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Value relevance of investor oriented vs. creditor oriented accounting systems through the IFRS transition Evidence from the UK, the Netherlands, Germany and France Dr. George Kontopoulos Pr. Georges Selim Mr. David Tyrrall

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Key issues Basic question: Are IFRS more value relevant than European National GAAPs? Aims of this research: - make within country comparison, testing the value relevance through the IFRS transition - make across-country comparisons, investigating the difference in value relevance between investor oriented (UK, Netherlands) and creditor oriented (Germany, France) accounting systems

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Literature review Prior literature on value relevance and IFRS –Test the difference between earnings and book value –Examine the difference between code and common law accounting systems –Use annual accounts of early IFRS adopters or reconciliation reports pre-adoption to assess the effects of the IFRS transition –Main finding: early adopters benefit from the shift to IFRS in terms of value relevance What is different to this research? –Looks at mandatory adopters – using annual financial statements under national GAAP (pre-IFRS period) and financial statements under IFRS (post-IFRS period) –It follows the Investor vs. Creditor oriented accounting systems categorization

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Methodology The theoretical framework of this study is based on Ohlson (1995) –Basic concept: use of financial reporting for equity valuation We use the following model: Where, = share price of a firm i three months after the end of fiscal year t, = earnings per share of firm i at the end of the year t, = book value per share of firm i at the end of year t, = indicator variable that is one if earnings are negative and zero otherwise, = error term, i.e. other value relevant information that cannot be captured by earnings and book value figures. Then the model is decomposed to test the incremental explanatory power of earnings and book value (Collins et al. 1997)

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Data collection 50 firms from four countries: UK, Netherlands, Germany, France Used annual published financial reporting data between 2003 and 2006 (inclusive i.e. four years data) –Financial statements year ending 2003 & 2004: pre-IFRS period –Financial statements year ending 2005 & 2006: post-IFRS period For pre-IFRS period include only firms using national GAAP and full consolidation

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Findings - UK Upward trend in explanatory power of book value, earnings, total model Explanatory power of earnings constantly outperforming that of book value Increase in the value relevance greater for book value than for earnings

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Findings - Netherlands Like the UK, upward trend in explanatory power of book value, earnings, and total model Explanatory power of earnings consistently outperforming that of book value Netherlands has the highest increase between the pre and post-IFRS value relevance but also the most variability

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Findings - Germany The explanatory power of book values is increasing while the value relevance of earnings is decreasing The overall value relevance is slightly rising Germany is the country with the highest level of value relevance through time

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Findings - France The explanatory power of earnings is decreasing and that of book value is increasing through time Value relevance peaks in 2004 and 2005 but is slightly decreasing for the post-IFRS period Overall through the period value relevance is higher from that in the UK and the Netherlands and lower from that in Germany

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Findings - Investor vs. creditor oriented Investor / UK Investor / Netherlands Creditor / Germany Creditor / France Overall level and change in value relevance not the same for all countries, but the overall value relevance is increasing for the observed countries for the post-IFRS period The creditor oriented group has different characteristics (higher level, lower increase) from the investor oriented group (lower level, higher increase)

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Conclusions Although there are differences, value relevance is increasing during the post-IFRS period Balance sheet is gaining in importance for value relevance over the income statement through time in all countries The overall value relevance spiked up between 2004 and 2005 possibly due to dual reporting (reconciliation statements) Investor oriented countries (the UK and the Netherlands) indicated higher positive change but lower overall level of value relevance of accounting information compared with creditor oriented countries (Germany and France) Putting it differently there are differences in level and differences in slope Why these results?

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Possible explanations Differences in slope: The UK and the Netherlands have more cross-listed firms than France and Germany, therefore more companies to gain the main benefits of the IFRS transition France and Germany had more early adopters than the UK and the Netherlands so the main beneficiaries of IFRS adoption were deliberately excluded from our sample Differences in level are more problematic: France and Germany had more early adopters than the UK and the Netherlands so they were more prepared for the IFRS transition, therefore the level was higher than that of the investor oriented countries Is creditor oriented accounting more value relevant?

