THE ECONOMIC ANALYSIS OF THE INTERNATIONALIZATION OF FINANCIAL REPORTING STANDARDS: IFRS INTERNATIONALIZATION FROM A LAW AND ECONOMICS PERPSECTIVE

Transcription

1 THE ECONOMIC ANALYSIS OF THE INTERNATIONALIZATION OF FINANCIAL REPORTING STANDARDS: IFRS INTERNATIONALIZATION FROM A LAW AND ECONOMICS PERPSECTIVE Dissertation Zur Erlangung der Doktorwiirde an der Fakultat fur Rechtswissenschaft der Universitat Hamburg vorgelegt von Name: Elif Erdemoglu Aus: Istanbul Hamburg,

2 INTRODUCTION 10 RESEARCH DESIGN 13 STATE OF THE DEBATE AND CONTRIBUTION 18 CHAPTER ONE. WHAT DETERMINED THE WIDE ADOPTION OF THE IFRS 31 l.a. Standards as Signaling Tools 31 l.b. Historical Evolution of the IFRS Internationalization 55 1.C. Path Dependencies 63 CHAPTER TWO. WHAT LED TO THE IFRS' SUCCESS? 69 2.A. Methodological Individualism in Accounting Theory Context 69 2.B. Signaling Theory in Accounting Theory Context 70 2.C. Transaction Cost Theory in IFRS Internationalization Context 86 2.D. Agency Theory in IFRS Internationalization Context 92 2.E. Public Choice Theory in IFRS Internationalization Context 97 2.F. Reputation Theory in IFRS Internationalization Context 98 CHAPTER THREE. INTERNATIONALIZATION OF IFRS AT THE STATE LEVEL A. Characteristics of the IFRS B. The Problem of Mixed Signals C. Pros and Cons of Convergence at the State Level D. IFRS Similarity to the Common Law Institutional Setting 125 CHAPTER FOUR. INTERNATIONALIZATION OF IFRS AT THE FIRM LEVEL A. Importance of IFRS for the Firm B. Network Effects of IFRS Internationalization C. Reputation Theory for Firm Behaviour 152 CHAPTER FIVE. THE FUTURE OF THE GLOBALIZATION OF THE IFRS REGULATION A. The Signal Quality of Standards Prepared by a Private Institution B. Future Concerns for the IFRS 178 Conclusion 187 APPENDIX 196 REFERENCE LIST 202 4

3 LIST OF ABBREVIATIONS 9 INTRODUCTION 10 RESEARCH DESIGN 14 STATE OF THE DEBATE AND CONTRIBUTION 18 CHAPTER ONE: WHAT DETERMINED THE WIDE ADOPTION OF THE IFRS? LAW AND ECONOMICS OF THE IFRS INTERNATIONALIZATION 31 l.a. Standards as Signaling Tools 31 l.a.l. Rise of the Need for IFRS 31 l.a.l.a. Signaling Theory in IFRS Context 36 l.a.l.b Agency Theory in IFRS Context 39 l.a.i.e. The Role of Standards in Accounting 42 l.a.2. International Market Integration Requires Strong Signals i 43 l.a.2.a. International Integration of Markets and Politics 43 l.a.2.b. Creating a Common Accounting Language 50 1.A.2.C. The Social Relevance of Financial Reporting 51 Summary 53 l.b. Historical Evolution of the IFRS Internationalizaton 55 l.b.l. Historical Facts of the IFRS Internationalization 55 l.b.2. International Initiatives Lead to Accounting Standardization 59 Summary 62 1.C. Path Dependencies 63 l.c.l. Concentrated Ownership 65 1.C.2. Dispersed Ownership 65 Summary 66 Chapter Conclusion 67 CHAPTER TWO: WHAT LED TO THE IFRS' SUCCESS? 69 2.A. Methodological Individualism in Accounting Theory Context 69 2.B. Signaling Theory in the Accounting Theory Context 70 2.B.I. Information Asymmetries for Investors from an Accounting Perspective 75 2.B.l.a. Expected Effect of the Convergence on Investor Decisions 78 2.B.l.a.l Cost-Benefit Analysis 78 Summary 85 2.C. Transaction Cost Theory in IFRS Internationalization Context 86 2.C.I. Transaction Costs Decrease for Multinational Companies, Auditing Companies, and Investors 86 5

