the SIC codes. The proportion of financials is % (56,916 observations), of manufacturing firms is % (39,540 observations), and of business equipment firms is % (10,748 observations). The proportion of others is 7.051% (27,346 observations). Other industries show a proportion less than %. Jurisdictions considerably differ in the industry distribution, especially in the proportion of financials (maximal proportion spread of %) and of manufacturing firms (proportion spread of %). This industry distribution of firms is widely 26

27 comparable to the industry distribution of observations as described above. Our study includes 387,854 unique observations. 9 === Table 2 === Table 3 shows the distribution of observations by year and type of pronouncement % stem from the early period of the IASB (years 2001 to 2004) % are from the years 2005 to 2007 and % are from the years 2008 to ,308 observations (18.417%) relate to discussion papers, 196,057 (48.591%) relate to exposure drafts, and 133,118 (32.992%) relate to final standards. Except for 2009, the number of observations increases monotonically over the period investigated. Reasons are, first, the increasing data availability of the used database, second, the higher number of firms apply IFRS (especially since the fiscal year 2005), and third, the increasing IASB activities resulting in a higher number of official standard setting pronouncements. 5. Empirical findings 5.1 IFRS adoption by jurisdiction Table 4 shows the yearly results of the probit regression model described in Section 3, which is the first step of our jurisdiction-level matching procedure to identify adequate benchmark jurisdictions ( Non-IFRS jurisdictions ) for those jurisdictions allowing or mandating the application of IFRS for publicly traded firms ( IFRS jurisdictions ). The proportion of IFRS jurisdictions within the yearly samples increases from % in 2001 to % in While the findings of these regressions are stable over time the explanatory power (McFadden R²s) of these probit models considerably increases from 9.470% in 2001 to % in ,629 additional observations relate to pronouncement days at which two types of pronouncements we published. Excluding these observations from our analyses does not change the results at any stage of the study. 27

28 We find limited evidence that the legal origin as well as the level of enforcement of the jurisdiction influences the likelihood of the IFRS adoption. Jurisdictions characterized by a common law legal origin are less likely to adopt the IFRS while jurisdictions showing a higher level of financial reporting enforcement are more likely to adopt the IFRS. In line with Hope et al. (2006), we find evidence that smaller jurisdictions show a higher IFRS adoption probability. Last, jurisdictions characterized by a higher economical importance of the capital market are more likely to adopt the IFRS. 10 We use the propensity score of each jurisdiction in each calendar year to determine three benchmark jurisdictions not applying IFRS for each IFRS jurisdiction allowing or mandating the use of IFRS. 11 === Table 4 === 5.2 Information content of (expected) changes in IFRS Within this study we use two different measures to evaluate market reactions to IASB standard setting pronouncements. The first measure, abnormal return volatility ( ), indicates the information content of the announced pieces of information (Beaver 1968; Landsman and Maydew 2002; Landsman et al. 2009). Referring to hypothesis 1, we find that IASB standard setting pronouncements show a highly significant information impact for investors (Table 5). The mean is (t = ) and the median is (z = ). This means that investors take into account and react to the development and publication of financial reporting rules in general. 10 The variables Capital Market Size and Capital Market Importance are positively correlated from to Thus, serious multi-collinearity concerns arise. However, these correlations do not seem to be critical at this stage of the analyses. 11 For an evaluation of the motives of an IFRS adoption see: Hope et al. (2006) and Ramanna and Sletten (2009). 28