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Thank you Questions/comments please

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Appendix I – Tables UK Descriptive Statistics NRangeMinimumMaximu m MeanStd. Dev.VarianceSkewnessKurtosis Statistic Std. Err.Statistic Std. Err.StatisticStd. Err. usto_06501621.0064.001685.00517.645058.38662412.8557 4 170449.8 6 0 1.273.3371.115.662 ubv_06505.54-.375.171.6756.161951.145141.311.758.337.864.662 uea_06501.41-.141.27.3070.04107.29043.0841.312.3371.837.662 usto_05501440.5037.501478.00475.250246.38214327.9712 8 107565.1 6 1 1.063.337.910.662 ubv_05505.79.236.021.6242.157201.111551.2361.544.3374.433.662 uea_05501.39-.221.17.2598.04127.29183.0851.407.3372.407.662 usto_04501364.0031.001395.00383.841037.88077267.8575 2 71747.64 9 1.788.3374.253.662 ubv_04506.21.166.371.5274.163281.154581.3332.036.3376.378.662 uea_04501.53-.62.91.1890.03525.24929.062-.052.3373.052.662 usto_03501154.6642.001196.66324.886431.35578221.7188 2 49159.23 6 1.738.3374.488.662 ubv_03506.70.156.851.4666.168091.188591.4132.381.3378.212.662 uea_0350.99.011.00.2248.02656.18778.0351.960.3375.372.662 Valid N50

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Appendix I – Tables UK (excluding outliers/extremes) Model Summary RR squareAdjusted R squar e Std. Error of the Esti mate Change Statistics ModelR sq. changeF changedf1df2Sig. F change 2003.571.325.296135.22.32510.85245.000 2004.746.584.545132.78.58415.07443.000 2005.704.495.448202.70.49510.55443.000 2006.748.560.519248.50.56013.68443.000 Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4).

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Appendix I – Tables UK (excluding outliers/extremes) Coefficients Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). ModelUnstandardised Coefficients Standardised Coefficients t.Sig.95% Confidence Interval CorrelationsCollinearity Statistics BSt. ErrorBetaLower Bound Upper Bound Zero- order PartialPartToleranceVIF Constant 117.532.955.387.000111.15243.89 BV 2003 7.20122.073.054.326.746-37.2551.65.413.049.040.5471.828 EAR 2003 511.4158.91.533 3.218.002191.37831.5.569.433.396.5471.828 Constant 144.736.1484.004.00071.840217.63 BV 2004 17.4726.75.253.653.517-36.4671.41.403.099.064.3842.601 EAR 2004 853.3158.9.580 5.368.000532.761173.9.617.663.528.2853.509 Constant 217.857.1883.809.000102.48333.14 BV 2005 33.7643.61.467.774.443-54.18121.7.504.117.084.3602.780 EAR 2005 667.7176.8.752 3.776.000311.071024.3.614.499.409.4322.316 Constant 113.366.671.669.097-21.17247.7 BV 2006 83.0839.78.300 2.088.0432.850163.32.605.303.211.6201.614 EAR 2006 800.5195.1.582 4.102.000407.011194.1.717.530.415.5581.793

