Are Different Stock Market Transparency Requirements Associated with Different Accounting Quality Levels? An Analysis of Bonding Effects in Germany

• In Event: Accounting's Role in Asset Pricing

Abstract

Typically, countries with sophisticated financial systems offer public companies different markets for trading of securities, characterized by different transparency requirements. In Germany, publicly traded companies can choose between two market segments with diverse transparency levels; the Prime Standard and the Non-Prime Standard segment. In addition to the transparency requirements for the Non-Prime Standard segment – which in principle coincide with the minimum legal requirements of the EU-regulated Market/Regulated unofficial market – companies that opt for the Prime Standard segment must comply with high international transparency standards stipulated by the stock ex-change. We find that companies which voluntarily bond themselves to these additional (private) regulations and tighter transparency requirements stipulated by the stock ex-change (Prime Standard listed companies) show a higher magnitude of accounting quality (less earnings management and lower bid-ask spreads). Our results relate to papers that emphasize the importance of regulatory and legal environments for accounting quality as well as to papers discussing bonding effects on an international level (cross listing) or national level (choice of accounting standard). In summary, the (unique) German listing regime offers companies an adequate setting (an interaction of legal and private reg-ulation) to flexibly choose an appropriate level of transparency, taking into account the trade-off between the costs and benefits of specific listing requirements.

Authors

• Marius F. Gros, Goethe-Universität Frankfurt

• Christoph Wallek, Goethe-Universität Frankfurt