29 === Table 5 === Referring to hypothesis 2, we evaluate if the information content of IASB standard setting pronouncements has changed over time due to the changing role of the IASB (Table 6). For the mean, we find that there is a significant increase of the information content of the IASB pronouncements in the periods of the international financial crises (years 2008 to 2009) relative to the periods before (years 2001 to 2007). However, median does not support this hypothesis and indicates a very constant information content of IASB pronouncements over the whole investigation period (years 2001 to 2009). === Table 6 === Our hypothesis 3 refers to difference in the pricing of the information content of IASB pronouncements between IFRS adopting jurisdictions. Overall, we document highly significant positive means and medians for each jurisdiction (Table 7). Only in very rare cases we find insignificantly positive or even negative means of for small and less developed jurisdictions. These differences primarily cause the remarkably high F- and χ²statistics reported in Table 7 (mean equality test: F = ; median equality test: χ² = ). An elimination of the five jurisdictions showing the lowest means of lead to F-statistics (χ²-statistics) of (24.177) which are still highly significant but on a more conventional level. === Table 7 === 29

30 The results of a jurisdiction-clustering following Leuz (2010) concerning regulatory, market property, and reporting practice variables provides further insight in jurisdiction differences (Table 8). By trend, it seems to be that there is higher information content for jurisdictions of the cluster 2 relative to cluster 1 and 3. Cluster 2 primarily contains traditional European jurisdictions (e.g., Austria, France, Germany, Switzerland, and the Scandinavian jurisdictions). Thus, more pronounced reactions in the jurisdictions of this cluster indicate that the IASB pronouncements are of particular interest for investors in these jurisdictions. === Table 8 === Next, referring to hypothesis 4, we explore whether the information content varies across different industries (Table 9). Mean (Median) equality tests provide evidence for considerable industry-differences (mean equality test: F = ; median equality test: χ² = ). === Table 9 === Referring to hypothesis 5, we evaluate if pronouncements of different stages in the IASB standard setting process (discussion papers, exposure drafts, and final standards) are characterized by different information content. This seems to be likely as these three types of IASB pronouncements have very different functions and provide different content about future financial reporting rules to the market participants. We find that each type of pronouncement shows very remarkable information content as mean (median) values of are highly significant positive for each type. However, F- and χ²-statistics reported in Table 10 (mean equality test: F = ; median equality test: χ² = ) indicate that there are highly significant differences between these types of pronouncements. By trend, the 30

31 mean and median values of show that exposure drafts have slightly lower information content than discussion papers and final standards. One reason for this finding could be that the publication of an exposure draft takes place in the phase of the IASB standard setting characterized by the most controversial debate. It seems to be plausible that investors participating or watching this debate are well informed and thus less interested or surprised by the content of the exposure draft resulting in lower. === Table 10 === Table 12 provides a broad overview about the firm-specific determinants of the information content measure sorted by the type of the IASB pronouncement (for descriptive statistics of the control variables see Table 11). The findings for each type of pronouncement are very similar. We find that is higher for firms with a high proportion of forgn sales, for firm with a higher financial leverage, and for larger firms. Further, we find that is lower for firms firm-time applying IFRS, for firms with a higher ownership concentration, for firms with a more desirable stock performance, and for firms with a higher stock volatility. The overall fits of these regressions are satisfactory (adjusted R² about 10%). === Table 11 and 12 === 5.3 Expected net-benefits of (expected) changes in IFRS Our second measure is a cumulative abnormal return metric. While indicates the information content of an IASB pronouncement (independent from the desirability of the announced information) directly indicates investors expected net-benefits. Expected 31

32 positive (negative) net-benefits of a standard setting pronouncement should results in positive (negative) cumulative abnormal returns. Referring to hypothesis 1, we find that IASB standard setting pronouncements lead to highly significant negative mean of 0.129% (t = ) and median of 0.160% (z = ). These findings indicate that investors expect higher cost (e.g., adoption cost, more expensive preparation of financial statements, etc.) than benefits (e.g., higher financial reporting quality, higher comparability of firms, reduced contracting cost, etc.) from modifications within the IFRS rules. Based on these findings, we overall answer our introducing research question: no, we do not find evidence that the IASB s standard setting pronouncements meet investors demands. However, an alternative explanation for the (overall) negative market reactions is that the improvement of the IFRS financial reporting quality by the IASB provides more insight in negative aspects of the future firm performance than in positive aspects. Referring to hypothesis 2, we evaluate if the expected investor net-benefits of (future) changes of IFRS in terms of have changed over time due to the changing role of the IASB. As indicated by the test statistics reported in Table 6 (mean equality test: F = ; median equality test: χ² = ) the of the three stages of the IASB standard setting activities differ on a highly significant level. For the early stage of the IASB (years 2001 to 2004), we find economically limited but for medians statistically significant negative. For the mid-stage of the IASB standard setting activities (years 2005 to 2007), we find significantly positive mean but significantly negative median. Finally, we find highly significant negative in the years of the international financial crisis (year 2008 to 2009). Our hypothesis 3 refers to difference in market reactions between different IFRS jurisdictions. Overall, as reported in Table 7 we document highly significant variations in 32 across the