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Appendix I – Tables Netherlands Descriptive statistics Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). NRangeMinimumMaximu m MeanStd. Dev.VarianceSkewnessKurtosis Statistic Std. Err.Statistic Std. Err.StatisticStd. Err. nsto_065056.202.8559.0528.33082.1330215.08275227.489.513.337-.429.662 nbv_065040.80.3641.1610.46321.120137.9205462.7351.645.3373.603.662 nea_06505.97-1.534.441.5630.168591.192141.421.200.337.288.662 nsto_055047.543.4651.0024.76421.7651412.48141155.786.311.337-.661.662 nbv_055039.90.7440.649.45001.081877.6499858.5221.910.3374.827.662 nea_05507.53-3.154.381.1330.200281.416212.006-.739.3372.746.662 nsto_045040.951.9542.9017.95401.392559.8467996.959.519.337-.459.662 nbv_045042.67.5043.179.02241.165118.2385467.8742.078.3375.545.662 nea_04506.62-2.384.24.9702.159951.130991.279-.182.3371.936.662 nsto_035038.351.6540.0014.71981.233708.7235876.101.734.337.055.662 nbv_035039.46.4539.918.64181.124197.9492563.1911.933.3374.497.662 nea_03508.87-4.254.62.9196.199791.412731.996-.491.3374.021.662 Valid N50

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Appendix I – Tables Netherlands Model summary Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). RR squareAdjusted R square Std. Error of the Estimate Change Statistics ModelR square change F changedf1df2Sig. F change 2003.708.501.4576.428.50111.309445.000 2004.900.811.7494.469.81148.215445.000 2005.868.753.7316.474.75334.269445.000 2006.901.811.7946.842.81148.278445.000

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Appendix I – Tables Netherlands Coefficients Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). ModelUnstandardised Coefficients Standardised Coefficients t.Sig.95% Confidence Interval CorrelationsCollinearity Statistics BSt. ErrorBetaLower Bound Upper Bound Zero- order PartialPartToleranceVIF Constant 7.7251.5305.049.0004.64310.81 BV 2003.359.140 -.349 2.559.014.076.641.571.356.269.6801.471 EAR 2003 3.5171.110 -.493 3.169.0031.2825.752.423.427.334.3432.914 Constant 7.0271.1306.216.0004.7509.303 BV 2004 -.152.130.018 -1.17.248-.415.110.644-.172-.076.3542.829 EAR 2004 11.081.274.845 8.701.0008.51813.650.835.792.564.1965.093 Constant 10.671.6936.304.0007.26214.081 BV 2005.1431.78.640.805.425-.215.502.638.119.060.4612.170 EAR 2005 9.3891.384.942 6.786.0006.60212.175.672.711.503.2234.488 Constant 6.9791.9273.622.0013.09910.860 BV 2006.252.148.233 1.697.097-.047.551.588.245.110.6911.448 EAR 2006 11.481.108.751 10.36.0009.24913.711.860.840.672.5481.825

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Appendix I – Tables Germany Descriptive statistics Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). NRangeMinimumMaximu m MeanStd. Dev.VarianceSkewnessKurtosis Statistic Std. Err.Statistic Std. Err.StatisticStd. Err. gsto_06501273.051.951275.0090.168831.14909220.2573 5 48513.29 9 4.441.33720.690.662 gbv_0650259.91.81260.7232.05187.7758954.983813023.2193.285.33710.561.662 gea_065074.35-.6673.694.97701.5880011.22886126.0875.092.33729.671.662 gsto_0550808.651.35810.0070.190020.60719145.7148 4 21232.81 4 3.944.33716.576.662 gbv_0550214.46.02214.4826.98846.7294947.584702264.3033.325.33710.602.662 gea_055047.28-2.5744.713.43581.079517.6332858.2674.231.33719.882.662 gsto_0450683.842.16686.0059.300617.46315123.4831 2 15248.08 2 3.897.33716.228.662 gbv_0450171.69.36172.0523.68365.3433637.783231427.5733.033.3379.112.662 gea_045038.50-3.2935.213.1374.981986.9436648.2143.778.33714.966.662 gsto_0350607.402.60610.0052.700415.62549110.4889 3 12207.80 5 3.782.33715.304.662 gbv_0350179.91.68180.5922.04125.1322036.290141316.9743.238.33710.858.662 gea_035086.16-.5485.624.09081.8222312.88508166.0255.613.33734.337.662 Valid N50