4 2.C.l.a. What Changes in Multinational Companies? 87 2.C.l.a.l Increasing Comparability for International Investors 88 2.C.l.a.2. Control Increased Over the Subsidiaries : 89 2.C.l.a.3. Monitoring Expenditures Decrease Over the Subsidiaries Through More Comparability 89 2.C.l.b. How Does IFRS Change the Auditing Companies? 90 Summary 91 2.D. Agency Theory in the IFRS Internationalization Context 92 2.D.I. International Standards as an Observable Precaution 94 2.D.l.a. Public Disclosure of the Financial Statements 95 2.D.l.a.l. Signaling Good Financial State 95 2.D.l.a.2. Repeated Public Disclosure 95 Summary 96 2.E. Public Choice Theory in IFRS Internationalization Context 97 2.F. Reputation Theory in IFRS Internationalization Context 98 Chapter Two Conclusion 99 CHAPTER THREE: INTERNATIONALIZATION OF IFRS AT THE STATE LEVEL A. Characteristics of the IFRS A.l.Flexible Application of the Standards A.l.a. The Flexible Standards and Customary International Law A.2. No Enforcement Mechanism Compels IFRS Compliance After ConvergencellO 3.A.3. Standards Set by a Private Institution A.3.a. The Practitioners, Investors, and Academics in IASB A.3.b. The Difference Between IASB and IASC 115 Summary B. The Problem of Mixed Signals B.I. Reputation Theory in International Law B.2. The Application of Reputation Theory on Customary International Law B.2.a. Institutional Similarities Between IFRS and CIL 120 Summary C. Pros and Cons of Convergence at the State Level D. IFRS Similarity to the Common Law Institutional Setting 125 Chapter Three Conclusion 131 CHAPTER FOUR. THE FUNCTIONING OF IFRS AT THE FIRM LEVEL A. Importance of IFRS for the Firm 133 6

5 4.A.I. Financial Statements Signal Firm Behavior A.2. Rules vs. Standards in the Disclosure Incentives Context A.2.a. Problems of Comparability A.2.a.l. Fair Value Accounting A.2.a.2. Historical Cost Accounting 145 Summary B. Network Effects of IFRS Internationalization B.I. The Role of Auditors in IFRS Internationalization Context B.2 Stronger Positioning of the Big Four Audit Firms B.3. Less transaction Costs More Responsibility for the Auditors 150 Summary C. Reputation Theory for Firm Behavior C.I. How Does the Disclosure Mechanisms Affect Managerial Incentives? C.2. The Moral Hazard Incurred by the Manager in a Prisoners' Dilemma C.3. Expected Reputational Benefits for Managers C.4. The Real Effect of the Convergence on Investor Decisions C.4.a. Data Comparison Between the European Union, United States, and Developing Countries C.4.b. Estimating the Market Value of a Firm Through Financial Statements Regarding Investor Decisions 160 Summary 161 Chapter Four Conclusion 162 CHAPTER FIVE. THE FUTURE OF THE GLOBALIZATION OF THE IFRS REGULATION A. The Signal Quality of Standards Prepared by a Private Institution A.I. Standards vs. Rules in Internationalization of Law Context A.2. Giving Up on Enforcement A.3. A Public Choice Perspective on Convergence in Developing Countries A.4. Representational Structure of the IASB A.4.a. The lasb's Vulnerability to U.S. Lobbyists A.4.b. The Revolving Door Perspective: Fending Off Governmental Pressures, or Cooperation? A.4.C. Developing Countries' Absence From the IASB 175 Summary B. Future Concerns for the IFRS B.I. Could System Competition Lead to Better Financial Reporting Standards? B.2. IFRS and Cloud-Computing 181 7

6 5.B.3. Corporate Sustainability Accounting 183 Summary 184 Chapter Five Conclusion 185 CONCLUSION 187 APPENDIX 196 REFERENCE LIST 202 8