33 jurisdictions of the sample (mean equality test: F = ; median equality test: χ² = ). For the overwhelming number of jurisdictions we find highly significant negative mean and median. Only for Australia we document limited evidence for an overall positive. The results of a jurisdiction-clustering following Leuz (2010) concerning regulatory, market property, and reporting practice variables provides further insight in jurisdiction differences concerning the expected investor net-benefits. Even if median equality tests provide evidence for differences between the three clusters (median equality test show χ² up to ) we are not able to document a clear cross-sectional trend in the market reactions. Referring to hypothesis 4, we explore variations in across different industries. Mean (Median) equality tests provide statistical evidence for industry-differences (mean equality test: F = 2.874; median equality test: χ² = ). Once more, there is no single industry (incl., financials ) showing a remarkably different mean or median relative to the other industries. Referring to hypothesis 5, we evaluate if pronouncements of different stages in the IASB standard setting process (discussion papers, exposure drafts, and final standards) are characterized by different expected net-benefits resulting in different. We find significantly mean and median negative for each type of pronouncement. Test statistics reported in Table 10 (mean equality test: F = ; median equality test: χ² = ) indicate that there are highly significant differences between these types of pronouncements. However, we do not find a clear trend concerning the desirability of discussion papers, exposure drafts, and final standards from an investor s perspective. Parallel to the regression results for previously discussed, Table 12 provides an overview about the firm-specific determinants of. The findings of these regressions are quite comparable to those for but show considerably lower overall fits (adjusted R²s 33

34 about 1%). We find that is higher for firms first-time applying IFRS, for firm with a high proportion of forgn sales, and for firm with a higher financial leverage. Further, we find that is lower for firms with a higher ownership concentration as well as for larger firms and for those firms characterized by a more desirable stock performance and by a higher stock volatility. Referring to hypothesis 6, we additionally include several variables indicating specific content-aspects of the IASB standard setting pronouncements under examination. We provide evidence that after controlling for diverse firm characteristics the content of the pronouncements considerably influences. We find that pronouncements which tend to increase fair value accounting rules within the IFRS lead to more negative on a highly significant level (t = 9.302). We show that standard setting pronouncements which tend to increase options and choices for the preparers of financial statements are associated with more negative market reactions than other pronouncements (t = 9.967). Further, we show that (expected) major changes within the IFRS as well as increasing disclosure requirement lead to more negative market reactions (t = and t = respectively). === Table 13 === 5.4 Comparison to a random sample In line with several current capital market studies (e.g., Daske et al. 2008), we re-perform all analyses using market reaction on a randomly selected set of pseudo-event days. For each standard setting event under examination, we randomly select a day ( pseudo event day in the same calendar which is not an event day of our original sample and calculate as well as for this day. This procedure results in 376,402 observations for each measure. We find that the overall mean (median) for this sample is (-0.013) and that the 34