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Appendix I – Tables Germany (excluding outliers/extremes) Model summary Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). RR squareAdjusted R squar e Std. Error of the Estim ate Change Statistics ModelR square chang e F changedf1df2Sig. F change 2003.898.807.79111.841.80737.678436.000 2004.918.842.82711.264.84254.628441.000 2005.960.921.9149.421.921119.909441.000 2006.903.815.79716.004.81545.295441.000

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Appendix I – Tables Germany (excluding outliers/extremes) Coefficients Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). ModelUnstandardised Coefficients Standardised Coefficients t.Sig.95% Confidence Interval CorrelationsCollinearity Statistics BSt. ErrorBetaLower Bound Upper Bound Zero- order PartialPartToleranceVIF Constant 9.95910.106.985.331-10.54230.461 BV 2003 1.296.452.407 2.864.007.3782.213.838.431.210.1248.095 EAR 2003 7.7652.312.519 3.359.0023.07712.453.857.488.246.2224.500 Constant 2.3612.648.892.378-2.9857.708 BV 2004 1.247.235.512 5.312.000.7731.721.889.693.330.3213.120 EAR 2004 5.3941.676.286 3.191.0031.9638.734.834.446.198.2504.000 Constant 1.5992.228.718.477-2.9016.099 BV 2005.820.197.385 4.159.000.4221.218.906.545.182.2504.006 EAR 2005 9.9241.389.526 7.145.0007.11912.729.915.745.313.2024.948 Constant 1.3383.985.336.739-6.7119.386 BV 2006 1.745.244.718 7.155.0001.2522.237.896.745.480.3792.635 EAR 2006 1.8921.576.122 1.201.237-1.2905.074.765.184.081.3492.867

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Appendix I – Tables France Descriptive Statistics Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). NRangeMinimumMaximu m MeanStd. Dev.VarianceSkewnessKurtosis Statistic Std. Err.Statistic Std. Err.StatisticStd. Err. fsto_0650646.932.07649.0078.756214.95966105.7808 0 11189.57 8 3.760.33717.541.662 fbv_0650394.83.69395.5245.456811.6160482.137826746.6213.328.33710.749.662 fea_065084.65-28.1556.504.08241.4539610.28106105.7002.564.33715.609.662 fsto_0550686.992.01689.0071.229014.72824104.1444 1 10846.05 8 4.670.33726.047.662 fbv_0550315.73.58316.3140.62829.9894270.635904989.4313.217.3379.945.662 fea_055035.69-2.2933.404.0380.908716.4255741.2883.498.33713.358.662 fsto_0450498.931.07500.0053.332010.4962174.219445508.5254.739.33727.350.662 fbv_0450268.55-.54268.0130.17926.7667947.848432289.4723.720.33715.406.662 fea_045034.09-3.5930.503.0666.683484.8329523.3574.002.33721.372.662 fsto_0350426.771.53428.3044.49609.1515164.710974187.5104.625.33725.881.662 fbv_0350257.67.69258.3628.55926.3877445.168152040.1623.754.33715.967.662 fea_035029.26-.1629.103.2650.679054.8016323.0563.802.33717.815.662 Valid N50

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Appendix I – Tables France (excluding outliers/extremes) Model summary Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). RR squareAdjusted R square Std. Error of the Estimate Change Statistics ModelR square change F changedf1df2Sig. F change 2003.833.695.66513.653.69523.308441.000 2004.890.791.77112.204.79138.892441.000 2005.902.814.79616.660.81444.907441.000 2006.807.652.61825.052.65219.208441.000