35 overall mean (median) is (-0.001). These values significantly differ from the market reactions upon IASB standard setting pronouncements. For our cross-sectional analyses, we do not find any significances for our variables of interest and document considerably lower overall fits of the regressions (adjusted R²s from 2% to 5% for the regressions explaining and even negative adjusted R²s for the regressions explaining ). Thus, we take these findings as evidence that our original test-statistics referring to zero abnormal return volatility as well as to zero cumulative abnormal returns are not systematically biased by the definition of these measures. 6. Summary and concluding remarks This paper investigates market reactions to IASB standard setting pronouncements, i.e., the publications of discussion papers, exposure drafts as well as of new standards. We analyze the overall impact of a publication of these pronouncements on IFRS firms abnormal return volatilities and cumulative abnormal returns as well as the determinants likely to influence market participants assessments of new standard setting releases. Using a sample of all IASB pronouncements from 2001 through 2009 we find no positive overall market reaction of investors around the world. This indicates that investors recognize the publication of IASB s new standard setting pronouncements and overall expect the cost to be higher than the benefits. Reasons for the negative evaluation of IASB standard setting pronouncements by investors might be the focus on other stakeholder groups, political pressures, private incentives, or a missing adaptation of rules to national peculiarities. Moreover, we find that market reactions vary cross-sectionally by jurisdiction, time period, industry, and type of pronouncement. We also provide some evidence about the impact of different qualitative characteristics of the pronouncements on thr evaluation by investors. Standard setting pronouncements which 35

36 tend to increase options and choices as well as fair value accounting are associated with more negative market reactions than other pronouncements. This result implies that these qualitative characteristics are percved to be less desirable by investors. Two comments on abnormal return volatilities and cumulative abnormal returns are in order: First, while abnormal values are not the only dimension of measuring the usefulness of new standards (e.g., implementation issues after the pronouncement and reactions of other users of financial statements might also be of interest), the reactions of equity investors are of great importance because they are regarded as the primary users of financial statements. Second, market returns are influenced by several other events besides standard setting pronouncements by the IASB. Yet, our specific benchmark construction as well as our comprehensive sample of firms from several jurisdictions around the world allow us to control for potentially biasing events. 36

37 Appendix 1 IASB standard setting pronouncements from 2001 to 2009 Panel A: April 1, 2001 to April 30, 2004 Type of IASB pronouncement Title of the IASB pronouncement Date of publication Exposure Draft Proposed Improvements to IFRS May 1, 2002 Standard Amendment to IAS 19 (Employee Benefits - Asset Cling) May 31, 2002 Exposure Draft First-time Application July 30, 2002 Exposure Draft Sharebased Payment December 15, 2002 Exposure Draft Business Combinations December 15, 2002 Standard IFRS 1 ( First Time Adoption of IFRS) June 19, 2003 Exposure Draft Disposal of Non-current Assets and Presentation of Discontinued Operations July 23, 2003 Exposure Draft Insurance Contracts July 30, 2003 Exposure Draft Standard Proposed Amendments to IAS 39 (Financial Instruments: Recognition and Measurement - Fair Value Hedge Accounting for a Portfolio Hedge of Interest Risk ) Revision of IAS 32 (Financial Instruments: Diclosure and Presentation ) and IAS 39 (Financial Instruments: Recognition and Measurement - Transition and Initial Recognition of Financial Assets and Financial Liabilities ) August 20, 2003 December 17, 2003 Standard Improvements of IFRSs December 18, 2003 Standard IFRS 2 (Share-based Payments ) February 19, 2004 Standard IFRS 3 (Business Combinations ), IFRS 4 (Insurance Contracts ), IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations ), Amendments to IAS 36 (Impairment of Assets ) and IAS 38 (Intangible Assets ) March 31, 2004 Standard Exposure Draft Exposure Draft Amendments to IAS 39 (Financial Instruments: Recognition and Measurement ) Proposed Amendments to IAS 39 (Financial Instruments: Recognition and Measurement - The Fair Value Option ) Proposed Amendments to IAS 19 (Employee Benefits Actuarial Gains and Losses, Group Plans and Disclosures ) March 31, 2004 April 20, 2004 April 30, 2004 (continued on next pages) 37

38 Appendix 1 (continued) Panel B: IASB Pronouncements (May 7, 2004 to August 18, 2005) Type of IASB Pronouncement Exposure Draft Exposure Draft Exposure Draft Exposure Draft Exposure Draft Standard Title of the IASB Pronouncement Proposed Amendments to Scope of IFRS 3 (Business Combinations - Combinations by Contract Alone or Involving Mutual Entities ) Proposed Amendments to IAS 39 (Financial Instruments: Recognition and Measurement - Transition and Initial Recognition of Financial Assets and Financial Liabilities ) Proposed Amendments to IAS 39 (Financial Instruments: Recognition and Measurement - Cash Flow Hedge Accounting of Forecast Intragroup Transactions ) Proposed Amendments to IFRS 4 (Insurance contracts, Financial guarantee contracts and credit insurance ) and IAS 39 (Financial instruments: Recognition and measurement ) Financial Instruments: Disclosures (incl., proposed Basis for Conclusion and Implementation Guidance) IFRS 6 (Exploration For and Evaluation of Mineral Resources ) and Amendments to IAS 19 (Employee Benefits ) Date of Publication May 7, 2004 July 2, 2004 July 19, 2004 July 19, 2004 July 22, 2004 December 9, 2004 Standard Amendments to IAS 39 (Transition and Initial Recognition ) December 17, 2004 Standard Amendment to IAS 39 (Financial instruments: Recognition and Measurement - Cash Flow Hedge Accounting ) April 14, 2005 Standard Amendments to IAS 39 (Fair Value Option ) June 16, 2005 Exposure Draft Proposed Amendments to IFRS 3 (Business Combinations ) and IAS 27 (Consolidated and Separate Financial Statements ) June 30, 2005 Exposure Draft Proposed Amendments to IAS 19 (Employee Benefits ) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets ) June 30, 2005 Standard Amendments to IFRS 1 (First-time Adoption of IFRS ) and IFRS 6 (Exploration for and Evaluation of Mineral Resources) June 30, 2005 Standard IFRS 7 (Financial instruments: Disclosure ), Amendment to IFRS 4 (Insurance contracts - Financial guarantee contracts ), IAS 1 (Presentation of financial statements - Capital disclosure ), and IAS 39 (Financial instruments: Recognition and measurement ) August 18, 2005 (continued on next pages) 38

39 Appendix 1 (continued) Panel C: IASB pronouncements (October 4, 2005 to March 5, 2007) Type of IASB Pronouncement Title of the IASB Pronouncement Date of Publication Exposure Draft Proposed Amendments to IAS 21 (Draft Technical Correction ) October 4, 2005 Discussion Paper Management Commentary November 7, 2005 Discussion Paper Standard Measurement Bases for Financial Accounting Measurement on Initial Recognition Amendment to IAS 21 (The effect of changes in forgn exchange rates - Net investment in a forgn operation ) November 17, 2005 December 15, 2005 Exposure Draft Operating Segments January 30, 2006 Exposure Draft Exposure Draft Proposed Amendments to IFRS 2 (Vesting Conditions and Cancellations ) Proposed Amendments to IAS 1 (Presentation of Financial Statements: A Revised Presentation ) February 16, 2006 March 27, 2006 Exposure Draft Proposed Amendments to IAS 23 (Borrowing Costs ) May 25, 2006 Exposure Draft Discussion Paper Discussion Paper Proposed Amendments to IAS 32 (Financial Instruments: Presentation ) and IAS 1 (Presentation of Financial Statements: Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation ) Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information Fair Value Measurements, Part 1: Invitation to Comment and relevant IFRS guidance June 22, 2006 July 17, 2006 November 30, 2006 Standard IFRS 8 (Operating segments ) November 30, 2006 Exposure Draft Proposed Amendments to IFRS 1 (First-time Adoption of IFRS ) January 25, 2007 Exposure Draft IFRS for SMEs (incl. Basis for Conculsions and Implementation Guidance) February 26, 2007 Exposure Draft Proposed Amendments to IAS 24 (Related Party Disclosures ) March 5, 2007 (continued on next pages) 39