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Appendix I – Tables France (excluding outliers/extremes) Coefficients Source: Developed by the authors *Notes: The estimated regression models are based on ordinary least squares. Adjusted R-square and Standardised beta coefficients were used in order to make valid comparisons. BV stands for Book Values Per Share while EAR stands for Earnings Per Share. The regression model used is (4). ModelUnstandardised Coefficients Standardised Coefficients t.Sig.95% Confidence Interval CorrelationsCollinearity Statistics BSt. ErrorBetaLower Bound Upper Bound Zero- order PartialPartToleranceVIF Constant 11.013.1633.482.0014.62417.398 BV 2003 -.258.255 -.177 -1.01.317-.773.257.698-.156-.087.2024.955 EAR 2003 10.992.166 1.049 5.076.0006.62015.368.827.621.438.1965.112 Constant 11.992.8234.250.0006.29617.697 BV 2004.092.206.413.446.658-.324.507.794.070.032.2174.600 EAR 2004 9.8541.887.719 5.222.0006.04313.666.762.632.372.1705.866 Constant 11.393.8412.967.0053.63919.154 BV 2005.374.056.356 6.674.000.261.487.650.772.449.9181.089 EAR 2005 10.061.097.256 9.178.0007.85312.285.710.820.618.8201.220 Constant 26.775.0125.332.00016.63136.912 BV 2006.326.090.567 3.616.001.144.508.671.492.333.7001.429 EAR 2006 5.797.1223.421 4.739.0003.3278.266.484.595.437.2643.792

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Appendix II – Creditor vs. investor oriented accounting systems (Nobes, 1998) Aspects of financial reporting FeatureClass A – Investor orientedClass B – creditor oriented Measurement Provisions for depreciation and pensions Accounting practice differs from tax rules Accounting practice follows tax rules Long-term contractsPercentage of completion methodCompleted contract method Unsettled currency gainsTaken to incomeDeferred or not recognised Legal reservesNot foundRequired Profit and loss formatExpenses by function (e.g. cost of sales) Expenses recorded by nature (e.g. total wages) Cash flow statementsRequiredNot required, found only sporadically Earnings per share disclosureRequired by listed companiesNot required, found only sporadically Disclosure OutsidersInsiders Examples of countriesUK, NetherlandsGermany, France

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Appendix III - Hypotheses testing H1: The adoption of IFRS will change the value relevance of accounting information in the EU H2: The investor oriented accounting systems (UK, Netherlands) will have different value relevance from the creditor oriented ones (Germany, France) after the adoption of IFRS

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Appendix IV - Data collection process Sampling process: Step 1: Selection of countries and listed firms Step 2: Exclusion of ADRs, financial & utility firms (using GICS) Step 3: Prior to 2005 include only firms using domestic GAAP and full consolidation (first-time adopters IFRS1). Companies voluntarily following IAS (early adopters) or US GAAP were also excluded. This will be the final population of firms out of which random sampling will follow. Step 4: Scale proxies: market capitalisation, P/E, growth/sales (eliminate top & bottom 1.5 %, control for effects of extreme values) Step 5: Randomly select 50 firms from each country for each year Observation period: Financial statement 2003-2004 (national GAAP) and 2005-2006 (mandatory IFRS) Grouping: - Investor oriented (UK, Netherlands), creditor oriented (Germany, France) UKNetherlandsGermanyFrance Population of Firms 511165222266 Random Sample 50 % 9.78%30.30%22.52%18.80%

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Appendix V – Graphs Findings individual countries congregate Value relevance in individual countries excluding outliers/extremes: UK Netherlands Germany France

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Appendix V – Graphs Decomposing the model (value relevance/black, book value/grey, earnings/white, disclosure effect/blue) Value relevance of book values vs. earnings : UK Netherlands Germany France

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Appendix V – Graphs Regression models used (UK)

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Appendix V – Graphs Regression models used (Netherlands)

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Appendix V – Graphs Regression models used (Germany)

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Appendix V – Graphs Regression models used (France)

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Appendix VI - Areas for future research Extend this research to cover more years (backwards and forwards) Include more countries, or group of countries (like Eastern Europe) Focus more on scale effects, difference between small, medium, large capitalization firms Examine sectors within and across countries under the same methodology Contradict German early IFRS adopters with German enforced IFRS users Apply and justify different methodologies like Hellstroms (2006) log regression model Do a qualitative study to juxtapose these findings to preparers and users views on the effect of IFRS transition

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