40 Appendix 1 (continued) Panel D: IASB pronouncements (March 29, 2007 to March 27, 2008) Type of IASB Pronouncement Title of the IASB Pronouncement Date of Publication Standard IAS 23 (Borrowing Costs ) March 29, 2007 Discussion Paper Insurance Contracts May 3, 2007 Standard IAS 1 (Presentation of Financial Statements ) September 6, 2007 Exposure Draft Joint Arrangements September 13, 2007 Exposure Draft Proposed amendments to IAS 39 (Recognition and Measurement: Identification of Exposures Qualifying for Hedge Accounting ) September 17, 2007 Exposure Draft Proposed Improvements to IFRSs October 11, 2007 Exposure Draft Proposed Amendments to IFRS 1 (First-time Adoption of IFRS ) and IAS 27 (Consolidated and Separate Financial Statements ) December 13, 2007 Exposure Draft Proposed Amendments to IFRS 2 (Shared-based Payment ) December 13, 207 Standard Revision of IFRS 3 (Business combinations ) January 10, 2008 Standard Amendments to IAS 27 (Consolidated and Separate Financial Statements ) January 10, 2008 Standard Amendment to IFRS 2 (Share-based payment ) January 17, 2008 Standard Amendments to IAS 1 (Presentation of financial statements ) and February 14, 2008 Discussion Paper Financial Instruments with Characteristics of Equity February 28, 2008 Discussion Paper Reducing Complexity in Reporting Financial Instruments March 19, 2008 Discussion Paper Proposed Amendments to IAS 19 (Employee Benefits ) March 27, 2008 (continued on next pages) 40

41 Appendix 1 (continued) Panel E: IASB Pronouncements (May 22, 2008 to December 18, 2008) Type of IASB Pronouncement Title of the IASB Pronouncement Date of Publication Standard Improvements to IFRSs May 22, 2008 Standard Amendments to IFRS 1 (First-time Adoption of IFRS ) and IAS 27 (Consolidated and Separate Financial Statements - Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate ) May 22, 2008 Discussion Paper Standard Improved Conceptual Framework for Financial Reporting, The Reporting Entity Amendments to IAS 39 (Financial instruments: Recognition and measurement - Eligible hedged items ) May 29, 2008 July 31, 2008 Exposure Draft Proposed Improvements to IFRSs August 7, 2008 Exposure Draft Proposed Amendments to IAS 33 (Simplifying Earnings per Share ) August 7, 2008 Exposure Draft Exposure Draft Standard Proposed Amendments to IFRS 1 (Additional Exemptions for Firsttime Adopters ) Proposed Amendments to IFRS 7 (Improving Disclosure about Financial Instruments ) IFRS 7 (Financial Instruments: Disclosure ) and Amendments to IAS 39 (Financial Instruments: Recognition and Measurement ) September 25, 2008 September 25, 2008 October 13, 2008 Exposure Draft Amendment to IFRS 7 (Improving Disclosures about Financial Instruments ) October 15, 2008 Discussion Paper Financial Statement Presentation October 16, 2008 Standard Standard Amendments to IFRS 1 (First-time adoption of international financial reporting standards ) Reclassification-Amendments to IFRS 7 (Financial instruments: Disclosure ) and IAS 39 (Financial instruments: Recognition and measurement ) November 27, 2008 November 27, 2008 Exposure Draft Amendments to IAS 24 (Relationships with the State ) December 11, 2008 Exposure Draft Consolidated Financial Statements December 18, 2008 (continued on next page) 41

42 Appendix 1 (continued) Panel F: IASB Pronouncements (December 19, 2008 to December 31, 2009) Type of IASB Pronouncement Title of the IASB Pronouncement Date of Publication Discussion Paper Revenue Recognition in Contracts with Customers December 19, 2008 Exposure Draft Amendment to IAS39 (Embedded Derivatives ) December 22, 2008 Exposure Draft Amendment to IFRS 7 (Investments in Debt Instruments ) December 23, 2008 Standard Amendments to IFRS 4 (Insurance Contracts ) and IFRS 7 (Financial Instruments: Disclosures ) March 5, 2009 Discussion Paper Leases March 19, 2009 Exposure Draft Derecognition Proposed Amendments to IFRS 7 (Financial Instruments: Disclosure ) and IAS 39 (Financial Instruments: Recognition and Measurement ) March 31, 2009 Exposure Draft Income Tax March 31, 2009 Standard Improvements to IFRSs April 16, 2009 Exposure Draft Fair Value Measurement May 28, 2009 Discussion Paper Credit Risk in Liability Measurement June 18, 2009 Standard Amendment to IFRS 2 (Share-based Payment ) June 18, 2009 Exposure Draft Management Commentary June 23, 2009 Exposure Draft Financial Instruments: Classification and Measurement July 14, 2009 Exposure Draft Rate-regulated Activities July 23, 2009 Standard Amendment to IFRS 1 (First-time Adoption of IFRS ) July 27, 2009 Exposure Draft Proposed Amendments to IAS 32 (Classification of Rights Issues ) August 6, 2009 Exposure Draft Proposed Amendments to IAS 19 (Discount Rate for Employee Benefits ) August 20, 2009 Exposure Draft Proposed Improvements to IFRSs August 26, 2009 Standard Amendment to IAS 32 (Financial Instruments: Presentation ) October 8, 2009 Standard Amendment to IAS 24 (Related Party Disclosure ) November 4, 2009 Exposure Draft Financial Instruments: Amortised Cost and Impairment November 5, 2009 Standard IFRS 9 (Financial Instruments ) November 12, 2009 Exposure Draft Proposed Amendments to IFRS 1 (Limited Exemption from Comperative IFRS 7 Disclosures for First-time Adopters ) November 26, 2009 Notes: This table shows all discussion paper, exposure draft, and final standard pronouncements from April 1, 2001 to December 31, It does not contain press releases and amendments which are described as editorial changes by the IASB itself as well as amendments, by way of consequence. 42

43 Appendix 2 Definition of control variables on the firm-level First Time IFRS International Sales Leverage Ownership Concentration Profitability Size Stock Performance Stock Volatility Binary variable taking a value of 1 if firm i first-time applies IFRS in the year of the event e, 0 otherwise. Percentage of international sales defined as the average of the lagged ratio of forgn to total sales and of the actual ratio of forgn to total sales (in %) of firm i for the year of the event e. Financial leverage ratio defined as the average of the lagged ratio of debt to equity and of the actual ratio of debt to equity (in %) of firm i for the year of the event e. Ownership concentration defined as the average of the lagged and actual percentage of closely held shares (in %) of firm i for the year of the event e. Return-on-assets defined as the average of the lagged and actual percentage of the return-on-assets (in %) of firm i for the year of the event e. The returnon-assets is calculated as net-income to total assets. Size of a firm defined as the natural logarithm of the yearly average market capitalization (in 1,000$) of firm i over the year of the event e. Average daily return of the stock of firm i over the estimation window of event e. Volatility defined as the standard deviation of the stock returns of firm i over the estimation window of event e. Notes: This table shows the definitions of control variables used within our multivariate regression models. All continuous variables are winsorized at the 1%- and 99%-percentiles. 43

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47 Figure 1 Yearly number of (projected) changes in standards pronouncements by the IASB Notes: This figure shows the yearly number of (projected) changes in standards pronounced by the IASB within discussion papers, exposure drafts, and final standards. Annual improvement projects are included as one change in standards. 47

48 Figure 2 Distribution of abnormal return volatility Notes: This figure shows the distribution of all abnormal return volatility () observations (387,854 observations). as defined in Section 3, winsorized at the 1%- and 99%-percentile. 48